The MSME 45-Day Payment Rule (Section 43B(h)) and What It Does to Your Vendors

Section 43B(h) of the Income Tax Act denies a business its tax deduction for amounts owed to micro and small enterprise vendors unless payment is actually made within 45 days, turning a commercial payment delay into a direct tax cost.

Key facts at a glance

• Section 43B(h) applies only to payments owed to micro and small enterprises, not medium enterprises.
• With a written agreement, payment is due within the agreed period, not exceeding 45 days from acceptance of goods or services.
• With no written agreement, the default payment period under the MSMED Act is 15 days.
• If payment is not made within this window, the expense is disallowed as a deduction in the year it was incurred.
• The disallowed amount becomes deductible only in the year it is actually paid, effectively switching that expense to a cash basis.
• Buyers should verify vendor status through the vendor's Udyam registration certificate.
• The provision applies from Assessment Year 2024-25 onward, following its introduction via the Finance Act.

What Section 43B(h) actually does

Section 43B of the Income Tax Act has long operated on a simple principle: certain expenses are only deductible when actually paid, not merely when they accrue on the books. Section 43B(h) extended this logic specifically to payments owed to micro and small enterprises, tying the deduction to the payment timelines already set out in Section 15 of the MSMED Act, 2006.

Before this amendment, a business could accrue an expense for goods or services bought from a small vendor and claim the deduction in that year, regardless of when it actually paid the vendor. Section 43B(h) closed that gap for MSME vendors specifically: if the vendor is a micro or small enterprise and payment is not made within the statutory window, the deduction is denied for that year.

The payment clock: 45 days or 15 days

The exact deadline depends on whether there is a written agreement between buyer and supplier. If a written agreement specifies a payment period, that period applies, but it cannot exceed 45 days from the date of acceptance of goods or services. If there is no written agreement at all, the fallback period is a much tighter 15 days. This makes having a documented payment term in vendor agreements directly useful, since it is the only way to access the fuller 45-day window rather than defaulting to 15.

Why this only applies to micro and small, not medium enterprises

The MSMED Act classifies enterprises into micro, small, and medium categories based on investment in plant and machinery or equipment, and annual turnover. Section 43B(h) deliberately covers only the micro and small categories, leaving medium enterprises outside its scope. This means the practical compliance task for a buyer is not just "check if my vendor is an MSME" but specifically "check if my vendor is registered as micro or small" - a distinction that requires looking at the actual Udyam registration certificate rather than assuming based on the vendor's size or reputation.

Payment timelines compared

What this means operationally for buyers

The practical effect on businesses buying from micro and small vendors has been a genuine shortening of payment cycles, because the cost of delay changed from a purely commercial risk (an annoyed vendor, a potential legal claim) to a direct tax cost (a lost deduction in the current year). Businesses that previously ran 60- or 90-day payment cycles with smaller vendors have had to either renegotiate terms, prioritise these vendors in payment runs, or accept the deferred deduction.

The first operational step is building a reliable way to identify which vendors are actually micro or small enterprises, since the provision cannot be applied correctly without that classification. Collecting Udyam registration certificates as part of vendor onboarding, and flagging those vendors in the accounts payable system for priority payment tracking, is the most direct way to manage this.

Getting the classification and paperwork right

Because the disallowance turns on facts - the vendor's registered classification, the existence and terms of a written agreement, and the actual date of payment - businesses should keep clear records of all three for every MSME vendor relationship. Relying on informal understanding of "this vendor is small" is not enough; the classification needs to be documented and current.

If you are not sure where your business stands on MSME vendor and broader statutory payment compliance, ComplianceCheck's compliance assessment gives you a clear picture in a few minutes.

Sources

• Income Tax Department - incometax.gov.in
• Ministry of Micro, Small and Medium Enterprises / Udyam Registration - msme.gov.in
• Ministry of Corporate Affairs - mca.gov.in

This guide is general information, not legal advice. Requirements vary by state, sector and headcount - confirm specifics with a compliance professional or the relevant authority.