Section 43B(h) of the Income Tax Act, effective from AY 2024-25, disallows business expense deductions for buyers who fail to pay Micro or Small Enterprises within 45 days (or 15 days without written agreement). The unpaid amount is disallowed as a tax deduction, forcing buyers to pay income tax on it until payment is made.
Section 43B(h) Income Tax: MSMEs Recover Dues from Buyers
Section 43B(h) of the Income Tax Act 1961, introduced by the Finance Act 2023 and effective from AY 2024-25 (FY 2023-24), is the most powerful payment recovery tool available to Micro and Small Enterprises in India. It works by threatening the buyer with a tax disallowance: if a buyer fails to pay a Micro or Small Enterprise within 45 days of acceptance (or 15 days where there is no written agreement), the unpaid amount is disallowed as a business expense in the buyer’s tax return for that year. The buyer pays income tax on the disallowed amount, effectively losing 25% to 30% of the unpaid sum as a tax cost for every year the payment is delayed.
The provision is enforced not by direct legal action against the buyer, but by making non-payment expensive through the Income Tax Act. Since large corporate buyers are acutely aware of their tax positions, the threat of a Section 43B(h) disallowance creates real pressure to clear MSME dues before the financial year ends on 31 March. This guide explains who is covered, how the disallowance is calculated, why the standard proviso to Section 43B does not help buyers, and the practical steps an MSME can take to use this provision to recover dues.
Contents
- What Is Section 43B(h) of the Income Tax Act 1961 and Why Was It Introduced?
- What Are the Payment Deadlines Under Section 43B(h) and the MSMED Act 2006?
- Which Enterprises Are Covered Under Section 43B(h)?
- How Does the Tax Disallowance Under Section 43B(h) Work in Practice?
- Does the Standard Proviso to Section 43B Apply to Clause (h)?
- What Steps Should an MSME Take to Use Section 43B(h) to Recover Dues?
- What Are the Compliance Obligations for Buyers and Auditors Under Section 43B(h)?
- What Are the Most Common Questions About Section 43B(h)?
What Is Section 43B(h) of the Income Tax Act 1961 and Why Was It Introduced?
Section 43B of the Income Tax Act 1961 is a special provision that overrides the normal accrual-basis deduction rules. Under the accrual basis (which most businesses use), an expense is deductible in the year it is incurred, not necessarily in the year it is paid. Section 43B carves out specific categories of payments that are deductible ONLY when actually paid, regardless of when the liability accrued.
Clause (h), inserted by the Finance Act 2023 with effect from 1 April 2024 (AY 2024-25), adds a new category: any sum payable by the assessee to a Micro or Small Enterprise as defined under the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act 2006). The deduction for such amounts is allowed only in the year of actual payment, subject to the time conditions in Section 15 of the MSMED Act.
The legislative intent is clear: MSMEs in India chronically suffer from delayed payments by large buyers. Delayed payments starve MSMEs of working capital, force them to borrow expensively, and contribute to MSME stress and insolvency. Section 43B(h) creates a direct financial incentive for buyers to pay on time by converting delayed payment into a tax disallowance.
Section 43B(h): Key Facts at a Glance
- Inserted by: Finance Act 2023
- Effective from: AY 2024-25 (FY 2023-24 onwards)
- Payment deadline: 45 days from acceptance (if written agreement); 15 days from acceptance (if no written agreement)
- Who faces disallowance: Any buyer/assessee computing income under PGBP who owes money to a Micro or Small Enterprise
- Who benefits: Micro enterprises (investment up to Rs 1 crore, turnover up to Rs 5 crore) and Small enterprises (investment up to Rs 10 crore, turnover up to Rs 50 crore)
- Medium enterprises: NOT covered by Section 43B(h)
- Proviso benefit: The standard proviso (pay before return filing date and get current year deduction) does NOT apply to clause (h)
- When disallowed amount becomes deductible: In the year of actual payment
What Are the Payment Deadlines Under Section 43B(h) and the MSMED Act 2006?
Section 43B(h) does not prescribe its own deadline; it imports the payment timeline from Section 15 of the MSMED Act 2006. Section 15 provides two distinct timelines depending on whether there is a written agreement between the buyer and the MSME supplier.
What Is the Date of Acceptance?
The date of acceptance under Section 2(b) of the MSMED Act 2006 is: (a) the day of actual delivery of goods or rendering of services if the buyer accepts on that date, or (b) if the buyer raises a written objection to quality within 15 days of delivery, the date on which the objection is resolved. Critically, if no written objection is raised within 15 days, the date of delivery is deemed to be the date of acceptance. This means a buyer cannot delay the acceptance clock by simply not acknowledging receipt.
| Scenario | Date Acceptance Clock Starts | Payment Deadline | If Unpaid by 31 March |
|---|---|---|---|
| Written agreement with 30-day credit period | Delivery date (or deemed acceptance) | 30 days from acceptance (within 45-day maximum) | Disallowed under Sec 43B(h) |
| Written agreement with 45-day credit period | Delivery date (or deemed acceptance) | 45 days from acceptance (maximum allowed) | Disallowed under Sec 43B(h) |
| Written agreement purporting 60-day credit period | Delivery date (or deemed acceptance) | 45 days (MSMED Act caps at 45; 60-day agreement is void to the extent of excess) | Disallowed under Sec 43B(h) |
| No written agreement (purchase order only or verbal) | Delivery date (or deemed acceptance) | 15 days from acceptance | Disallowed under Sec 43B(h) |
Which Enterprises Are Covered Under Section 43B(h)?
Section 43B(h) benefits suppliers that are classified as Micro or Small enterprises under the MSMED Act 2006. The classification thresholds (revised in 2020) are based on a composite criterion of investment in plant and machinery or equipment AND annual turnover.
| Enterprise Category | Investment Ceiling | Turnover Ceiling | Section 43B(h) Applies? |
|---|---|---|---|
| Micro Enterprise | Up to Rs 1 crore | Up to Rs 5 crore | YES |
| Small Enterprise | Up to Rs 10 crore | Up to Rs 50 crore | YES |
| Medium Enterprise | Up to Rs 50 crore | Up to Rs 250 crore | NO (not covered) |
| Large Enterprise / Non-MSME | Above Rs 50 crore | Above Rs 250 crore | NO (not covered) |
How Does a Buyer Verify if a Supplier Is a Micro or Small Enterprise?
The buyer must obtain a copy of the supplier’s Udyam Registration Certificate, which is issued by the Ministry of MSME on the Udyam Registration Portal. The certificate shows the enterprise’s Udyam Registration Number (URN), the category (Micro/Small/Medium), and the date of registration. Buyers should collect and record this certificate for every MSME supplier and update it annually (since turnover changes may shift a supplier between categories). If a supplier does not have Udyam registration, they technically cannot claim MSMED Act protections for that period.
What If an MSME’s Turnover Grows Beyond the Small Enterprise Limit During the Year?
Under the MSMED Act 2006, an enterprise that was classified as Small at the beginning of a financial year retains that classification for the entire year even if its turnover exceeds Rs 50 crore during the year. The reclassification happens at the start of the next financial year based on the final audited turnover and investment figures. So if your supplier was registered as a Small Enterprise at the start of FY 2025-26, Section 43B(h) applies to your entire FY 2025-26 dealings with them, even if their mid-year turnover shoots above the Rs 50 crore threshold. Verify Udyam certificates at the start of each financial year.
How Does the Tax Disallowance Under Section 43B(h) Work in Practice?
The Section 43B(h) disallowance operates at the year end. At 31 March of each financial year, the buyer checks: do I have any outstanding dues to Micro or Small Enterprises that have crossed the 45-day (or 15-day) payment deadline? If yes, the outstanding amount is added back to taxable income and denied as a deduction for that year.
Impact on the Buyer (Negative)
- Tax disallowance of 100% of unpaid amount (not just interest)
- Effective cost: 25-30% of unpaid dues becomes extra tax
- Tax audit report must disclose MSME outstanding dues
- Companies must also file Form MSME-1 with ROC every half year
- If amount is large, may trigger scrutiny and Section 156 demand notice for additional tax
Benefit to the MSME Supplier (Positive)
- Powerful non-litigation lever to force payment before 31 March
- Tax threat is more immediate than court proceedings
- Compounded interest at 3x RBI bank rate under Section 16 MSMED Act
- Recourse via MSME Samadhaan portal and MSME Facilitation Council
- Reduced dependence on expensive working capital borrowings
Does the Standard Proviso to Section 43B Apply to Clause (h)?
This is the most critical and misunderstood aspect of Section 43B(h), and it is what makes the provision far more stringent than all other clauses of Section 43B.
The standard proviso to Section 43B (the first and second provisos) states that even if a payment covered by Section 43B has not been made by 31 March (the year-end), the deduction is still allowed for that year if the payment is made before the due date of furnishing the income tax return for that year. For companies, this means payments made up to the tax audit and return filing deadline (31 October) can still be deducted for the previous year. This proviso gives buyers a 7-month grace window.
The Proviso Does NOT Apply to Section 43B(h): No Grace Window for MSME Payments
The Finance Act 2023 explicitly excluded Section 43B(h) from the benefit of the standard proviso to Section 43B. This is stated in the explanation to the provision itself. Unlike taxes, PF contributions, or bank interest (which benefit from the proviso and can be deducted if paid by the return filing date), MSME payments under clause (h) MUST be made within the MSMED Act time limits during the financial year itself. A buyer who owes Rs 50 lakh to an MSME and pays in August (after 31 March) cannot claim the deduction retroactively for the previous year. The deduction shifts to the year of actual payment. There is no cure for this after 31 March.
| Section 43B Clause | Payment | Standard Proviso Applies? | Pay-Before-Return-Date Allowed? |
|---|---|---|---|
| Section 43B(a) | Taxes, duties, levies | YES | Yes, if paid by return due date |
| Section 43B(b) | Employer PF/ESI contribution | YES (up to 2023) | Yes (though EPF late payment disallowance varies) |
| Section 43B(d) | Interest on bank loans | YES | Yes, if paid by return due date |
| Section 43B(h) | MSME payments (Micro and Small only) | NO | No; must pay within 45/15 days during the FY itself |
What Steps Should an MSME Take to Use Section 43B(h) to Recover Dues?
Section 43B(h) is a passive protection: it creates a tax consequence for the buyer automatically at the year-end. But MSMEs can take proactive steps to maximize the pressure on buyers and recover dues faster.
Step 1: Get and Share Your Udyam Registration Certificate
Register on the Udyam Registration Portal (managed by the Ministry of MSME at msme.gov.in) and obtain your Udyam Registration Certificate. This is the proof that your enterprise is Micro or Small and that Section 43B(h) applies to your transactions. Share the certificate with every buyer at the start of the relationship. Many large buyers have procurement teams that will flag MSME suppliers for accelerated payment processing once they have the Udyam certificate on file.
Step 2: Ensure Written Agreements Specify Payment Terms
Have a written agreement, purchase order, or supply contract with every buyer that specifies a credit period of 45 days or less from the date of acceptance. If there is no written agreement, the default is 15 days, which is even stricter. A well-drafted agreement creates an unambiguous due date that both parties can track, and it also helps if the matter escalates to the MSME Facilitation Council.
Step 3: Send Formal Notice Citing Section 43B(h) Before 31 March
When payment is overdue and approaching year-end, send a formal written reminder to the buyer’s accounts and tax teams simultaneously. Explicitly mention: (a) the outstanding invoice amount, (b) the date it became due under Section 15 of the MSMED Act, (c) that non-payment by 31 March will trigger a Section 43B(h) disallowance in the buyer’s AY, and (d) that interest under Section 16 of the MSMED Act is accruing. This reminder, sent in writing with a read receipt, creates pressure at the right time: most buyers rush to clear MSME dues in late March specifically because of Section 43B(h).
Step 4: Use the MSME Samadhaan Portal for Formal Dispute Resolution
If informal follow-up fails, file an application on the MSME Samadhaan portal (samadhaan.msme.gov.in). The application is forwarded to the MSME Facilitation Council in the buyer’s state. The Council first attempts conciliation; if it fails within 45 days, the matter is referred to arbitration. Arbitration awards are enforceable as court decrees. Filing on Samadhaan also creates a public record of the dispute, which buyers often want to avoid.
Step 5: Coordinate With Your Tax Advisor on Timing
Work with your Chartered Accountant to ensure your own tax return (ITR-6 for companies, ITR-5 for partnership firms, ITR-3 for proprietorships) correctly reports the dues receivable from buyers. Your income tax filing does not directly enforce Section 43B(h) on the buyer, but your tax advisor can alert you to buyers who may be attempting to contest MSME status and advise on documentation.
What Are the Compliance Obligations for Buyers and Auditors Under Section 43B(h)?
Buyers have significant compliance obligations under Section 43B(h), both under the Income Tax Act (in their annual returns and tax audit reports) and under the Companies Act (Form MSME-1 filings with the ROC).
Tax Audit Report (Form 3CD): Clause 26(A)
For buyers who are required to get their accounts audited under Section 44AB of the Income Tax Act (typically businesses with turnover above Rs 1 crore or Rs 10 crore in cashless transactions), the tax auditor must specifically report details of amounts payable to Micro and Small Enterprises that have been disallowed under Section 43B(h) in clause 26(A) of the tax audit report (Form 3CD). This means the auditor must identify all outstanding MSME dues, verify the due dates, and compute the disallowance. If the buyer’s accounts do not have clear records of supplier MSME status (Udyam certificates) and acceptance dates, the auditor cannot correctly fill this clause.
Form MSME-1: Companies Act Filing with ROC
Under the Ministry of Corporate Affairs notification, all companies that have received goods or services from Micro or Small Enterprises and whose outstanding dues exceed 45 days must file a half-yearly return in Form MSME-1 with the Registrar of Companies. The two filing periods are: April to September (filed by 31 October) and October to March (filed by 30 April). Non-filing attracts penalties. This is a separate obligation from the income tax compliance and is enforced by the ROC, not the Income Tax Department. MSME suppliers can check whether their buyers (if companies) have filed Form MSME-1 by searching the MCA portal, giving them visibility into whether dues are being tracked at the regulatory level.
What Buyers Must Do to Avoid Section 43B(h) Disallowance: a Compliance Checklist
- Collect Udyam Registration Certificate from every supplier; update annually
- Tag all MSME suppliers in the accounting system with their Micro/Small category
- Track acceptance dates for all MSME purchase invoices; set payment reminders at 40 days
- Ensure payment is processed within 45 days (or 15 days if no agreement) and before 31 March for year-end invoices
- File Form MSME-1 with ROC every half-year (for company buyers)
- Maintain documentation for tax auditor: acceptance dates, Udyam certificates, payment records, and any quality objection notices
- For large organizations: implement a separate MSME payment queue with accelerated processing (many large corporates now treat MSME invoices as priority payments specifically because of Section 43B(h))
What Are the Most Common Questions About Section 43B(h)?
What is the payment deadline under Section 43B(h) of the Income Tax Act?
Under Section 43B(h) read with Section 15 of the MSMED Act 2006, the payment deadline is 45 days from the date of acceptance of goods or services if there is a written agreement specifying a credit period. If there is no written agreement, the deadline is 15 days from the date of acceptance. If payment is not made within these limits and the amount remains outstanding as of 31 March, the expense is disallowed in that financial year. The disallowed amount becomes deductible in the financial year in which actual payment is made. Note that the date of acceptance is either the actual acceptance date or, if no written objection is raised within 15 days of delivery, the delivery date is deemed to be the acceptance date.
Does Section 43B(h) apply to Medium enterprises or only Micro and Small enterprises?
Section 43B(h) applies only to Micro enterprises (investment up to Rs 1 crore AND turnover up to Rs 5 crore) and Small enterprises (investment up to Rs 10 crore AND turnover up to Rs 50 crore) as classified under the MSMED Act 2006. It does NOT apply to Medium enterprises (investment up to Rs 50 crore, turnover up to Rs 250 crore) or to large enterprises. If your supplier is classified as Medium or above, Section 43B(h) does not apply to your payments, and normal accrual-basis deduction rules apply. Always verify your supplier’s Udyam Registration Certificate to confirm their category. A supplier without Udyam registration cannot enforce Section 43B(h) or Section 15 protections for the period before registration.
Can a buyer deduct the MSME expense in the next year when payment is actually made?
Yes. If an MSME expense is disallowed under Section 43B(h) in year 1 (because payment was not made within the 45 or 15 day limit by 31 March), the buyer can claim the deduction in year 2 when actual payment is made. For example, Rs 30 lakh due to an MSME in FY 2025-26 but not paid by 31 March 2026 is disallowed for AY 2026-27. When paid in June 2026 (FY 2026-27), the deduction is available for AY 2027-28. However, the buyer has already incurred extra tax (at 25-30%) on the Rs 30 lakh for AY 2026-27, which is an irrecoverable cash cost. Also, Section 16 of the MSMED Act compounds interest at 3 times the RBI bank rate from the due date, which is a separate civil liability for the entire delayed period.
Does the standard proviso to Section 43B (payment before return filing date) apply to clause (h)?
No. The Finance Act 2023 explicitly excluded Section 43B(h) from the benefit of the standard proviso. For all other clauses of Section 43B (taxes, PF, interest on bank loans, etc.), a payment made after 31 March but before the return filing due date (31 October for tax-audited entities) is allowed as a deduction for the prior year. Section 43B(h) has no such relief. For MSME payments, the payment MUST be made within the 45 or 15 day window during the financial year itself. There is no last-minute cure after 31 March. This makes Section 43B(h) the strictest clause in Section 43B and the single most powerful payment recovery tool available to Micro and Small enterprises.
Does Section 43B(h) apply to all types of buyers, including individuals and firms?
Yes. Section 43B(h) applies to all assessees who compute income under the head Profits and Gains of Business or Profession, including companies, LLPs, partnership firms, proprietorships, and individuals with business income. The only practical exemption is for assessees computing income under the presumptive taxation scheme (Section 44AD or Section 44ADA), where income is computed as a flat percentage of turnover and there is no itemized expense deduction to disallow. For all other business assessees, if they owe money to a Micro or Small Enterprise and have not paid within 45 or 15 days, the disallowance applies regardless of their size, turnover, or the nature of the goods or services. If you received a Section 156 tax demand with a disallowance under Section 43B(h), review your MSME supplier payment records immediately.
CA Madhusmita Padal is a Practicing Chartered Accountant with firms based in Odisha and Chennai. She specializes in taxation, company law, and auditing. She is passionate about simplifying complex concepts and making knowledge accessible to all.