What’s the Fuss About MSME Payments?
From FY 2023-24 onwards, businesses have a new tax compliance headache: Section 43B(h) of the Income Tax Act.
What does Section 43B(h) of Income Tax Act says:
any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006),]
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him
In Simple Language, If you buy something from a registered Micro or Small Enterprise (MSME), and you don’t pay them on time, you can’t claim the expense for tax deduction.
Yes, even if goods are received, services are done, and invoice is booked — if you delay payment beyond the legal time limit, it’s disallowed.
And nope, it doesn’t matter if you paid before March 31st or even before filing your return — if you cross the 15/45-day line, that expense is gone for this year.
What Exactly Does Section 43B(h) Say – In Plain English
As per the law, you must pay MSMEs within the time allowed under the MSMED Act, otherwise the expenses will not be allowed as per the Income Tax Act for that Financial Year.
- If no written agreement → Pay within 15 days
- If agreement exists → Pay within 45 days max (even if your PO says “60 days,” it’s invalid)
- Miss the timeline = expense disallowed in that year
- Pay later = allowed in next FY or in the year of actual payment
Who Exactly Is an MSME (And Why It Matters So Much)?
MSME stands for Micro, Small, and Medium Enterprises, as defined under the MSMED Act, 2006. However, for the purpose of Section 43B(h), only Micro and Small enterprises are relevant — Medium enterprises are excluded.
The classification is based on investment in plant and machinery (for manufacturing) or equipment (for services), and annual turnover.
For a business to legally qualify as MSME under Section 43B(h): It must be registered on the Udyam portal (https://udyamregistration.gov.in).
Here’s the current classification as per the latest government notification:
| Type | Investment (Plant & Machinery) | Turnover |
|---|---|---|
| Micro | ≤ ₹1 crore | ≤ ₹5 crore |
| Small | ≤ ₹10 crore | ≤ ₹50 crore |
| Medium | ❌ Not covered under 43B(h) | ❌ Not covered under 43B(h) |
Knowing exactly who qualifies as an MSME is critical because Section 43B(h) applies only to registered Micro and Small Enterprises — not to Medium ones, and not just anyone who claims to be an MSME. If you assume wrong and delay payment thinking the rule doesn’t apply, you risk having your expense disallowed and facing a higher tax liability. On the flip side, if you panic and rush payments to a Medium enterprise, you may disrupt your cash flow unnecessarily. That’s why verifying Udyam registration and MSME classification isn’t just a formality — it directly affects your profit, tax planning, and legal compliance.
Real-Life Scenarios You’ll Definitely Relate To:
| Scenario | What Happens |
|---|---|
| Paid within 15 days (no agreement) | ✅ Allowed |
| Paid within 45 days (with agreement) | ✅ Allowed |
| Paid after 15/45 days, but within same FY | ❌ Disallowed this FY → ✅ Allowed next FY |
| Paid within legal time, but in next FY | ✅ Allowed in next FY |
| Paid after time limit, in next FY | ✅ Allowed in year of payment |
| Never paid | ❌ Never allowed |
| Vendor is Medium | ✅ Not covered by 43B(h) — normal rules apply |
Beware of This Common Mistake:
Some vendors say “We are MSME,” but are actually Medium enterprises. Only Micro and Small Enterprises are covered under this section.
Always ask for Udyam Certificate and verify the Udyam Registration Certificate from Govt. official portal https://udyamregistration.gov.in/
Smart Habits to Stay Out of Trouble:
- Ask every vendor if they’re MSME registered
→ And get a copy of their Udyam Certificate - Maintain a simple MSME payment tracker
→ Invoice Date, Due Date, Payment Date, MSME Status - Set alerts for MSME vendor payments
→ Delay = disallowance = higher tax - Never sign >45-day terms with MSMEs
→ Even if mutually agreed, it’s illegal under MSMED Act - Account separately for delayed MSME payments
→ Use “Disallowed u/s 43B(h)” to track & claim later - Don’t panic if vendor is ‘Medium’
→ 43B(h) does not apply, you’re safe under regular accounting - Educate your clients (if you’re a consultant)
→ Because ignorance here is expensive
Section 43B(h) of Income Tax Act, may look like a boring clause, but it has serious bite. It’s meant to protect MSMEs — not ruin your tax planning. But if you don’t ask, don’t check, and don’t pay on time, the tax authority will thank you with a higher bill.
Section 43B(h) isn’t just another line in the tax law—it’s a serious compliance checkpoint that directly affects your bottom line. The intention is noble: protect Micro and Small businesses by ensuring they get paid on time. But if you don’t stay alert—miss verifying MSME status, delay payments, or ignore timelines—you could end up paying the price in tax, not to your vendor. So, treat MSME payments like you’d treat your deadlines—non-negotiable. A little discipline now can save you a lot of disallowance later.
Need Help Navigating MSME Compliance?
If you’re unsure about MSME classification, payment timelines, or how Section 43B(h) affects your books — don’t guess. We’re here to help you stay compliant, reduce tax risks, and keep your finance team stress-free.
Contact Us — because tax laws may be complicated, but your support system shouldn’t be.