It has been two financial years since clause (h) was inserted into Section 43B of the Income-tax Act, 1961 by the Finance Act 2023, with effect from 1 April 2024 (i.e., from AY 2024-25). The provision moves the deduction for amounts payable to a registered micro or small enterprise (MSE) to the year of actual payment if the buyer breaches the time limit prescribed under Section 15 of the MSMED Act, 2006. The rule is now fully operational and the same principle carries forward into the Income-tax Act, 2025 from FY 2026-27 onwards.
This is what we’ve seen go right and go wrong across two assessment cycles.
The rule, in plain terms
If a buyer purchases goods or services from an MSE registered on the Udyam Portal:
- Where there is no written agreement on payment terms, the buyer must pay within 15 days from acceptance (or deemed acceptance) of goods/services.
- Where a written agreement exists, payment must be made within the agreed period — capped at 45 days. Any clause stretching beyond 45 days is void in law.
Miss either window and the deduction for that expense is denied in the year it accrued. It is allowed only in the year payment is actually made. The buyer also owes interest under the MSMED Act — three times the bank rate notified by the RBI, compounded monthly. That interest is itself disallowed under the Income-tax Act.
What “MSME” means for this clause — only Micro and Small
Clause (h) covers payments to micro and small enterprises only. Medium enterprises are outside the scope. The classification is the post-Atmanirbhar Bharat one (notified June 2020 and updated in 2024) based on investment in plant and machinery and turnover. The supplier must be registered on the Udyam Portal and must have qualified as micro or small at the time the goods or services were supplied. Practical implication: get and retain the Udyam Registration Certificate from each vendor and refresh annually.
The five mistakes we see most
- Treating the supplier’s self-declaration as enough. An invoice that just says “MSME” is not proof. Ask for the Udyam Registration Number, verify on the portal, and keep a screenshot or PDF in the vendor file.
- 45-day blanket terms. Buyers assume that putting “net 60” in the contract gives them 60 days. It does not — the law caps the agreement at 45. The 60-day clause is unenforceable to the extent it exceeds 45.
- Wrong day-zero for the clock. The 15/45-day period runs from the day of acceptance or deemed acceptance, not invoice date. Where goods are accepted on delivery and there is no objection within 15 days, deemed acceptance is the delivery date. Get the receipt date right in your purchase ledger.
- March 31 cliff effect. Invoices booked in late March that are paid in early April don’t qualify for FY deduction unless paid within the statutory period — not by 31 March. The exception in the proviso to Section 43B (payment before due date of return filing) does not apply to clause (h).
- Missing the tax-audit disclosure. The auditor must report breaches in the tax-audit form (Clause 22 / equivalent under the new Form 26 from FY 2026-27 onwards). Departmental scrutiny systems flag mismatches between the MSME schedule in financial statements and the tax-audit disallowance. Reconcile both before signing.
Process changes that work
The clients who survived the first two cycles cleanly did three things:
- Vendor master flag. A boolean field in the ERP marking each vendor as MSME-yes/no with the Udyam UIN attached. Invoice booking tags the AP entry automatically. AP team gets a daily report of MSME invoices nearing the 12th (under no-agreement) or 42nd day (under agreement).
- Contract template review. Standard PO terms updated to default to a 30- or 45-day cap with an explicit reference to MSMED Section 15. New vendors on-boarded with the term sheet baked in.
- Quarterly disclosure check. The MSME schedule under Schedule III of the Companies Act (Note on trade payables) is reconciled with the AP aging at quarter-end, not just March-end. Catches issues early enough to fix.
What scrutiny notices have asked for
From notices we have seen this season, the data the assessing officer typically asks for is: vendor-wise breakup of MSE purchases for the year, Udyam UIN of each vendor, payment date for each invoice, and a reconciliation between the MSME schedule in the audited accounts and the tax-audit disallowance. Keep these working papers ready in the audit file.
What we recommend
- Refresh Udyam UINs annually. A vendor who was “small” last year may have grown to “medium”. Re-validate during the year-end cut-off.
- Build the MSME flag into your ERP if you haven’t. Manual tracking does not survive the close.
- Cap PO terms at 45 days for MSE vendors — keep it cleaner at 30 to give a buffer for processing time.
- Pay interest if you breached. The interest is not deductible, but paying it cleans up the liability and reduces dispute risk on next year’s assessment.
- Run a half-yearly self-audit on AP aging for MSE vendors. The cost of catching a breach in October is much lower than in March.
If you would like a working-paper template for MSME compliance under Section 43B(h), or a review of your current AP process, write to us at [email protected].
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