Section 43B(h) Explained: The 45-Day MSME Payment Rule

Section 43B(h) of the Income-tax Act is the single most useful piece of law for a small supplier chasing payments — because it changes the buyer's own tax math. Inserted by the Finance Act 2023 and effective from Assessment Year 2024-25 (i.e., FY 2023-24 onwards), it ties the buyer's tax deduction to paying micro and small suppliers on time.

Normally, a business claims expenses as a deduction in the year they accrue, even if paid later. Section 43B(h) carves out an exception: 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 it is actually paid — not in the year it accrued.

In plain terms: if a buyer books your invoice as an expense in FY 2025-26 but pays you beyond the statutory time limit, that expense is disallowed for FY 2025-26 and only becomes deductible in the year the money actually leaves their account. Their taxable profit goes up in the meantime.

Section 15 of the MSMED Act sets the clock, and 43B(h) borrows it:

• If there is a written agreement on payment terms, payment must be made within the agreed period — which cannot exceed 45 days from the day of acceptance (or deemed acceptance) of goods or services.

• If there is no written agreement, payment is due within 15 days.

• Deemed acceptance matters: if the buyer does not object in writing within 15 days of delivery, the goods or services are treated as accepted on the day of actual delivery.

One nuance buyers often miss: payments made within the Section 15 limit keep their normal accrual-basis deduction, even if the payment crosses March 31. The disallowance bites only when the payment breaches the 45-day (or 15-day) limit.

The rule protects micro and small enterprises — not medium ones. Under the revised classification effective 1 April 2025, a micro enterprise is one with investment in plant and machinery or equipment up to ₹2.5 crore and turnover up to ₹10 crore; a small enterprise has investment up to ₹25 crore and turnover up to ₹100 crore.

Two practical qualifiers:

• Udyam registration is how the buyer's auditor identifies you. Without a Udyam certificate, you may still be micro or small in fact, but in practice buyers apply 43B(h) based on registration status.

• Traders are generally outside the net. Wholesale and retail traders can obtain Udyam registration, but only for priority sector lending benefits — the prevailing position is that 43B(h) protection covers manufacturers and service providers, not pure traders. If you are a services firm, an agency, or a manufacturer, you are squarely covered.

The year-end effect is what concentrates minds. If a buyer's dues to micro and small suppliers are outstanding beyond the Section 15 limit as of March 31, those amounts get added back to taxable income for that year. At a 25 to 30 percent effective tax rate, delaying a ₹10,00,000 payment can mean ₹2,50,000 to ₹3,00,000 of extra tax outflow that year — purely from timing. The deduction is not lost forever, but the cash-flow hit is real, and tax auditors now report these ageing balances.

• Put your Udyam registration number on every invoice, right near your GSTIN. This is the single highest-leverage line you can add.

• State your payment terms in writing — 30 or 45 days — so the 45-day clock, not the 15-day one, is unambiguous.

• Around February and March, send a factual note: "Since we are Udyam-registered, invoices unpaid beyond 45 days as on 31 March will be disallowed under Section 43B(h) in your tax computation. Clearing them this month protects your deduction." You are doing the buyer's finance team a favour by flagging it.

• Never lead with the section number on day one. Use it after normal reminders have run their course — it works best as quiet leverage, not a threat.

If you have not registered, do it today at udyamregistration.gov.in. It is free, fully online, needs only your Aadhaar and PAN, and takes under 15 minutes. No consultant is required, and there is no renewal fee.

This article is general information, not legal or tax advice. Provisions and thresholds change with Finance Acts and notifications — confirm your specific situation with a chartered accountant.