Since assessment year 2024-25, Section 43B(h) of the Income-tax Act denies buyers a deduction for any sum owed to a micro or small enterprise that is not paid within the time allowed by Section 15 of the MSMED Act — 45 days with a written agreement, 15 days without. The expense becomes deductible only in the year it is actually paid. Two March year-ends later, it is still one of the most-searched provisions by both CAs and suppliers, and the 2025 Act carries it forward (renumbered).
How the clock works
| Situation | Deadline |
|---|---|
| Written agreement specifying credit period ≤ 45 days | Agreed period |
| Written agreement specifying more than 45 days | Capped at 45 days from acceptance |
| No written agreement | 15 days from acceptance |
"Acceptance" is the date of delivery of goods/services — or 15 days after delivery if the buyer raises no objection in writing. Use the business days calculator to count calendar days precisely; the rule is calendar, not working, days.
What happens to the buyer
- The unpaid amount at 31 March is added back to taxable income for the year if it is still within/over the deadline unpaid.
- It becomes deductible in the year of payment.
- Separately, the supplier is entitled to interest at 3× the RBI bank rate, compounded monthly, under Section 16 of the MSMED Act — and that interest is itself not deductible for the buyer.
- The auditor must report outstanding MSE dues in the tax audit report (Clause 22) and the company's financial statements.
What suppliers should do
- Register on Udyam — only micro and small (not medium) enterprises are covered, and only if registered. See our Udyam guide.
- Print your Udyam number on every invoice and PO. Buyers' ERPs now flag MSE vendors; make it easy. The GST invoice generator remembers your details.
- Get a written agreement with a ≤45-day credit period — or none, and enforce 15 days.
- Track acceptance dates, not invoice dates. Delivery challans with signed receipt dates are your evidence.
- Send a formal reminder at day 30 quoting Section 15 of the MSMED Act and the interest that will accrue. Most accounts teams pay before their auditor sees it.
- File on MSME Samadhaan if unpaid: the Facilitation Council can award the principal plus interest. Compute the claim with the late payment interest calculator — at a 5.5% bank rate the compound rate is 16.5% per annum.
What buyers should do
- Tag vendors by Udyam status in your ERP; ask every vendor for their certificate.
- Move MSE vendors to a 30-day payment run to leave margin.
- If cash flow is tight, pay MSE vendors first — the tax hit on unpaid MSE dues is worse than a bank overdraft.
- Note that traders registered as MSEs are excluded from 43B(h) (the section covers manufacturing and service enterprises), though the MSMED interest still applies.
Worked example
A retailer owes ₹10 lakh to a micro-enterprise packaging supplier, invoice accepted on 1 February 2026, no written agreement. Due date: 16 February. Still unpaid at 31 March 2026:
- ₹10 lakh is disallowed in FY 2025-26; the buyer's tax rises by ₹2.5–3 lakh for the year.
- Interest to the supplier from 17 February at 16.5% compounding monthly: about ₹19,500 by 31 March, ₹1.6 lakh if it drags to the end of the next year.
FAQ
Does 43B(h) apply if I pay within the credit period in my agreement?
Yes if the agreed period is within 45 days. If the agreement says 60 days, the law caps it at 45.
Does it apply to purchases of capital goods?
No — 43B(h) is about deductible expenses. But the MSMED interest still applies to any delayed payment.
Are medium enterprises covered?
No. Only micro and small. Check the vendor's Udyam certificate category.
What if the vendor registered on Udyam after supplying the goods?
The rule applies from the date of registration; earlier supplies are not covered.