The micro, small, and medium enterprise sector is the backbone of the Indian economy. To resolve payment delays that cripple small business cash flows, the Indian government introduced a strict tax amendment under Section 43B(h) of the Income Tax Act. For buyers purchasing goods or services from registered MSMEs, complying with the MSME 45 day payment rule is mandatory to avoid major tax penalties. This comprehensive guide covers the operational details, tax implications, calculation rules, and best practices for buyers and sellers under this clause for FY 2025-26 (AY 2026-27).

Before diving in, note that this guide covers the msme 45 day payment rule, discusses who it applies to, explains how to calculate payment deadlines, and outlines the tax disallowance rules under Section 43B(h).

Table of Contents

• What is Section 43B(h) of the Income Tax Act?
• Calculating the 15-Day and 45-Day Payment Deadlines
• Tax Disallowance: What Happens if You Fail to Pay on Time?
• Who is Covered and Who is Exempt Under the Rule?
• Step-by-Step Action Plan for Buyers and Sellers
• Frequently Asked Questions (FAQs)

What is Section 43B(h) of the Income Tax Act?

Section 43B(h) was introduced via the Finance Act 2023 and became active on April 1, 2024. The rule mandates that any sum owed to a micro or small enterprise for goods or services supplied must be paid within the timelines specified under Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. If a business fails to pay the supplier within these timelines, they cannot claim that expense as a business deduction in the tax year of purchase. The expense is disallowed and added back to the buyer’s taxable income, forcing them to pay income tax on it.

Calculating the 15-Day and 45-Day Payment Deadlines

The MSMED Act specifies two primary timelines for payments depending on the presence of a written agreement:

Even if an agreement specifies 60 or 90 days, the law caps the maximum credit period at 45 days. Any payment made after 45 days is considered delayed under the MSMED Act.

Tax Disallowance: What Happens if You Fail to Pay on Time?

If the payment is not made within the allowed 15 or 45 days, the buyer faces the following tax and legal consequences:

• Disallowance of Expense: The outstanding purchase amount cannot be deducted as an expense in the year of purchase. It is added back to taxable profits, increasing tax liability.
• Deduction Only on Actual Payment: The deduction will only be allowed in the financial year in which the actual payment is made to the supplier.
• Compulsory Interest Penalty: The buyer must pay compound interest to the supplier at three times the bank rate notified by the RBI. This interest is not tax-deductible.

Who is Covered and Who is Exempt Under the Rule?

It is critical to identify which suppliers trigger the disallowance under Section 43B(h):

• Applies Only to Micro & Small Enterprises: The rule applies to suppliers registered under the Udyam portal as Micro (Investment < 1 Cr, Turnover < 5 Cr) or Small (Investment < 10 Cr, Turnover < 50 Cr) enterprises. It does not apply to Medium enterprises.
• Applies Only to Manufacturers & Service Providers: The Udyam registration benefits for Section 43B(h) do not cover wholesale or retail traders. Expenses from traders are not subject to this disallowance.
• Registration is Mandatory: The supplier must hold a valid Udyam Registration Certificate at the time of transaction.

Step-by-Step Action Plan for Buyers and Sellers

To avoid tax compliance issues, companies should implement these structural controls:

1. Audit Your Supplier Database: Send circulars to all suppliers asking for their Udyam registration status and certificate. Categorize them into Micro, Small, or others.
2. Update Payment Terms: Set up automated alerts in your ERP or accounting software (like Tally or Zoho) to flag payments approaching the 15-day or 45-day threshold.
3. Collect Declarations: Print Udyam numbers on sales invoices if you are a seller to ensure your clients know they must pay you within 45 days to secure their tax deductions.

FAQs: MSME 45-Day Payment Rule

Does Section 43B(h) apply to opening balances?

No, the rule applies only to purchases made during the current financial year. It does not apply to outstanding opening balances from previous years.

What if the payment is made after 45 days but before filing the ITR?

Unlike other subsections of 43B, payments to MSMEs must be made within the 15/45-day window. Even if paid before filing the ITR, if it was after the 15/45-day limit and fell after the financial year-end, the expense is disallowed in the year of purchase and allowed only in the next year.

Are retail traders covered under the MSME payment rule?

No. Retail and wholesale traders registered under Udyam are excluded from the scope of Section 43B(h) as per MSME office memorandums.

How is RBI interest calculated for delayed payment?

Interest is compounded monthly at three times the RBI bank rate from the day after the payment due date until the actual date of payment.

Conclusion

The MSME 45-day payment rule is a double-edged sword. It boosts liquidity for small businesses but requires strict bookkeeping controls from buyers. Keeping your records verified ensures compliance. For personalized tax consulting and accounting compliance audits, get in touch with our team at TaxMSME today.