Tax
If a business does not settle dues to a registered micro or small enterprise within the statutory 45‑day (or 15‑day without contract) window, the amount is added back to taxable profit at year‑end, removing the deduction and increasing income‑tax liability.
Check your DPDP readiness — free More on the blogSection 43B(h) of the Income‑Tax Act removes the tax deduction for any amount payable to a registered micro or small enterprise if the payment is not made within the time limits prescribed in the MSMED Act. The rule applies at the end of the financial year, meaning the unpaid sum is treated as income and taxed accordingly.
When a written agreement exists, the law caps the credit period at 45 days from the date the supplier accepts the order. Any clause that extends the period to 60, 90 or 120 days is void. In the absence of a written contract, the payment must be made within 15 days of the invoice or delivery, whichever is later.
A common misconception is that paying before the income‑tax return filing date (the Section 139(1) deadline) rescues the deduction. The first proviso to Section 43B expressly excludes clause (h), so the deduction can only be claimed in the year the payment is actually made, not merely before filing.
The disallowance applies only to suppliers registered as Micro or Small enterprises under the Udyam portal. Medium‑size firms and traders in the retail or wholesale segment are excluded, as clarified by CBDT guidelines and the relevant MSME circular. If a business fails to meet the statutory deadline, the unpaid amount is added back to taxable profit on 31 March. This not only raises the income‑tax bill for that year but also attracts compound interest under Section 16 of the MSMED Act, which itself is non‑deductible under Section 23 of the MSMED Act. Disputes raised within the first 15 days of delivery can postpone the start of the 45‑day period, but only after the dispute is resolved. Until then, the original deadline remains, and any delay beyond it will trigger the disallowance. Businesses often overlook the need to collect and verify the vendor's Udyam registration. Without proper documentation, the buyer may inadvertently treat a payment as ordinary expense, only to face a tax adjustment during audit when the vendor is identified as an MSME. The financial impact can be significant. A Rs 10 lakh overdue invoice, for example, would be added back to profit, attracting tax at the applicable corporate rate and additional interest. The net cost therefore includes both the tax on the added profit and the penalty interest, effectively eroding cash flow.
If a written contract exists, payment must be made within 45 days of the supplier's acceptance of the order. Without a contract, the payment is due within 15 days of the invoice or delivery, whichever is later.
No. The proviso that allows deductions for payments made before the return filing date does not apply to clause (h) of Section 43B. The deduction is only allowed in the year the payment is actually made.
No. Section 43B(h) applies solely to suppliers registered as Micro or Small enterprises under Udyam. Medium enterprises and retail or wholesale traders are expressly excluded from this provision.
No. Interest charged for delayed payment under Section 16 of the MSMED Act is non‑deductible when computing taxable income, as reinforced by Section 23 of the MSMED Act.
Founder & CEO at VidhiSar. I have watched four companies pay for the same mistake, and it was never the mistake anyone expected. VidhiSar is software, not a law firm: every answer names the section it relies on so you can check it, and anything turning on your specific facts is worth putting to a professional. More about who builds this