Section 43B(h): the 45-day MSME payment rule, explained for buyers
If you buy from small Indian suppliers, Section 43B(h) of the Income Tax Act is probably the most expensive rule you are not tracking.
It is simple to state: pay a registered micro or small enterprise later than the MSMED Act allows, and you cannot claim that expense in the year you incurred it. The deduction moves to the year you actually pay. On a large purchase near year end, that is a real tax bill on money you have already spent.
The deadline
The limit comes from Section 15 of the MSMED Act:
- No written agreement — 15 days from acceptance.
- With a written agreement — the agreed date, capped at 45 days. A clause longer than 45 days does not extend anything; the cap still applies.
The clock starts at acceptance of the goods or services, not the invoice date. If you have an inspection or approval step, that is what fixes the date.
What it costs to get wrong
Two separate costs, and they stack:
- The disallowance. The expense is added back to taxable income for that year.
- Interest under Section 16 — three times the RBI bank rate, compounded monthly, which at recent rates lands near 20% a year. Under Section 23, that interest is not deductible either. You bear the whole thing.
Who it applies to — and the two exclusions that catch people out
This is where most summaries are wrong, in both directions.
It applies to suppliers that are Udyam-registered as micro or small at the time of supply. It does not apply to:
- Medium enterprises. Explicitly outside the provision.
- Traders. A wholesale or retail trader may hold a Udyam registration, but that registration exists for lending purposes. A trader is not a "supplier" under Section 15 for payment timing.
So you can neither assume every Udyam-registered vendor triggers the rule, nor assume none of them do. You have to know which.
What to actually do
Collect Udyam numbers at onboarding, not at year end. Ask every new supplier for their Udyam registration number and their category — micro, small or medium — and record it against the vendor, not in an email thread. Verification is free on the Udyam portal.
Flag micro and small vendors in your payables. Once you know which vendors carry a 45-day clock, the rest is just paying them in the right order.
Put the payment term in the purchase order. Silence means 15 days, not 45. Most buyers who get caught by this assumed they had a month and a half by default.
Do the March review early. The disallowance lands on your year end. Late February is when to clear micro and small balances, not the last week of March.
The upstream version
Every one of these is a records problem, and records problems are cheapest to fix at the start of a relationship rather than at the end of a year.
When we introduce a buyer to a supplier, MSME status and payment terms are established before the first order, not discovered during a tax audit. If you want to see what that looks like in practice, post a requirement and compare the quotes you get back.
For the supplier's side of the same rule — and the leverage it gives them — see how to actually get paid.
This is general information, not tax advice. Confirm applicability and current rates with your CA.