Section 43B(h) of the Income Tax Act: Applicability, Due Date, Limit & Example
Section 43B(h) provides that any amount payable to Micro and Small Enterprises (MSEs) for goods supplied or services provided will be allowed as an expense in the same financial year only if it is paid within the time frame specified under the MSMED Act, 2006. If the payment is delayed beyond this period, the deduction will be permitted in the year in which the payment is actually made. This provision aims to ease working capital issues for MSMEs and ensure timely payments to small businesses.
MSME Section 43B(h): New 45-Day Payment Rule
The newly introduced clause (h) states that any payment made by an assessee to a Micro or Small Enterprise after the time limit mentioned under Section 15 of the MSMED Act will be deductible only in the year the payment is actually made, regardless of the accounting method followed.
Simply put, payments made to Micro or Small Enterprises within 45 days can be claimed as a deduction in the same financial year. Payments made after 45 days can only be claimed in the year of actual payment.
MSME Turnover Criteria
Micro and Small Enterprises are defined as follows:
- Micro Enterprise: Investment in plant and machinery up to ₹1 crore and turnover up to ₹5 crore.
- Small Enterprise: Investment in plant and machinery up to ₹10 crore and turnover up to ₹50 crore.
Applicability of Section 43B(h)
This clause applies when a business purchases goods or avails services from Micro or Small Enterprises registered under the MSMED Act, 2006. The buyer does not need MSME registration for this clause to apply. Section 43B(h) is effective from April 1, 2024.
Example:
Mr. A (not registered under the MSMED Act) buys goods from Mr. B (registered MSME).
Is Section 43B(h) applicable?
Yes, since the supplier is registered under the MSMED Act.
Applicability of Section 43B(h) on Traders
According to Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders can obtain Udyam Registration only for Priority Sector Lending benefits. Therefore, dues payable to traders are not covered under Section 43B(h), as traders are not classified as “enterprises” under the MSMED Act’s definition.
Example:
Mr. A buys goods from Mr. B, who is a trader.
Is Section 43B(h) applicable?
No, because the supplier is a trader. The provision applies only to manufacturing and service enterprises.
Section 43B(h) Effective Date
Section 43B(h) applies from April 1, 2024, and is relevant for Assessment Year (AY) 2024–25.
Example:
Mr. A purchased goods from Mr. B on 31.03.2023.
Is Section 43B(h) applicable?
No, this provision does not apply to purchases made before 31.03.2023.
Section 43B(h) Time Limit
Businesses must clear payments to MSMEs within the time frame specified under Section 15 of the MSMED Act, 2006.
- If no written agreement exists, payment must be made within 15 days.
- If there is a written agreement, payment must follow the agreed period, but it cannot exceed 45 days.
Example of Section 43B(h) Application
| Sr. No. | Date of Acceptance | Credit Period (Days) | Due Date (MSME Act) | Actual Payment Date | Deduction Allowed in FY |
| 1 | 29/03/2024 | 60 | 13/05/2024 | 25/05/2024 | FY 2024–25 |
| 2 | 01/04/2024 | 45 | 16/05/2024 | 21/05/2024 | FY 2024–25 |
| 3 | 31/01/2024 | 15 | 15/02/2024 | 20/02/2024 | FY 2023–24 |
| 4 | 11/09/2023 | 20 | 01/02/2023 | 03/10/2023 | FY 2023–24 |
| 5 | 30/11/2023 | 30 | 30/12/2023 | 20/12/2023 | FY 2023–24 |
| 6 | 21/04/2024 | 40 | 31/05/2024 | 20/06/2024 | FY 2024–25 |
| 7 | 15/12/2023 | – | 30/12/2023 | 05/04/2024 | FY 2024–25 |
| 8 | 10/11/2023 | – | 25/11/2023 | 30/11/2023 | FY 2023–24 |
Penalties for Late Payment to MSMEs
When payments to an MSME are delayed, interest becomes payable.
- Interest rate: Compound interest at three times the RBI-notified bank rate.
- Interest start date: From the date mentioned in the agreement, or if no agreement exists, from the day after 15 days of acceptance or deemed acceptance (the “appointed day”).
This interest amount cannot be claimed as a deduction under the Income-tax Act, 1961.
Benefits of Clause (h) of Section 43B
Benefits for MSMEs
Timely Cash Flow:
Section 43B(h) encourages larger businesses to clear dues to MSMEs within the prescribed period—15 days when there is no written agreement and up to 45 days when an agreement exists. This ensures a steady cash flow for MSMEs, which is crucial for their operations and growth.
Improved Negotiating Power:
MSMEs gain stronger leverage during discussions on payment terms. They can insist on timelines that align with the law, knowing that delays will have tax consequences for buyers.
Fewer Disputes:
With payments being made on time, the likelihood of conflicts or legal challenges due to unpaid dues is reduced, saving both MSMEs and larger companies significant time and effort.
Benefits for Large Enterprises
Tax Efficiency:
By paying MSMEs within the stipulated timeline, larger businesses can claim the expense in the same financial year, thereby lowering their tax burden.
Better Compliance and Transparency:
Section 43B(h) supports disciplined financial behaviour and helps organisations maintain transparent, compliant accounting practices.
Stronger MSME Network:
Timely payments help build a healthy MSME sector, ultimately benefiting larger entities through a more reliable supply chain and easier access to essential goods and services.
Practical Understanding
- If invoices raised between 01.04.2024 and 15.02.2025 are paid before 31.03.2025, the expenses are deductible in FY 2024–25.
- If invoices dated 16.02.2025 to 31.03.2025 are paid within 45 days, the expenses are allowed in FY 2024–25, assuming a written 45-day agreement exists.
- If payment is not made within the due date, the expense becomes deductible only in the year of actual payment.
Example: If goods purchased in March 2025 are paid for in June 2025, the deduction is allowed in FY 2025–26.
How to Check MSME Registration Status
You can verify the MSME registration status by visiting the official Udyam Registration portal.
Final Word
To claim an expense deduction in the appropriate financial year, buyers must ensure timely payment to Micro and Small Enterprise suppliers. If the payment is delayed or made after the permissible period, the deduction will only be allowed in the financial year in which the payment is actually made.
Frequently Asked Questions (FAQs)
1️⃣ Who is affected by Section 43B(h)?
Any business or taxpayer who purchases goods or services from Micro or Small Enterprises (as per MSMED Act, 2006). Deductions for delayed payments are allowed only on actual payment.
2️⃣ What is Section 43B(h) about?
It disallows expense claimed towards MSE suppliers if payment is not made within 15/45 days. Deduction is allowed only in the year of payment, not accrual.
3️⃣ What is the time limit for payment?
| Condition | Maximum Payment Period | Rule |
| No written agreement | 15 days | From date of acceptance |
| Written agreement exists | Agreed timeline, max 45 days | If more than 45 days → invalid |
4️⃣ Is Section 43B(h) applicable to Medium Enterprises?
❌ No. Only Micro & Small Enterprises are covered.
5️⃣ Is Section 43B(h) applicable to traders?
❌ No. As per Office Memorandum 01.09.2021, retail/wholesale traders are excluded as “Suppliers”.
6️⃣ What if the MSE is unregistered?
Udyam Certificate is preferred, but:
✔ Supplier Declaration + PAN + Invoice Nature
can be accepted to identify them as MSE.
7️⃣ How to verify MSME status of suppliers?
Via MSME Verification Portal using Udyam registration details.
8️⃣ What happens if payment is delayed beyond 45/15 days?
✔ Expense will be disallowed in the current FY
✔ Deduction allowed only when payment is actually made
✔ Interest liability may arise under MSMED Act
(3x RBI notified bank rate – monthly compounding)
9️⃣ Does the supplier need to raise an interest invoice?
No. Interest accrues automatically under Section 16 of MSMED Act.
🔟 What is “Appointed Day”?
The day after 15 days from acceptance/deemed acceptance of goods/services.
11️⃣ Does it apply to advance payments?
No. Only to credit purchases from MSEs.
12️⃣ Does Section 43B(h) apply to capital purchases?
✔ Yes
The expense (depreciation value) will be disallowed proportionately if delayed.
13️⃣ Do transportation bills, professional fees, AMC, rent to MSME vendors get covered?
✔ Yes — includes goods & services
14️⃣ Is it applicable to payments to Government/PSUs?
No, unless the supplying entity is a registered Micro or Small Enterprise.
15️⃣ Will TDS deduction validate the payment?
No. TDS deduction ≠ payment.
Expense still gets disallowed if payment is delayed.
16️⃣ Will the tax auditor report delayed payments?
Yes, in Form 3CD – Clause 22
CPC will auto disallow such expenses in ITR processing.
17️⃣ What if the invoice is disputed?
Payment timeline starts after acceptance, so:
✔ Keep written proof of dispute
✔ Acceptance date shifts → deadline shifts
18️⃣ Can credit period clauses like 60-90 days be used?
No. Any clause exceeding 45 days = ignored → 15 days applies.
19️⃣ What if payment is made in the next financial year?
Deduction allowed in the year of payment only.
20️⃣ Which sectors are most affected?
Manufacturing, job work, raw materials, packaging, IT services, construction support, etc.
