MSME 45-Day Payment Rule: Section 43B(h) Tax Disallowance Guide 2026

If your business buys goods or services from small Indian suppliers, a tax provision added in 2023 may have already cost you a deduction — quietly and without warning. Section 43B(h) of the Income Tax Act, 1961, inserted by the Finance Act 2023 and effective from FY 2023-24 (AY 2024-25), requires that payments to Micro and Small Enterprises be made within a strict time window. Miss that window, and the expense is disallowed in the year of accrual, pushing your taxable income up without any change to your actual spending.

Three assessment years in, Section 43B(h) remains one of the most misunderstood provisions in practice. Businesses discover disallowances only when the audit starts. CAs ask how to account for pending MSME payments correctly. And the question — how do I even know which vendors are MSMEs? — trips up firms of every size. This guide settles all of it: the exact rules, real rupee examples, the accounting entries, and a practical year-end checklist.

What Section 43B(h) Actually Says

Section 43B of the Income Tax Act lists expenses that are deductible only in the year of actual payment, regardless of your accounting method. Employer PF contributions, bonus payments, and interest on loans from scheduled banks are classic Section 43B items. The Finance Act 2023 added a new clause (h) to this list.

Section 43B(h) states that any sum payable to a Micro or Small Enterprise shall be deductible only in the year of actual payment — provided the payment is made within the time limits under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Those limits are:

• Without a written agreement: Payment must be made within 15 days from the date goods are delivered or services are rendered.
• With a written agreement specifying credit terms: Payment must be made within 45 days from the date of delivery or completion of service. The agreement cannot specify a credit period exceeding 45 days — if it does, the 45-day cap applies automatically.

Two points your team must internalise. First, only Micro and Small enterprises are covered — Medium enterprises are expressly excluded from Section 43B(h). Second, the 45-day window runs from the date of delivery, not the invoice date. If goods arrive on July 5 but the invoice is dated July 10, your clock started on July 5.

Who Qualifies as a Micro or Small Enterprise?

Under the revised MSME classification effective July 2020, enterprises are classified based on two criteria — investment in plant, machinery, or equipment, and annual turnover. The enterprise is classified according to whichever threshold it crosses first:

Medium enterprises are not covered by Section 43B(h). Only Micro and Small enterprises trigger the provision.

The Udyam Registration Requirement

An enterprise must be registered on the Udyam Registration Portal to be legally recognised as an MSME. Udyam registration generates a unique Udyam Registration Number (URN). If your supplier has no Udyam certificate, they are not an MSME for Section 43B(h) purposes — even if their size would qualify them.

Your compliance requirement is simple: collect a copy of the Udyam Registration Certificate from every supplier. Build this into your vendor onboarding checklist. Without the certificate on file, you cannot determine whether Section 43B(h) applies — and you cannot establish your position if a disallowance is raised later.

The Disallowance Mechanics — What It Actually Costs

Here is what Section 43B(h) means in rupees.

Your business purchases raw materials worth ₹30 lakh from a Small enterprise in March 2026. Goods are delivered on March 10, 2026. You have a written agreement allowing 45 days of credit. The payment deadline under Section 43B(h) is therefore April 24, 2026 (45 days from March 10).

If you pay by April 24, 2026: The ₹30 lakh is fully deductible in FY 2025-26. No issue.

If you pay on June 1, 2026: The ₹30 lakh is disallowed in FY 2025-26. It becomes deductible in FY 2026-27 when the payment is actually made.

The immediate tax cost: at 30% corporate tax rate, that is ₹9 lakh in additional tax in FY 2025-26, plus potential interest under Section 234B/234C if advance tax was underpaid. You recover the deduction in FY 2026-27 when payment is made — but the timing mismatch creates real cash outflow now.

Scale this across 20 to 30 MSME vendors with occasional late payments, and the aggregate disallowance can run into crores for mid-sized manufacturing or trading businesses.

Partial payments matter too. If you pay ₹15 lakh of the ₹30 lakh invoice within 45 days, only the remaining ₹15 lakh outstanding beyond the deadline is disallowed. Section 43B(h) tracks the actual unpaid amount at the due date — not the full invoice value.

The Accounting Treatment You Must Implement

Most accounting systems do not automatically flag MSME payment timelines. You need to configure your system to track this proactively.

Tag MSME Creditors Separately in Your System

In your accounts payable module, tag every Micro and Small enterprise vendor distinctly — a separate creditor group or a custom field for the Udyam Number. This enables you to generate a creditor ageing report filtered only to MSME vendors.

The journal entries for purchases are standard. There is no special entry at the time of purchase:

On purchase (delivery date: March 10, 2026)

• Debit: Raw Material Purchases — ₹30,00,000
• Credit: MSME Creditor (Vendor A) — ₹30,00,000

No separate book entry is required for the Section 43B(h) disallowance itself — it is a tax computation adjustment. However, if you follow AS-22 (Taxes on Income), which is mandatory for companies, you must recognise a Deferred Tax Asset for this timing difference:

If still outstanding on March 31, 2026 (beyond the due date)

• Debit: Deferred Tax Asset — ₹9,00,000 (₹30,00,000 × 30%)
• Credit: Deferred Tax Benefit (P&L) — ₹9,00,000

When the payment is made in FY 2026-27 and the deduction is claimed, reverse this deferred tax entry.

Run an MSME Creditor Ageing Report Before Year-End

Configure your accounts payable system to generate a report showing, for each MSME creditor: the delivery date, the 45-day due date, the outstanding amount, and days overdue. Run this report by March 15 each year. Any amount past its due date either needs to be cleared before March 31 to preserve the deduction, or flagged for disallowance in the tax computation.

Year-End Checklist for CAs: Section 43B(h) Audit Steps

Work through this list when finalising accounts for any client with MSME vendors:

1. 1Collect Udyam certificates for all creditors outstanding at March 31. Mark each as Micro, Small, or not-MSME.
2. 2Filter for Micro and Small only — these trigger Section 43B(h).
3. 3Identify the delivery date for each outstanding invoice — not the invoice date, but the actual goods receipt or service completion date.
4. 4Calculate the due date — 15 days from delivery (no written agreement) or 45 days (written agreement with defined credit terms, capped at 45 days).
5. 5Flag overdue amounts — any MSME payable where the due date falls on or before March 31 and remains unpaid.
6. 6Compute total disallowance — sum of all overdue outstanding amounts at March 31.
7. 7Add back to taxable income in the tax computation. If your client is subject to tax audit, note the disallowance in Form 3CD, Clause 26(A).
8. 8Assess deferred tax impact under AS-22 for company clients.
9. 9Advise your client to settle overdue MSME payables before March 31 wherever cash flow permits — it is always cheaper to pay early than to carry the additional tax into the next year.
10. 10Retain your working papers — include Udyam certificates, ageing report, and the Section 43B(h) computation as part of your audit file.

Common Mistakes That Lead to Disallowances

Using invoice date instead of delivery date. If goods arrive July 1 and the invoice is dated July 10, your 45-day window closes August 15, not August 24. A 9-day gap can turn a timely payment into a disallowance. Record the goods receipt date in every purchase entry — not just the invoice date.

Assuming vendor size declarations are always current. An enterprise that qualified as Small last year may have crossed the ₹50 crore turnover threshold this year and become Medium. Re-verify Udyam certificates annually — vendors must update their registration when they change classification, but many miss this step.

Checking only one MSME threshold. A supplier with ₹8 crore in plant and machinery (within the Small investment limit of ₹10 crore) but ₹60 crore in annual turnover (above the Small turnover limit of ₹50 crore) is a Medium enterprise — and not covered by Section 43B(h). Both thresholds must be tested; classification follows whichever is breached first.

Misunderstanding TDS and Section 43B(h). When you deduct TDS from an MSME vendor payment and remit it to the government, that TDS amount counts as payment for Section 43B(h) purposes. So if a ₹5 lakh invoice has ₹50,000 TDS deducted and paid to the government by the due date, the full ₹5 lakh is treated as settled — not just the ₹4,50,000 net amount paid directly to the vendor.

Missing service completion dates. For services, the 45-day clock starts from the date the service is completed and accepted — not the invoice date. Document service completion dates in your work orders and acceptance certificates.

Treating advance payments as covered by Section 43B(h). If you pay an advance to an MSME vendor before goods are delivered or services rendered, Section 43B(h) does not apply to that advance — the provision covers amounts payable after delivery, not prepayments. Advances are deductible normally when the corresponding expenditure is recognised in the books.

Key Takeaways

• Section 43B(h), effective from FY 2023-24, disallows MSME supplier payments not settled within 15 days (no written agreement) or 45 days (written agreement, capped at 45 days) of delivery.
• Only Micro and Small enterprises are covered; Medium enterprises are expressly excluded from the provision.
• The time limit runs from the date of delivery or service completion — not the invoice date.
• Disallowed amounts become deductible in the year of actual payment, but the timing mismatch creates immediate additional tax liability and potential interest under Section 234B/234C.
• Partial payments reduce the disallowance proportionally — pay as much as you can before the 45-day deadline.
• Collect and archive Udyam Registration Certificates from every MSME supplier — they are your primary compliance evidence if a disallowance is contested.
• Run an MSME creditor ageing report by March 15 each year and clear overdue payables before March 31 wherever possible.

How corpus Helps

corpus lets you tag vendors as Micro, Small, or Medium enterprises directly in the vendor master, with a dedicated Udyam Registration Number field against each supplier profile. The accounts payable module generates an MSME-specific creditor ageing report with payment due dates computed from goods receipt dates — not invoice dates — so your Section 43B(h) exposure is visible before year-end, not after.

For CAs managing multiple client books, corpus flags outstanding MSME payables that have crossed the 45-day window in a single dashboard view, turning the Section 43B(h) year-end review from a manual spreadsheet exercise into a 10-minute task per client.

Start your free trial at corpusca.in and take Section 43B(h) off your year-end compliance checklist for good.