Tax & MSME · Provision
Unpaid dues to registered micro and small enterprises beyond 45/15 days are disallowed as business expenses — under s.43B(h) to FY 2025-26, and s.37(2)(g) of the Income-tax Act 2025 from tax year 2026-27. (Section 43B(h), Income-tax Act, 1961.) Inserted by the Finance Act, 2023, for FY 2023-24 onward · Replaced from 1 April 2026 by section 37(2)(g) of the Income-tax Act, 2025.
Quick Statutory Answer
Under Section 43B(h) of the Income-tax Act, 1961 (inserted via Finance Act 2023), any payment owed to a registered Micro or Small enterprise beyond the statutory limit under Section 15 of the MSMED Act (maximum 45 days with written agreement, or 15 days without) cannot be claimed as a tax deduction on an accrual basis. If outstanding past the deadline at the end of the financial year (March 31), the entire expense is added back to taxable business income for that year and is deductible only in the year actually paid. Medium enterprises and traders are exempt. From tax year 2026-27 the same rule applies as Section 37(2)(g) of the Income-tax Act, 2025.
| Supplier Category | Agreement Terms | Payment Date | Income Tax Deduction Status | MSMED Section 16 Penalty |
|---|---|---|---|---|
| Micro / Small Enterprise | Written (e.g. 30 days) | Paid within 30 days | Allowed as deduction in current FY | Nil |
| Micro / Small Enterprise | Written (e.g. 60 days agreed) | Paid on Day 42 (within 45 days) | Allowed in current FY (statutory 45-day cap honoured) | Nil |
| Micro / Small Enterprise | Written (e.g. 60 days agreed) | Paid on Day 50 (after 31 March) | Disallowed in current FY; deductible in next FY when paid | Compounded monthly at 3× RBI bank rate from Day 46 |
| Micro / Small Enterprise | No written agreement | Paid on Day 20 (after 31 March) | Disallowed in current FY (exceeded 15-day limit); deductible next FY | Compounded monthly at 3× RBI bank rate from Day 16 |
| Medium Enterprise | Any terms | Overdue at 31 March | Allowed under standard mercantile accrual (Section 43B(h) exempt) | Section 16 interest does not apply to medium units |
| Wholesale / Retail Trader | Any terms | Overdue at 31 March | Allowed under standard mercantile accrual (Traders exempt under OM 2021) | MSME Chapter V dispute resolution excluded |
100% deduction disallowed at 31 March. The overdue invoice amount is added back to taxable business profits for the financial year, triggering income tax liability plus MSMED Section 16 compound interest.
Section 37(2)(g). The Income-tax Act, 2025 took effect on 1 April 2026, and section 37(1) allows the listed sums only in the tax year they are actually paid; clause (g) is the amount payable to a micro or small enterprise beyond the section 15 MSMED Act time limit. Section 37(3), like the old first proviso to section 43B, excludes clause (g) from the relief for payment before the return due date. Section 43B(h) continues to govern FY 2025-26 and earlier.
No. The first proviso to Section 43B, which allows deductions for certain taxes and statutory liabilities paid before the ITR filing due date under Section 139(1), specifically excludes clause (h). If payment to a micro or small enterprise was overdue on March 31, the deduction is disallowed for that assessment year and can only be claimed in the subsequent year when actual payment is made.
No. Section 15 of the MSMED Act mandates that the agreed period of credit cannot exceed 45 days. Even if both parties sign a contract for 60 or 90 days, the law caps it at 45 days. Any payment made after 45 days is overdue and triggers Section 43B(h) disallowance if unpaid by March 31.
No. Section 43B(h) applies only to Micro and Small enterprises. Medium enterprises are excluded. Additionally, the Ministry of MSME circular (OM No. 5/2(2)/2021-E/P & G/Policy) clarified that registration of Retail and Wholesale Trade on Udyam is only for Priority Sector Lending and not for Chapter V benefits, exempting traders from 43B(h).
No. Under Section 23 of the MSMED Act, 2006, any interest paid or payable by a buyer under Section 16 is explicitly non-deductible while computing taxable business income under the Income-tax Act, 1961.
Under the Explanation to Section 15 of the MSMED Act, if the buyer raises a written objection to the vendor within 15 days of delivery, the 45-day payment period commences only from the day the dispute is settled between the parties, postponing the 43B(h) disallowance trigger.
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