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Business Compliance & Labour Lawvia MCA21 Portal (mca.gov.in) — Form MSME-1

MSME 45-Day Payment Compliance — Section 43B(h) Income Tax & MSME Form 1 Return

Compliance advisory and implementation for the MSME 45-day payment rule — identifying MSME suppliers, setting up payment tracking, computing Section 43B(h) disallowance in income tax, and filing the half-yearly MSME Form 1 return with MCA for companies with outstanding payments to MSME suppliers beyond 45 days.

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STARTING FROM₹9,999
TYPICAL TIMELINE7 days
DOCS REQUIRED4 documents
APPLICABLE TOCompany, LLP

Regulatory Framework

MSMED Act, 2006: Section 15 — buyer to pay MSME supplier within agreed period not exceeding 45 days; if no agreement, within 15 days; Section 16 — compound interest at 3× RBI bank rate on overdue amounts; Section 22 — specified companies to mention MSME dues in financial statements. Income Tax Act, 1961: Section 43B(h) — deduction for payment to micro or small enterprise under Section 15 MSMED Act allowed only if payment made within time limit (inserted by Finance Act 2023, effective AY 2024-25). Ministry of Corporate Affairs Order S.O. 367(E) dated 22 January 2019: companies and specified entities with paid-up capital ≥₹1 crore or turnover ≥₹10 crore to file Form MSME-1 half-yearly — by 30 April (for amounts outstanding as on 31 March) and 31 October (for amounts outstanding as on 30 September). MSME Samadhaan Portal — online delayed payment monitoring system for MSME suppliers.

Overview

The MSME 45-day payment obligation creates two distinct compliance obligations for businesses that procure from MSME suppliers:

1. Section 43B(h) Income Tax Act — Disallowance for Late Payment to MSMEs
Inserted by the Finance Act, 2023 and effective from Assessment Year 2024-25 (Financial Year 2023-24 onwards), Section 43B(h) provides that any sum payable to a micro or small enterprise for goods/services on credit is allowable as a deduction only if the payment is actually made within the time limit prescribed under Section 15 of the MSMED Act, 2006 (i.e., 45 days, or the agreed period not exceeding 45 days). If the payment is not made within 45 days, the amount is disallowed in the year of accrual and becomes deductible only in the year of actual payment.

Critical nuances:

  • Section 43B(h) applies only to Micro and Small enterprises — not Medium enterprises.

  • The trigger is the date the liability is recorded (purchase entry), not the invoice date.

  • Even if the buyer has a credit period agreement with the MSME supplier, that agreement cannot exceed 45 days per Section 15 MSMED Act.

  • For FY 2023-24 tax returns, many businesses have large disallowances that were missed — retrospective clean-up is required.

2. MSME Form 1 — Half-Yearly MCA Return
Companies (and specified entities with paid-up capital ≥ ₹1 crore or turnover ≥ ₹10 crore) that have procured goods or services from MSME suppliers and have outstanding dues beyond 45 days as on 31 March or 30 September must file Form MSME-1 with the Ministry of Corporate Affairs. Form MSME-1 is a half-yearly return specifying: the name and PAN of MSME suppliers, the amount outstanding and its age. MCA Order dated 22 January 2019 (MCA S.O. 367(E)) mandates this filing; non-filing constitutes non-compliance under the Companies Act 2013.

CA's role in MSME 45-day compliance:
(i) Identify which suppliers are MSMEs by verifying their Udyam Registration Numbers (cross-check on the Udyam Assist Platform); (ii) Map outstanding invoices by supplier and calculate aging beyond 45 days; (iii) Compute Section 43B(h) disallowance for the financial year; (iv) Advise on payment prioritisation to MSMEs to minimise disallowance in the assessment year; (v) File MSME Form 1 with MCA for the half-year ended 31 March (due 30 April) and 30 September (due 31 October).

How It Works

  1. 1

    MSME Supplier Identification — Udyam URN Verification

    Identify all suppliers in the company's accounts payable ledger that are Micro or Small Enterprises. Collect Udyam Registration Numbers (URNs) from suppliers and verify their validity on the Udyam Assist Platform (udyamassist.gov.in) or by requesting a copy of the Udyam Certificate. Note: Section 43B(h) applies only to Micro and Small enterprises — Medium enterprises are excluded. Without verified URNs, the company cannot determine its compliance obligation.

    Government2-3 days
  2. 2

    Outstanding Payment Aging Analysis — 45-Day Breach Mapping

    Prepare a creditor aging analysis for all verified MSME suppliers: identify invoices outstanding beyond 45 days as on 31 March and 30 September (for Form MSME-1) and as on 31 March (for Section 43B(h) disallowance). Compute the exact number of days each invoice has been outstanding from the date of acceptance of goods/services. Flag invoices where no written agreement exists — the 45-day limit applies automatically without a written agreement.

    Government2-3 days
  3. 3

    Section 43B(h) Disallowance Computation — Income Tax Impact

    Compute the Section 43B(h) disallowance: total amount outstanding to Micro and Small enterprise suppliers beyond 45 days as on 31 March of the financial year. This amount is added back to the company's taxable income. Prepare a comparative analysis: amount that would become deductible next year if paid by 31 March of the assessment year. Advise on accelerated payment to MSME suppliers before year-end to reduce the disallowance.

    Government1-2 days
  4. 4

    MSME Form 1 — Half-Yearly MCA Return Filing

    Prepare and file Form MSME-1 with MCA for both half-years: due 30 April (for amounts outstanding as on 31 March) and 31 October (for amounts outstanding as on 30 September). The form requires: supplier name, Udyam registration number, PAN, amount outstanding, and the reason for non-payment beyond 45 days. File on MCA21 portal with DSC of MD/WTD or Company Secretary. Note: Nil return must be filed if no amounts are outstanding.

    Government1-2 days
  5. 5

    Payment Tracking System Setup & Ongoing Compliance Advisory

    Design a payment tracking workflow: flag all MSME supplier invoices with a 30-day payment reminder (15 days before the 45-day breach) and a 40-day final alert. Configure accounting system (Tally/ERP) to tag MSME supplier accounts with Udyam URNs for automatic aging alerts. Advise on credit terms: contracts with MSME suppliers must not contain payment terms exceeding 45 days — any clause providing for longer payment period is void per Section 15 MSMED Act.

    Government1-2 days

Frequently Asked Questions

Does Section 43B(h) apply to payments to all MSME suppliers?
No. Section 43B(h) applies only to payments to Micro and Small enterprises — it does not apply to Medium enterprises. The enterprise must have a valid Udyam Registration to be classified as Micro or Small. The payer (buyer) must verify the Udyam Registration status of each supplier. If the supplier does not have Udyam Registration, Section 43B(h) does not apply to payments made to them — but equally, the supplier loses all MSME benefits including the 45-day payment protection under Section 15/16 of the MSMED Act.
What if a company has been accruing expenses payable to MSME suppliers without paying within 45 days — what is the FY 2023-24 impact?
For FY 2023-24 (AY 2024-25), which is the first year Section 43B(h) applies, many companies have discovered large opening balances payable to MSME suppliers that are more than 45 days old. All such outstanding amounts as on 31 March 2024 that relate to Micro or Small enterprises are disallowed under Section 43B(h) and must be added back to taxable income in AY 2024-25. They become deductible only when actually paid. Companies should urgently: (i) identify and verify all MSME suppliers by Udyam Registration; (ii) quantify the disallowance; (iii) consider whether accelerated payment before filing the return is economical compared to the tax cost of disallowance.
What is MSME Form 1 and who must file it?
MSME Form 1 is a half-yearly return mandated by the Ministry of Corporate Affairs (MCA) under a Companies Act 2013 compliance order. Companies (and other specified entities — LLPs with paid-up contribution ≥₹1 crore or turnover ≥₹10 crore) that have procured goods or services from MSME suppliers and have amounts outstanding beyond 45 days as on 31 March or 30 September must file Form MSME-1 with MCA. Due dates: 30 April (for 31 March position) and 31 October (for 30 September position). Even if no amounts are outstanding, a Nil return may be required. Failure to file is a Companies Act non-compliance.
Can a company enter into a contract with an MSME supplier providing for payment terms longer than 45 days?
No. Section 15 of the MSMED Act, 2006 provides that where an agreement exists between the buyer and MSME supplier for a credit period, the buyer must make payment within the period specified in the agreement — but such agreed period cannot exceed 45 days from the date of acceptance of goods or services. Any clause in a contract providing for a payment period exceeding 45 days is void to the extent it exceeds 45 days. The 45-day limit is a statutory maximum — it cannot be contracted out of.
What is the MSME Samadhaan portal?
MSME Samadhaan (samadhaan.msme.gov.in) is a government portal that allows MSME suppliers to file applications against buyers who have delayed payment beyond the 45-day period specified under Section 15 of the MSMED Act. The application goes to the relevant Micro and Small Enterprises Facilitation Council (MSEFC). The MSEFC can pass an award directing the buyer to pay the principal amount plus compound interest at 3× the RBI bank rate under Section 16 MSMED Act. A buyer who fails to comply with an MSEFC award faces proceedings under the Arbitration and Conciliation Act, 1996. The award is immediately executable as a decree of a civil court.

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