If your business purchases goods or services from MSMEs, the new Income Tax rule under Section 43B(h) can directly impact your tax calculation. Starting from FY 2024–25, delayed payments to MSMEs can lead to disallowed expenses and increased taxable income.
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What is Section 43B(h)?(MSME Payment Rule)
Section 43B(h) mandates that:
Payments to registered MSMEs must be made within 45 days (if there is a written agreement) or within 15 days (if there is no agreement), failing which the expense will be disallowed in the same financial year.
In short, if you take services or buy materials from a registered Micro or Small enterprise, and don’t pay within the allowed time, you will not get income tax benefit for that expense in the current year.
Why Has This Rule Been Introduced?
Many businesses delay payments to MSMEs for months. To ensure timely payments and improve cash flow for small businesses, the government has now linked payment timelines with income tax deductions.
This will force bigger businesses to either pay on time or lose the benefit of claiming it as an expense.
Who Qualifies as an MSME?
Only registered Micro and Small enterprises under the Udyam Portal are covered.
- Micro Enterprise: Investment < ₹1 crore, Turnover < ₹5 crore
- Small Enterprise: Investment < ₹10 crore, Turnover < ₹50 crore
- Revised Turnover Limit from April 2025
- Micro Enterprise: Investment: Up to Rs. 10 crore
Small Enterprise: Investment: Up to Rs. 100 crore
This rule does not apply to medium enterprises or unregistered suppliers.
Which Expenses Are Affected?
Here are examples of expenses that can be disallowed under Section 43B(h) if paid late:
- Purchases of goods or materials from MSME suppliers
- Job work or outsourced manufacturing
- Freelancing, design, printing, digital marketing services from MSMEs
- Repair and maintenance services
- Packaging or labour services
Time Limit for Payment for MSME
| Condition | Time Limit to Pay | Result if Not Paid in Time |
|---|---|---|
| Written agreement | 45 days | Expense disallowed in current year |
| No agreement | 15 days | Expense disallowed in current year |
If payment is made late, the deduction will be allowed only in the year of actual payment, not in the year of purchase.
Example
You purchased material worth ₹5,00,000 from a registered MSME on 1 Jan 2025. There was an agreement giving 30 days credit.
You paid the supplier on 25 March 2025 – within 45 days.
Result: Expense is allowed in FY 2024–25.
If you had paid on 10 April 2025 (after 45 days):
Result: Expense not allowed in FY 2024–25. It will be allowed only in FY 2025–26.
Tax Calculation Impact
Suppose your business profit is ₹20 lakh. You had purchases worth ₹5 lakh from an MSME, but paid them after 45 days.
This ₹5 lakh expense will be disallowed. Your taxable income will become ₹25 lakh – and you’ll pay more tax.
When Is This Rule Applicable?
Section 43B(h) is applicable from FY 2023–24, but it comes into full effect starting 1 April 2024. That means it will impact Income Tax Returns (ITRs) and Tax Audits for AY 2025–26.
Action Points for Businesses
- Collect Udyam Registration Certificates from vendors
- Track invoice dates and payment due dates
- Ensure your accounting software or team tracks MSME invoices separately
- Make payments within the 15 or 45-day window
- Mark disallowed expenses clearly in your tax computation, if payment is delayed
Important Clarifications
- Applies only to registered MSMEs (Micro & Small)
- Applies only to businesses, not individuals filing ITR-1 or 2
- Does not apply to medium enterprises
- Applies to both goods and services purchased
- Disallowance is automatic – even if your intent was genuine
Final Words
If you’re dealing with MSMEs, paying them on time is no longer just good ethics — it’s a tax-saving necessity. Even a small delay in payment can increase your taxable income and reduce your deductions.
Take action now: verify MSME status, maintain proper agreements, and clear payments within time.
Contact taxgiveindia.com for services of msme and taxation.