Aran Law Firm Clause (h) in section 43B of the IT Act - A Beacon of Hope for MSME

Section 43B(h): What a Late Payment to an MSME Now Costs You at Tax Time

KEY FACTS — Section 43B(h) and MSME Delayed Payments

From Assessment Year 2024-25, a missed MSME payment deadline means the related expense can't be deducted in the year it was incurred only in the year it's actually paid.

The deadline itself comes from the MSMED Act, not the Income Tax Act: 45 days where there's a signed agreement, 15 days where there isn't one.

Clause (h), added to Section 43B by the Finance Act 2023, switches off the usual grace period that let companies pay any time before their tax return fell due.

Coverage turns on size: a micro enterprise tops out at ₹1 crore invested and ₹5 crore turnover; a small enterprise at ₹10 crore invested and ₹50 crore turnover.

Paying late doesn't only cost a deduction — the supplier can also raise the dispute on the MSME Samadhaan portal, where compound interest can be charged at a multiple of the RBI bank rate.

The protection is reserved for registered, Udyam-certified micro and small suppliers; medium enterprises and unregistered vendors sit outside clause (h) entirely.

At a Glance

AT A GLANCE

WRITTEN AGREEMENT

45 Days

NO AGREEMENT

15 Days

0 15 30 45 60

For decades, Section 43B let a company book a deduction the moment a liability was incurred, so long as it settled the bill before its tax return fell due. Clause (h) carves MSME suppliers out of that comfort. Effective from the 2023-24 financial year, a buyer that pays a registered micro or small enterprise late doesn’t just risk a vendor dispute it loses the deduction outright until the year it actually pays. The wider enforcement picture, including how an MSME can pursue the Samadhaan process and other recovery routes, is covered on our debt recovery practice page.

What Clause (h) Actually Changes

Section 43B has long governed the timing of certain deductions. The older rule let a company claim a deduction on an accrual basis for outstanding expenses, provided the actual payment landed on or before the due date for filing that year’s income tax return. In practice, that gave corporates real room to delay vendor payments without any immediate tax bite.

The Finance Act 2023 inserted clause (h) into Section 43B with effect from 1 April 2024, and it applies specifically to sums owed to micro and small enterprises. For those payments, the usual grace period pay before the ITR due date and still claim the deduction no longer applies. Miss the Section 15 deadline under the MSMED Act, and the deduction moves entirely to the year the payment is actually made.

In practical terms: a company that books a liability to an MSME vendor in FY 2023-24 but pays beyond the 45-day (or 15-day) window cannot deduct that expense in AY 2024-25 even if it pays before the 31 July or 31 October ITR deadline. The deduction simply shifts to AY 2025-26.

The Section 15 Clock

Section 15 of the Micro, Small and Medium Enterprises Development Act 2006 sets the actual payment timelines, and it works on two tracks. Where a written agreement specifies a credit period, payment is due within 45 days of acceptance or deemed acceptance of the goods or services. Where no written agreement exists, the window tightens to 15 days.

A negotiated 60- or 90-day payment term doesn’t change any of this. A contractual period beyond 45 days is simply unenforceable against an MSME supplier past that point the statutory cap wins. Treasury teams still running standard 60- or 90-day cycles with MSME vendors are now exposed on two fronts at once: outright non-compliance with the MSMED Act, and a disallowed tax deduction.

Who Counts as a Protected MSME

Clause (h)’s protection is limited to enterprises that qualify as micro or small under the MSMED Act. A micro enterprise is capped at ₹1 crore of investment in plant, machinery or equipment, with annual turnover not exceeding ₹5 crore. A small enterprise goes up to ₹10 crore of investment and ₹50 crore turnover. Medium enterprises — investment up to ₹50 crore, turnover up to ₹250 crore — fall outside clause (h) altogether.

Registration matters just as much as size. Only suppliers holding a valid Udyam Registration Certificate can invoke these protections; an unregistered vendor has no claim to delayed-payment interest under the MSMED Act, and a buyer’s exposure under clause (h) only arises with respect to registered micro and small enterprises.

The Cost of Paying Late

The disallowed deduction is the immediate consequence, but it isn’t the only one. An MSME that isn’t paid within the Section 15 window can file a complaint on the MSME Samadhaan portal, which routes the matter to the Micro and Small Enterprises Facilitation Council in the relevant state. The Council can attempt conciliation first; failing that, it can move to arbitration under the Arbitration and Conciliation Act 1996. Any award can include the principal outstanding plus compound interest, calculated at a multiple of the RBI’s bank rate.

Disputes that were already pending before a Facilitation Council as of 1 April 2024 continue to run under the earlier framework clause (h) applies prospectively, to sums becoming payable from FY 2023-24 onward.

There’s also a disclosure layer. Section 22 of the MSMED Act requires companies with outstanding dues to micro or small enterprises to disclose the principal and interest due, interest actually paid, any interest overdue beyond the Section 15 period, and interest accruing but not yet due — all in the annual financial statements, with auditors required to verify the disclosure. Companies that have treated this as a formality are now drawing more scrutiny.

A Compliance Checklist for Buyers

There are four practical steps worth working through.

Map which vendors actually hold a valid Udyam Registration Certificate — it's publicly verifiable on the Udyam portal, and many companies simply don't have this mapped today.

Review existing vendor agreements for payment terms beyond 45 days. Anything longer is unenforceable against an MSME supplier and will trigger both the tax disallowance and Facilitation Council exposure.

Adjust accounts payable workflows to flag MSME invoices and prioritise the 45-day window from the date of acceptance — not the invoice date.

Make sure the Section 22 disclosure is complete in the annual report; auditors are now expected to check it closely.

Where Service-Sector MSMEs Fit In

Clause (h) doesn’t extend to medium enterprises, full stop. But it does cover both manufacturing and service businesses equally the 2020 classification reform merged the thresholds for the two sectors, so a registered service-sector micro or small enterprise gets the same Section 15 protection, and triggers the same Section 43B(h) consequence for its buyer, as a manufacturing one.

FAQ

1.When did Section 43B(h) start applying?

From Assessment Year 2024-25 — meaning payments owed to MSMEs from Financial Year 2023-24 onward.

2.How long do I actually have to pay an MSME vendor?

45 days if there’s a written agreement, 15 days if there isn’t one — counted from acceptance of the goods or services.

3.If I pay late but before filing my return, can I still claim the deduction?

No. Clause (h) switches off that grace period specifically for MSME payments — the deduction only becomes available in the year you actually pay.

4.Does this cover medium enterprises too?

No. Only registered micro and small enterprises with a valid Udyam certificate are covered; medium enterprises and unregistered suppliers sit outside clause (h).

5.What can a supplier do if payment is overdue?

File on the MSME Samadhaan portal. The state Facilitation Council can order payment of the principal plus compound interest, and move to arbitration if conciliation doesn’t resolve things.

If You're Dealing With a Delayed Payment or a Compliance Question

Aran Law advises both MSME suppliers chasing overdue payments through the Facilitation Council and buyer companies working out their exposure under clause (h) and Section 22. Advocate Suresh Kumar has appeared before the Debt Recovery Tribunal in Chennai, the NCLT’s Chennai bench, and Tamil Nadu’s revenue tribunals.

Whichever side of the payment you’re on, a short conversation usually clarifies where you stand. For the full range of recovery options available to MSMEs and creditors, see our debt recovery practice page.

For Enquiry

Adv.Suresh Kumar

Aran Law

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About the Author

Founding Advocate and Senior Partner

Adv. Suresh Kumar is the Founder and Managing Attorney of Aran Law, with over 18 years of litigation and legal advisory experience. He is enrolled with the Bar Council of Tamil Nadu and Puducherry and practises before the Madras High Court, City Civil Court, DRT Chennai, NCLT Chennai Bench, and district courts across Tamil Nadu. He holds a BA, BL (Hons), an M.Sc in Criminology, and postgraduate qualifications in Victimology and Juvenile Justice.