Section 43B(h): the MSME 45-day payment rule and why your company's tax deduction depends on paying suppliers on time

An unpaid MSME invoice of ₹50 lakh sitting at your year-end costs roughly ₹13.9 lakh of corporate tax a year early — s.43B(h) ITA 1961 disallows the deduction until actual payment. Since AY 2024-25, any sum payable to a Udyam-registered micro or small enterprise beyond 45 days (15 days where there is no written agreement) is deductible only in the year you pay. The tax auditor must report it in Form 3CD Clause 26A.

What the law actually requires

Section 43B(h) was inserted by the Finance Act 2023 and applies from AY 2024-25 (i.e., FY 2023-24 onwards). It adds to the s.43B list — the section that forces cash-basis deduction for specified payables even in a mercantile system — "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."

The deduction for such a sum is allowed only in the year it is actually paid, regardless of when it was incurred. Two time limits come from s.15 MSMED Act 2006:

Which suppliers count. Only micro and small enterprises, not medium — and only where the supplier holds a live Udyam registration. A supplier without a Udyam number falls outside s.43B(h) entirely (though the buyer's own diligence may still flag the payment as overdue). The buyer is responsible for confirming Udyam status; there is no deeming fiction that spares a buyer who "didn't know."

How the disallowance operates. This is a timing rule, not a permanent bar. The unpaid sum is added back to income in the year of accrual and deducted in the year of payment. It is not a penalty — there is no separate fine under s.43B(h) — but the working-capital cost is real: tax paid a year early, and advance-tax interest exposure if the disallowed amount was not provided for in the installment schedule.

The disclosure requirement. Clause 26A of Form 3CD requires the tax auditor to report the amount payable to micro or small enterprises outstanding beyond the prescribed period at the end of the year, with the date from which it became overdue. For a company, that same population feeds the MCA Form 1 half-yearly return of payments due to MSME suppliers under the Specified Companies Order 2019.

What changed FY 2025-26

• No transition relief remains. In the first year (FY 2023-24) taxpayers treated the provision as new and many simply booked the add-back at year-end. By FY 2025-26 the rule is routine: the disallowance applies to every MSME payable outstanding past 45/15 days on 31 March 2026, with the deduction deferred to FY 2026-27.
• Form 3CD Clause 26A is now enforced, not decorative. Tax auditors are separately asked to reconcile Clause 26A with the MSME payables register, and scrutiny proceedings cross-check the clause against the suppliers' Udyam numbers. A blank Clause 26A in a company with overdue MSME invoices is a red flag, not an omission.
• The MCA and income-tax rails now run in parallel. The Specified Companies Order 2019 (as amended July 2024) and s.43B(h) capture the same overdue-M SME population. The overlap means the same ₹50 lakh appears in Form 3CD, MCA Form 1, and your financials — three places to keep consistent.

Worked example: TechCore Pvt Ltd

TechCore Pvt Ltd buys components from a Udyam-registered micro supplier. There is no written credit agreement.

FY 2025-26 (AY 2026-27): the ₹50,00,000 is disallowed under s.43B(h). Tax impact at the default corporate rate (25% + 7% surcharge + 4% cess):

The ₹13,91,000 must also be provided for in FY 2025-26 advance-tax installments (15 June, 15 Sep, 15 Dec, 15 Mar). If TechCore's CFO computed advance tax on the accrual basis without the add-back, interest under s.234B applies on the shortfall.

FY 2026-27 (AY 2027-28): the ₹50,00,000 is paid on 15 May 2026, so the deduction of ₹50,00,000 is allowed in that year, reducing that year's tax by the same ₹13,91,000. The provision is a pure timing difference — but it is a ₹13.9 lakh timing difference, and the company that planned for it keeps the float; the company that did not pays interest on top.

Step-by-step: manage the 43B(h) exposure

• Verify every supplier's Udyam status before the purchase order — collect the Udyam Registration Number into the vendor master. A supplier who de-registers or was never registered takes the invoice out of s.43B(h).
• Run a monthly MSME payables report aged past 15 and 45 days, so the year-end add-back is never a discovery.
• Decide the payment policy deliberately — pay MSME suppliers within the limit and keep the deduction current, or accept the deferred deduction and book the tax provision.
• Provide for the disallowance in advance tax — add the year-end MSME payable beyond the limit to the income on which installments are computed.
• Reconcile Form 3CD Clause 26A, MCA Form 1 and the payables ledger so the three disclosures tell the same story.
• Watch the MCA threshold. If your company is a "specified company" under the Specified Companies Order 2019 (as amended), the same overdue MSME payables must be reported to the ROC half-yearly — separate from the income-tax treatment.

FAQ

Does s.43B(h) apply to medium enterprises?
No. The provision covers sums payable to micro and small enterprises only, as defined under the MSMED Act 2006. A medium-enterprise supplier's unpaid invoice is not hit by s.43B(h), though it may still be reportable under the July 2024 MCA Form 1 amendment.

What if there is a written agreement for 60 days' credit?
s.15 MSMED Act caps any agreed period at 45 days; a 60-day term is void to that extent. s.43B(h) looks to the statutory limit, so the sum is payable beyond the prescribed time and the deduction defers to the year of payment.

Is the disallowed amount ever permanently lost?
No. It is added back in the year of accrual and allowed in the year of actual payment — s.43B works on payment, not a sunset. The permanent cost is only the interest on the early tax and the working capital locked in the interim.

Our supplier has no Udyam number. Do we still face s.43B(h)?
No — the provision applies only to micro and small enterprises registered on the Udyam portal. Document the supplier's non-MSME status (a Udyam search print) in the vendor file, because the burden of showing the supplier is outside the Act is the buyer's if ever questioned.

For a 43B(h) exposure review of your payables, visit pvtltd.co.

Sources

• s.43B(h) Income-tax Act 1961, inserted by Finance Act 2023, effective AY 2024-25
• s.15 MSMED Act 2006 (45-day / 15-day payment limits)
• Form 3CD, Clause 26A (Income-tax Rules 1962)
• Specified Companies (Furnishing of Information about Payment to Micro and Small Enterprise Suppliers) Order 2019, as amended by SO 2670(E) dated 22 July 2024
• s.234B ITA 1961 (advance-tax interest)

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See Also

• Section 43B(h): the 45-day MSME payment rule that changes your year-end
• Government e-Marketplace (GeM) for MSMEs: mandatory seller registration, zero commission, and the ₹25L direct purchase exemption
• MSME Samadhaan: how to recover delayed payment from large companies through the MSCI complaint process

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