Short answer: If your business buys goods or services from a micro or small enterprise (one registered with Udyam) and you do not pay within the time limits set by MSMED Act Section 15 — 15 calendar days without a written agreement, or up to 45 calendar days with one — the unpaid expense is disallowed in the year it was accrued. You get the deduction only in the year you actually pay. The trap hits quietly at 31 March every year.

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What changed and from when

Section 43B(h) was inserted by the Finance Act 2023. It applies from Assessment Year 2024-25 onwards (i.e., financial years starting 1 April 2023). Any purchase from a qualifying MSME supplier that was unpaid beyond the s.15 time limit as at 31 March 2024 or later is at risk.

The older parts of Section 43B already deferred deductions on PF, ESI, and bonus until actual payment. Section 43B(h) applies the same logic to trade payables owed to micro and small enterprises.

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Which suppliers are covered

The disallowance applies only when the supplier is micro or small under the MSMED Act 2006 — meaning they hold a Udyam Registration in either the micro or small category.

Verify note: An Office Memorandum has been issued clarifying that Udyam-registered wholesale and retail traders are eligible for priority lending only and may not fall within the original MSMED Act manufacturing/services scope for s.43B(h) purposes. CA confirmation is recommended before excluding such suppliers.

To find out if a supplier is registered: search by name or Udyam number at the government Udyam portal.

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The payment time limits (MSMED Act Section 15)

"Day of acceptance" means the day the buyer actually accepts the goods or services. If there is a dispute about acceptance and the buyer has not communicated objection within 15 days of delivery, the delivery date is treated as the deemed acceptance date.

These are calendar days, not working days. Weekends and public holidays count.

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The year-end window — where most businesses get it wrong

The disallowance is assessed at 31 March (financial year end). The question the law asks is:

Was this invoice unpaid at 31 March, AND had the s.15 payment window already closed by 31 March?

If the payment window has not yet closed at 31 March (because the invoice arrived in late March and the deadline falls in April), the expense is not disallowed — even though it remains unpaid at year-end. The window is simply still open.

Example:

• Micro supplier, no written agreement, invoice accepted 20 March


• Payment deadline: 20 March + 15 calendar days = 4 April


• At 31 March: only 11 days have elapsed; the 15-day window is still open


• Result: NOT disallowed — the deduction is valid in the FY it was accrued

Contrast:

• Same supplier, same category, invoice accepted 10 March


• Deadline: 10 March + 15 calendar days = 25 March


• At 31 March: 21 days have elapsed; the window closed on 25 March


• Amount unpaid at year-end → DISALLOWED in that FY; allowed only in the FY you actually pay

Practical implication: a payment review in the last week of March is essential. Invoices from micro/small suppliers accepted on or before roughly 16 March with no agreement (or on or before mid-February with a 45-day agreement) are at risk if unpaid.

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The tax impact of a disallowance

If an expense is disallowed, you lose the deduction for that FY. The timing cost depends on your entity's effective tax rate:

The deduction is not lost permanently — it is deferred to the year of actual payment. But the interest cost of the timing difference is real.

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MSMED Section 16 interest — separate from disallowance

Independently of the income-tax disallowance, MSMED Act Section 16 requires buyers who miss the s.15 deadline to pay compound interest at three times the RBI bank rate on the delayed amount. This interest:

• Accumulates from the date of non-payment
• Is payable to the supplier (it is the supplier's right, not a government fee)
• Is itself permanently disallowable under Section 23 of the MSMED Act read with the ITA — you cannot deduct it even when paid

This means delayed MSME payments carry a double penalty: income-tax timing cost on the principal, and non-deductible interest on top.

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Practical checklist

Before 31 March each year, run through your outstanding supplier invoices:

• Is the supplier Udyam-registered micro or small? If no Udyam registration, s.43B(h) does not apply.
• Is there a written agreement? If yes, the limit is up to 45 days; if no, 15 days.
• Has the payment window already closed as at 31 March? If yes and unpaid, disallowance is triggered.
• Can you pay before 31 March? Even a partial payment reduces the disallowed amount to the unpaid balance.
• If you cannot pay, track it — the deduction is available in the FY you actually pay; do not double-claim.

Use the MSME 43B(h) Disallowance Forecaster to model your outstanding invoices and see the exact disallowance and tax impact before year-end.

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Reviewed by CA Harun Raaj, ICAI Membership No. 238303. Statute: Section 43B(h) ITA 1961 (Finance Act 2023) read with MSMED Act 2006 ss.2, 15, 16, 23. Effective AY 2024-25 onward. Last verified: 2026-08-05. The trader-supplier exclusion nuance and year-end window treatment are flagged for ongoing CA review.

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