Pay your micro and small suppliers in 45 days — or your deduction waits a year

In July 2026 the government was asked about Section 43B(h) twice in two days, and both times it gave the same answer: the rule stays. For any business that buys from small vendors, this is the provision most likely to produce an unpleasant surprise at assessment time — because the penalty is not a fine, it is your expense being pushed into the next financial year.

What Parliament was told (July 2026)

• 20 July 2026 — Rajya Sabha Unstarred Question No. 159, answered by the Minister of State for MSME, Sushri Shobha Karandlaje: clause (h) was inserted in Section 43B by the Finance Act, 2023 to strengthen payment discipline and improve liquidity for micro and small enterprises. Stakeholders, including MSME associations, endorsed it as helping enterprises facing delayed payments, cash-flow stress and the risk of closure.
• The same reply reported that the Udyam Registration Portal (launched 1 July 2020) had 8.84 crore registered enterprises as on 30 June 2026, and that deregistrations — for reasons such as change of ownership, duplicate registration, or the certificate no longer being needed — account for just 0.60% of all registrations.
• 21 July 2026 — Rajya Sabha Unstarred Question No. 242, answered by the Minister of State for Finance, Shri Pankaj Chaudhary, confirmed the mechanics and, importantly, that the provision continues as Section 37(2)(g) of the Income-tax Act, 2025.

How Section 43B(h) actually works

Normally you claim a business expense when the liability is incurred, regardless of when you pay. Section 43B(h) removes that privilege for one category of creditor. If you owe a micro or small enterprise and you pay beyond the time limit in Section 15 of the MSMED Act, 2006, the deduction is allowed only in the year you actually pay.

The clause took effect from 1 April 2024 — that is, from AY 2024-25, covering FY 2023-24 onwards.

The Section 15 time limit is:

• 45 days where there is a written agreement — this is the outer ceiling, and no agreement can lawfully exceed it.
• 15 days where there is no written agreement.
• The clock runs from the day of acceptance (or deemed acceptance) of the goods or services — not from the invoice date.

Three traps businesses keep falling into

1. Paying before your ITR due date does not save you. For every other clause of Section 43B, paying before the return due date preserves the deduction. The proviso expressly excludes clause (h). Miss the 45 days and the deduction moves to next year — full stop.

• 2. The invoice date is a red herring. The period runs from acceptance of the goods or services. Goods sitting with a transporter, or an objection raised and later resolved, shift the starting point.
• 3. The interest is not deductible either. Delayed payment attracts interest under the MSMED Act at three times the RBI bank rate, compounded monthly — and Section 23 of that Act specifically bars you from claiming that interest as a deduction.

Who is covered — and who is not

• Only micro and small enterprises. Medium enterprises are outside Section 43B(h) entirely.
• The status that matters is your supplier's, not yours. A large buyer purchasing from a micro vendor is caught; a micro buyer purchasing from a medium vendor is not.
• Traders are outside the provision. Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated 2 July 2021 lets wholesale and retail traders register on Udyam only to access Priority Sector Lending — they are not treated as an "enterprise" for other MSMED benefits, including Section 43B(h). A purchase from a pure trader is therefore not caught; a purchase from a manufacturer or service provider is. Worth confirming which one each vendor actually is.
• The provision bites businesses computing income on a normal (accrual) basis; it does not operate the same way where income is offered under a presumptive scheme.

What about the GST on the invoice?

A question that comes up constantly: if the disallowed invoice carries GST, is the GST disallowed too? It depends on how you booked it:

• GST claimed as input tax credit: the GST never went through your profit and loss account as an expense, so the disallowance under 43B(h) bites only on the amount excluding GST.
• GST not claimed as ITC (booked as an expense instead): the whole amount, GST included, is tested against Section 43B(h).

The other side of the argument

Question No. 242 was pointed. MPs asked whether enforcement had led large and medium buyers to cancel orders with registered MSMEs, whether buyers were shifting to unregistered vendors or pressuring small suppliers to surrender their Udyam registration, and whether the section affects only Udyam-registered suppliers.

The government did not accept that the provision is misfiring. Its reply restated the intent — solving cash-flow and working-capital stress and sparing small firms the cost of arranging short-term funds — and noted the provision was introduced after wide deliberation with stakeholders, including the MSME Ministry. Read together with the 0.60% deregistration figure, the message is that the rule is settled policy and businesses should plan around it rather than wait for relief.

What to do before 31 March

• Flag your micro and small vendors in your books — collect Udyam registration numbers and record the classification (micro / small / medium) against each ledger.
• Get written agreements in place so you have the full 45 days rather than 15.
• Run an ageing report of MSME creditors before year-end and clear anything approaching the limit — this is the single highest-value hour of work in March.
• Record acceptance dates, not just invoice dates, so the 15/45-day count can be proved.
• Re-confirm vendor status annually — an enterprise can move between micro, small and medium as it grows.
• Companies: don't forget Form MSME-1 — the half-yearly return to the MCA reporting dues to micro and small suppliers outstanding beyond 45 days.

Takeaway: Section 43B(h) is not a penalty you can settle later. Pay your micro and small suppliers inside the limit, or the expense simply moves to next year's books — and Parliament has now confirmed the rule carries into the Income-tax Act, 2025.

Want your MSME creditor ageing reviewed before year-end, or your vendor master tagged for Udyam status? Talk to us — we'll set it up so this never costs you a deduction.

Tags: msme, section 43b(h), income tax, udyam, vendor payments

AI-assisted note, reviewed by Chartford Consultancy. Rules and figures can change with government notifications — talk to us to confirm exactly what applies to your business.