The MSME 45-day payment rule: what Section 43B(h) means for buyers

Section 43B(h) of the Income-tax Act, 1961 is the tax side of the MSME 45-day payment rule. Inserted by the Finance Act 2023 and applying from FY 2023-24 (assessment year 2024-25), it says that any sum payable to a micro or small enterprise beyond the time limit in Section 15 of the MSMED Act, 2006 is deductible only in the year in which it's actually paid.

Section 43B already deferred deductions for items like statutory dues until payment. Clause (h) extends the idea to supplier payments, with one important difference: the relief that lets other Section 43B items be deducted if paid before the return due date doesn't apply to clause (h). Paying an overdue bill in April doesn't rescue the deduction for the year that ended in March.

Section 15 of the MSMED Act sets the time limit that Section 43B(h) refers to. A buyer must pay a micro or small supplier by the date agreed in writing or, if there's no written agreement, within 15 days of accepting the goods or services. A written agreement can't stretch the period beyond 45 days from acceptance.

When the clock starts

The clock runs from the day of acceptance, not the invoice date. That's normally the day the goods are delivered. If you object to the goods in writing within 15 days of delivery, acceptance is the day the supplier removes the objection. If you don't object within 15 days, the goods are deemed accepted on the day of delivery.

An example

The dates below are illustrative, for a buyer whose financial year ends on 31 March:

The first row reflects the common reading: an amount still unpaid at year end but paid within the Section 15 limit stays deductible in the year of purchase. The rule bites only when payment is late. The third row shows why written terms matter: without them, the limit is 15 days, not 45.

Section 43B(h) covers payments to micro and small enterprises as defined in the MSMED Act. In practice, that means a supplier with a valid Udyam registration showing it as micro or small. The Act's payment protections apply to a supplier that has registered, which is why the Udyam certificate is the document to collect.

• Micro and small enterprises: covered. Manufacturers and service providers alike.
• Medium enterprises: not covered by Section 43B(h), even though they register on the same Udyam portal.
• Traders: generally treated as not covered. Retail and wholesale traders can register on Udyam, but a Ministry of MSME office memorandum of July 2021 limits the benefit of that registration to priority-sector lending. The widely held view is that the delayed-payment provisions, and so Section 43B(h), don't apply to them. Many MRO vendors are distributors, so this matters.
• Unregistered businesses: generally treated as not covered, but a supplier can register at any time, so ask again at renewal.

Classification also changes. An enterprise's category depends on its investment in plant and machinery and its turnover, and is reviewed every year, so a small enterprise can become medium, or the reverse. Check the certificate at onboarding and again each year. The rule applies whatever your own size: a large company and an MSME buyer are both covered when they buy from a micro or small supplier.

Late payment to a micro or small supplier also carries interest, whatever your contract says. Under Section 16 of the MSMED Act, the buyer must pay compound interest with monthly rests, from the day after the due date, at three times the bank rate notified by the Reserve Bank of India.

Three further rules add to the cost:

• The interest isn't tax-deductible. Section 23 of the MSMED Act says interest payable under it is not allowed as a deduction under the Income-tax Act.
• It must be disclosed. Under Section 22, buyers whose accounts are audited must show the principal and interest unpaid to micro and small suppliers in their annual accounts.
• Suppliers can enforce it. A supplier can refer the dispute to the Micro and Small Enterprises Facilitation Council, and delayed-payment cases are filed through the MSME Samadhaan portal.

Companies also file a half-yearly return, MSME Form I, with the Ministry of Corporate Affairs, reporting dues to micro and small suppliers outstanding for more than 45 days from acceptance.

Section 43B(h) is usually treated as a finance issue, but most of the fixes sit with purchase and stores, because they control the vendor master, the PO terms and the acceptance date.

The vendor master

• Add fields for the Udyam registration number, category (micro, small or medium), major activity (manufacturing, services or trading) and the date it was checked.
• Collect the Udyam certificate at onboarding, and a written declaration from vendors who say they aren't registered.
• Check again every year, and whenever a vendor's details change.

Payment terms and PO terms

• Write payment terms into the PO for every micro and small vendor. Without a written term, the limit is 15 days.
• Keep agreed terms at 45 days or less from acceptance. A 60- or 90-day term with a micro or small supplier doesn't extend the legal limit beyond 45 days.
• Don't let the invoice date drive the term; the clock runs from acceptance.

GRN and ageing

• Record the GRN on the day of delivery. If goods are rejected or short, raise the written objection within 15 days, because that's what moves the acceptance date.
• Age payables to micro and small vendors from the acceptance date, with the due date shown, and review them weekly near month end and year end.
• Clear invoice queries quickly. Only a written objection to the goods within 15 days of delivery changes the acceptance date; an invoice sitting in a query queue is still ageing.

Accurate receipt dates make all of this work. Our guide to the goods receipt note covers how to record full and partial receipts.

GODOWN doesn't classify your vendors or set your payment terms; your finance team does. As one procurement partner for every category, GODOWN gives you one PO and a GST tax invoice for each delivery, tracked to your gate, so many small payables become one. See Delivery & GRN.