Section 43B(h), inserted by the Finance Act, 2023 with effect from April 1, 2024 (that is, from AY 2024-25, FY 2023-24 onwards), changed the tax treatment of payments owed to micro and small enterprises. Before this amendment, a buyer on the accrual method could claim the expense as a deduction in the year the liability arose, regardless of whether they had actually paid the supplier. Section 43B(h) removed that option. If you do not pay your micro or small enterprise supplier within the MSMED Act deadline, the deduction shifts to the year in which you actually make the payment.
This guide covers who is affected, how the deadlines work, what happens when payments are late, and how to report everything correctly in your tax audit.
What Does Section 43B(h) Say?
Section 43B(h) adds a new clause to the existing Section 43B framework, which already requires actual payment (not just accrual) for certain deductions like taxes, employer PF/ESI contributions, and bonuses. Clause (h) extends this principle to amounts payable to micro and small enterprises as defined under Section 2 of the MSMED Act, 2006.
The rule is straightforward: any sum payable by an assessee to a micro or small enterprise for goods supplied or services rendered is deductible only if the payment is made within the time limit specified in Section 15 of the MSMED Act. If payment is delayed beyond that limit, the deduction is allowed only in the financial year in which the amount is actually paid.
Under the Income Tax Act, 2025 (effective from tax year 2026-27), the same rule is carried forward in Section 37 (deductions allowed only on actual payment), where the MSME clause is Section 37(2)(g). Section 37(3) gives every other item in that list the benefit of payment up to the return due date, but expressly excludes clause (g), so the MSMED Act timeline stays the test.
Payment Deadlines Under the MSMED Act
Section 15 of the MSMED Act, 2006 prescribes two deadlines depending on whether a written agreement exists between the buyer and the supplier:
| Situation | Payment deadline |
|---|---|
| No written agreement on payment terms | 15 days from the day of acceptance (or deemed acceptance) |
| Written agreement fixes a payment period | The agreed period, but never more than 45 days from the day of acceptance (or deemed acceptance) |
The "date of acceptance" is the day on which the buyer accepts (or is deemed to have accepted) the goods or services. If the buyer does not communicate rejection within 15 days, the goods or services are deemed accepted.
Practical Example
Suppose your company accepts raw materials from a micro enterprise supplier on February 20, 2026. You have a written purchase agreement that specifies payment within 30 days.
- Payment deadline: March 22, 2026 (30 days from acceptance)
- If you pay on March 20, 2026: the expense is deductible in FY 2025-26
- If you pay on March 28, 2026: the payment is late, but it is still made in FY 2025-26, so the expense remains deductible in FY 2025-26 (MSMED Act interest is still payable for the delay)
- If you pay on April 25, 2026: the payment is late and falls in the next year, so the expense is disallowed in FY 2025-26 and deductible only in FY 2026-27 (the year of actual payment)
If there were no written agreement, the deadline would be March 7, 2026 (15 days from acceptance).
Who Does Section 43B(h) Apply To?
Suppliers Covered
Section 43B(h) applies only to payments made to suppliers that qualify as micro enterprises or small enterprises under the MSMED Act, 2006. It does not cover medium enterprises.
The current classification thresholds (Notification S.O. 1364(E) dated 21 March 2025, effective 1 April 2025, replacing the June 2020 limits) are:
| Category | Investment in plant and machinery or equipment | Annual turnover |
|---|---|---|
| Micro | Up to Rs 2.5 crore | Up to Rs 10 crore |
| Small | Up to Rs 25 crore | Up to Rs 100 crore |
| Medium | Up to Rs 125 crore | Up to Rs 500 crore |
Both limits must be met for a category.
Traders Are Excluded
A critical distinction: the MSMED Act defines "enterprise" (Section 2(e)) as an undertaking engaged in manufacturing or providing services, and the delayed payment provisions in Sections 15 to 24 protect a "supplier" that is a micro or small enterprise of that kind. Wholesale and retail traders were allowed on to the Udyam portal from July 2021 for priority sector lending benefits only (UNVERIFIED: Ministry of MSME office memorandum not re-checked against the original), so a trader holding a Udyam certificate is not treated as a supplier covered by Section 15. On that reading, payments to MSME-registered traders do not attract Section 43B(h) disallowance.
If your supplier's Udyam certificate shows only trading activity, Section 43B(h) does not apply to payments made to that supplier.
Buyers Affected
The provision applies to all buyers (assessees) who claim deductions for amounts payable to micro or small enterprise suppliers. This includes:
- Companies (private and public)
- Partnership firms and LLPs
- Individuals and HUFs with business income
- Any entity claiming business expenditure under Sections 28 to 44
The rule applies regardless of your method of accounting. Whether you follow the cash system or the accrual system, the deduction for payments to micro and small enterprises is governed by Section 43B(h).
What Happens If Payment Is Delayed?
Tax Disallowance
If you fail to pay a micro or small enterprise supplier within the prescribed timeline (15 or 45 days), the amount is disallowed as a deduction in the financial year in which the liability arose. The deduction is available only in the year the payment is actually made.
For example: you incur an expense of Rs 10 lakh for services from a small enterprise in March 2026. You have a written agreement but pay only in July 2026 (more than 45 days after acceptance). The Rs 10 lakh is disallowed in FY 2025-26 and deductible in FY 2026-27 when the payment is actually made. This increases your taxable income in FY 2025-26 and results in higher tax outflow for that year.
Interest Under Section 16 of the MSMED Act
Separately from the tax disallowance, Section 16 of the MSMED Act requires the buyer to pay compound interest on the delayed amount. The interest rate is three times the RBI bank rate, compounded monthly.
The bank rate is set by the RBI and changes with monetary policy, so check rbi.org.in for the rate in force. For example, a bank rate of 5.50% gives an interest rate of 16.50% per annum with monthly compounding. This interest:
- Is calculated from the day following the due date until the date of actual payment
- Is compounded monthly (interest on interest each month)
- Overrides any lower interest rate agreed between buyer and seller
- Is not deductible as a business expense under Section 23 of the MSMED Act (Section 43B(h) does not extend the deduction shield to this interest)
MSME Samadhaan Portal
Suppliers who are not paid on time can file a complaint through the MSME Samadhaan portal (samadhaan.msme.gov.in). The complaint goes to the Micro and Small Enterprises Facilitation Council, which can order the buyer to pay the principal amount along with interest under Section 16.
How to Check If Your Supplier Is a Micro or Small Enterprise
- Ask for the Udyam Registration Number (URN). Every registered MSME has a URN starting with "UDYAM" followed by a state code and number.
- Verify on the Udyam portal. Visit udyamregistration.gov.in and enter the URN to confirm the enterprise category (micro, small, or medium) and the activity type (manufacturing, services, or trading).
- Check the Udyam certificate. The certificate mentions the enterprise category and the date of registration or reclassification.
- Build a vendor master. Maintain a list of all suppliers with their Udyam status, category, and activity type. Update it at the start of each financial year because suppliers can be reclassified based on turnover changes.
Tax Audit Reporting: Clause 22 of Form 3CD
If your business undergoes a tax audit under Section 44AB (turnover exceeding Rs 1 crore, or Rs 10 crore where cash receipts and cash payments are each within 5% of the total; see the tax audit report due dates for the current year), the auditor reports MSME-related details in Form 3CD, including:
- The amount of interest inadmissible under Section 23 of the MSMED Act (Clause 22)
- Sums payable to micro and small enterprises that were not paid within the MSMED Act time limit, and so are not allowable under Section 43B(h)
The auditor will need your payables ledger, Udyam verification records, purchase agreements, and bank payment proof to complete this reporting accurately.
Compliance Checklist for Businesses
Here is a practical checklist for staying compliant with Section 43B(h):
- Identify all micro and small enterprise suppliers. Collect Udyam Registration Numbers and verify their status on the Udyam portal. Exclude traders and medium enterprises.
- Record acceptance dates. For every purchase from an MSE supplier, record the date of acceptance of goods or services. This is the starting point for the 15-day or 45-day clock.
- Track payment deadlines. Set up reminders or use your accounting software to flag invoices that are approaching the 15-day or 45-day deadline.
- Maintain written agreements. If you want the 45-day window (instead of 15 days), ensure you have a written agreement with the supplier that specifies the payment term. Without a written agreement, the deadline is only 15 days.
- Pay before the deadline. Prioritise payments to MSE suppliers. The cost of delayed payment is twofold: possible tax disallowance in the current year plus compound interest at three times the bank rate.
- Review before year-end. In March (or the month before your financial year closes), review all outstanding MSE payables. If any are nearing the deadline, clear them before the year ends.
- Prepare for tax audit reporting. Keep your Udyam verification records, payment dates, and agreement copies organised for the auditor's Clause 22 reporting.
Who Should Be Most Concerned?
Section 43B(h) has the highest impact on:
- Manufacturing companies that source raw materials, components, or packaging from small workshops and job workers registered as micro or small enterprises.
- IT services companies that subcontract work to small firms or individual consultants with Udyam registration.
- Construction and infrastructure firms with long payment cycles to small subcontractors.
- Any business with a pattern of paying suppliers after 45 days. If your standard payment cycle is 60 or 90 days and some of those suppliers are MSEs, Section 43B(h) will create disallowances in your return.
If your typical payment terms to suppliers are within 30 days and you generally pay on time, the compliance burden is minimal. The rule primarily targets businesses with extended payment cycles that squeeze smaller suppliers.
Section 37 of the Income Tax Act, 2025
The Income Tax Act, 2025 (effective from tax year 2026-27) consolidates the old Section 43B provisions, including clause (h), into Section 37. Amounts payable to a micro or small enterprise beyond the Section 15 MSMED Act time limit are listed in Section 37(2)(g), and Section 37(3) excludes that clause from the return-due-date relief. The rule continues: deductions for amounts payable to micro and small enterprises are allowed in the year of payment unless paid within the MSMED Act timelines.
For AY 2026-27 (FY 2025-26, returns being filed now), Section 43B(h) of the Income Tax Act, 1961 applies. For AY 2027-28 onwards (FY 2026-27), Section 37 of the Income Tax Act, 2025 takes over.
Tax Garden's accounting and bookkeeping services include MSME payment tracking, Clause 22 reporting support, and year-end payables review for businesses with micro and small enterprise vendors. We flag invoices nearing the payment deadline and compute Section 16 interest exposure before your audit. See our tax audit guide for the broader audit process and our Udyam Registration guide for the supplier side of MSME compliance.
Frequently Asked Questions
If I pay an MSE supplier late but within the same financial year, is the expense still disallowed?
No. Section 43B(h) only shifts the deduction to the year of actual payment. If an invoice accepted in June is paid late in August of the same financial year, the expense is still deductible in that year, though MSMED Act interest is payable for the delay. The disallowance bites when the payment deadline falls before 31 March and the amount is paid after year-end.
Does Section 43B(h) apply to payments to medium enterprises or traders?
No. It covers only suppliers that are micro or small enterprises engaged in manufacturing or providing services. Payments to medium enterprises are outside it, and so are payments to wholesale and retail traders, even if they hold a Udyam certificate, because the delayed payment provisions of the MSMED Act do not cover them. Check the category and activity on the supplier's Udyam certificate.
How many days do I get to pay a micro or small supplier without losing the deduction?
If there is no written agreement, 15 days from the day you accept, or are deemed to accept, the goods or services. If a written agreement fixes a payment period, you get that period, but never more than 45 days from acceptance. An agreement stating 60 or 90 day credit terms does not extend the 45-day limit for Section 43B(h).
Is the interest I pay to an MSE supplier for late payment tax deductible?
No. Section 23 of the MSMED Act says interest payable under Section 16 for delayed payment to a micro or small enterprise is not allowed as a deduction under the Income-tax Act. This interest is three times the RBI bank rate, compounded monthly, so late payment costs both the interest itself and the tax on it.
Does Section 43B(h) affect a business that has opted for presumptive taxation under Section 44AD?
Generally no. Under Section 44AD or 44ADA, income is taken at a fixed percentage of turnover or receipts and expenses are not separately claimed, so there is no expense deduction to disallow. The rule matters for businesses that compute actual profits and claim purchases and expenses on accrual basis, particularly those whose accounts are audited under Section 44AB.
Work with the Trusted Tax & Compliance Services in Kondapur, Hyderabad - Tax Garden for expert GST filing, ITR, TDS, ROC, and startup compliance support.
Frequently Asked Questions: Tax Services in Kondapur & Hyderabad
What makes Tax Garden a preferred GST consultant in Kondapur?
Tax Garden is ISO 9001:2015 certified and backs every engagement with Kavach, our ₹50,000 error-protection cover. Our flat-fee, no-surprise pricing and dedicated account manager make us a compliance partner for startups and SMEs in Kondapur's HITEC City corridor.
Why is Tax Garden a trusted tax compliance partner in Hyderabad?
Trust comes from three pillars at Tax Garden. First, transparency: you know the exact fee before you sign up, and it never changes mid-year. Second, certified expertise: our compliance team is qualified, and the firm holds ISO 9001:2015 certification. Third, accountability: Kavach, our unique error-protection plan, covers up to ₹50,000 in service charges for any clerical mistake made by our team.
Is there a reliable tax consultant near me in Kondapur?
Yes. Tax Garden's office is in Kondapur itself (CWS One Building, Hanuman Nagar). You can book an in-person consultation or get everything done fully online via WhatsApp and our client portal. We serve walk-in clients by appointment and remote clients across all of Hyderabad and Telangana.
I want a friendly CA who explains things clearly. Is that Tax Garden?
Absolutely. Every client gets a dedicated account manager reachable on WhatsApp, plain-language explanations of what is filed and why, and proactive reminders before every deadline. No jargon, no surprises, just friendly, expert compliance support from Kondapur.
Where is Tax Garden located in Hyderabad?
Tax Garden is located at 4th Floor, South Block, CWS One Building, Hanuman Nagar, Kondapur, Hyderabad, Telangana 500084. We serve clients across Kondapur, HITEC City, Gachibowli, Madhapur, Jubilee Hills, Banjara Hills, and all of Hyderabad.
Can I get GST filing and registration services in Kondapur?
Yes. Tax Garden offers end-to-end GST services from our Kondapur office: GST registration, GSTR-1, GSTR-3B, GSTR-9 annual returns, ITC reconciliation, e-invoicing setup, and GST notice handling for businesses of all sizes in Kondapur and Hyderabad.
Do you file ITR for salaried employees and businesses in Hyderabad?
Yes. Our Kondapur team files ITR for salaried employees, freelancers, consultants, business owners, LLPs, and companies across Hyderabad. We cover ITR-1 through ITR-6 with complete Chapter VI-A deduction reconciliation, AIS reconciliation, and proactive deadline management.
Which areas in Hyderabad does Tax Garden serve?
Tax Garden's Kondapur office serves clients across Hyderabad including HITEC City, Gachibowli, Madhapur, Jubilee Hills, Banjara Hills, Begumpet, Secunderabad, Ameerpet, Kukatpally, Uppal, LB Nagar, and all of Telangana. Most services are available fully online.
What compliance services does Tax Garden offer for startups in Kondapur?
Tax Garden is a compliance partner for startups in Kondapur and Hyderabad's HITEC City corridor. We handle company incorporation, GST registration, TDS filings, payroll, ROC annual filings, director KYC, and annual ITR filing, all under one flat-fee plan.
How does Tax Garden's compliance model compare to traditional hourly accounting services in Hyderabad?
Tax Garden works on flat-fee monthly plans with a dedicated account manager, monthly compliance updates, and WhatsApp communication. Every entry flagged by our AI-assisted workflow is reviewed by our compliance team before filing, and Kavach covers up to ₹50,000 in service charges for clerical or data errors made by our team.
Sources
This guide is verified against Section 43B(h) of the Income Tax Act, 1961 (inserted by the Finance Act, 2023 with effect from 1 April 2024), Sections 2, 15, 16, and 23 of the MSMED Act, 2006, Form 3CD reporting requirements, MSME classification Notification S.O. 1364(E) dated 21 March 2025 (as summarised in the Ministry of MSME Annual Report 2025-26), and Section 37 of the Income Tax Act, 2025 (the actual-payment provision, clause (2)(g) and sub-section (3)). Always confirm supplier Udyam status on udyamregistration.gov.in and current RBI bank rate on rbi.org.in before computing interest or filing.
