A Detailed Guide to Section 43B(h) of Income Tax Act: Applicability, Date, Limit, And Example

Section 43B(h) of the Income Tax Act, 1961, was introduced to ensure that businesses make timely payments to micro and small enterprises (MSEs). It states that if a business purchases goods or services from an MSE but delays the payment beyond the timeline specified in the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, it cannot claim the expense as a deduction in that financial year. Instead, the deduction is allowed only in the year the payment is actually made.

This provision encourages businesses to pay MSEs on time, typically within 45 days, as per the MSMED Act. By linking tax benefits to actual payments, Section 43B(h) helps improve cash flow for MSEs, reducing financial stress and ensuring their sustainability.

Section 43B(h) of the Income Tax Act, 1961, was introduced through the Finance Act of 2023 and became effective on April 1, 2024. However, it is essential to note that while presenting the interim budget, 2024, the Union Finance Minister did not mention this provision that Indian companies with pending dues to micro and small manufacturing vendors will face higher taxes in AY 2024-25 due to the new Clause (h) in Section 43B, introduced by the 2023 Finance Act. 

In this blog, we are going to discuss everything about Section 43B(h) of Income Tax Act, such as applicability, date, limit, and implications. Whether you are a legal practitioner, tax consultant, financial advisor, accountant, or business entrepreneur, you can read this blog to get familiar with the vital Income Tax Act. 

Section 43B(h) was introduced to ensure timely payments to Micro, Small, and Medium Enterprises (MSMEs). It mandates that payments due to MSMEs for goods or services must be made within the timeframe specified under the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006—i.e., 45 days if there is a written agreement, or 15 days if there is none. If payments exceed this limit, the buyer cannot claim it as an expense in the same financial year, potentially increasing taxable income.

Applicability to Traders and Non-Traders

1. For Traders (Resellers) – Section 43B(h) does not apply to payments made by traders to MSMEs if the goods purchased are for resale without modification. For example, if a retailer buys packaged products from an MSME manufacturer and sells them unchanged, the delayed payment is not covered under this section.
2. For Non-Traders (Manufacturers/Service Providers) – Businesses that procure raw materials or services from MSMEs for value addition or production fall under this provision. For instance, if a furniture manufacturer buys wood from an MSME supplier and delays payment beyond the prescribed period, the expense will be disallowed in that financial year.

Section 43B(h) – Effective Date

The provisions of Section 43B(h) come into effect starting from April 1, 202,4, and will be applicable from the assessment year (AY) 2025-26.

For instance, Mr. X purchased goods from Mr. Y  on March 31, 2023. 

Will Section 43B(h) apply?

No, Section 43B(h) will not apply to purchases made before March 31, 2023.

Time Limit for the Payment 

According to Section 15 of the MSMED Act, 2006, businesses must settle payments with MSMEs within 45 days, based on the existence of a formal agreement. If no written agreement is in place, the payment must be made within 15 days. However, if there is a written agreement, the payment should be made as per the terms specified, with the payment period not exceeding 45 dayss

MSME Section 43B (h) has laid penalty rules for buyers who make late payments. This includes the Interest Rate for Delayed Payments to MSMEs.

If a buyer delays payment to an MSME, they are required to pay compound interest on the overdue amount. The interest rate is three times the bank rate, as set by the Reserve Bank of India (RBI).

When Interest Applies:

1. Based on the Agreement: If the buyer and MSME have agreed on a specific payment date, interest charges begin the day after that due date.
2. Without an Agreed Date: If no payment date is specified, the interest penalty starts 15 days after the goods or services are accepted, or deemed to be accepted, by the buyer.

Deduction of Interest Rates Under Section the Income Tax Act, 1961

It is essential to note that interest paid or payable on overdue payments to MSMEs cannot be deducted as a business expense for income tax calculations. As per Section 23 of the MSME Development Act, 2006, any interest incurred due to delayed payments to MSMEs is not eligible for deduction when determining taxable income under the Income Tax Act, 1961.

How Does It Impact Business?

Penalties for non-compliance of payment terms can impact a business’s financial and operational efficiency. 

1. From the financial point of view, the business has to mandatorily pay compound interest 3 times, the RBI’s rate, which increases financial expenses and burden. 
2. Secondly, late payment also affects the business’s operational efficiency as they have to strictly maintain all invoices received from MSMEs to avert further severe penalties. They must comply with the contractual terms and ensure timely payment. 

Complying with MSME Payment Rules: Best Practices 

The best practices to comply with MSME payment terms include

1. Terms and Conditions of the Contract Must Be Clear- Businesses and MSMEs must make the terms and conditions of the contract, including payment terms. Hence, drafting legal documents for contractual clarity is necessary to avoid any disputes. 
2. Streamlined Payment Process: Establish internal systems that focus on fast-tracking the approval and payment of MSME invoices to prevent delays.
3. Periodic Audits and Monitoring: Conduct regular assessments of vendor records and payment schedules to accurately identify MSME suppliers and ensure their dues are settled in compliance with legal requirements.

How MSMEs Will Benefit

1. Timely Payments & Cash Flow: Section 43B(h) encourages large companies to clear dues to MSMEs within the stipulated timeframe—15 days if there’s no written agreement and 45 days if an agreement exists. This ensures a steady cash flow, helping MSMEs sustain and grow their business.
2. Stronger Negotiation Power: MSMEs gain better leverage in setting payment terms with larger companies. Since the law enforces strict payment deadlines, MSMEs can confidently negotiate payment cycles without fear of delayed settlements.
3. Fewer Disputes & Legal Issues: Prompt payments reduce financial disputes and legal complications related to overdue payments. This saves valuable time, money, and effort for both MSMEs and their buyers.

The Advantages For Larger Enterprises

1. Optimized Tax Planning: By settling MSME payments within the prescribed period, businesses can claim these expenses as deductions in the same financial year, reducing their tax liability.
2. Improved Compliance & Transparency: Section 43B(h) ensures financial discipline, encouraging businesses to follow fair payment practices and maintain regulatory compliance.
3. Stronger MSME Ecosystem: Timely payments help MSMEs thrive, leading to a healthier supply chain. Larger businesses benefit from a well-supported MSME sector, which ensures resource availability and operational stability.

Understanding Expense Allowability Based on Payment Timing

1. If invoices dated between April 1, 2023, and February 15, 2024, are paid before March 31, 2024, the expenses will be deductible in FY 2023-24.
2. If invoices from February 16, 2024, to March 31, 2024, are paid within 45 days, the expenses remain deductible in FY 2023-24, provided a written agreement allows a 45-day payment period.
3. If payments are delayed beyond the due date, the expense will be deductible only in the financial year when the payment is made. For example, if an invoice from March 2024 is paid in June 2024, the deduction will apply in FY 2024-25 instead of FY 2023-24.

Step 1: Visit the official MSME registration portal at https://udyamregistration.gov.in. Enter the type of enterprise (Micro/Small/Medium) by the registration number.

Step 2: Click on the "Print/Verify" tab and select "Verify Udyam Registration Number" from the dropdown menu.

Step 3: Enter your Udyam Registration Number (URN) exactly as mentioned in your registration certificate.

Step 4: Provide the registered mobile number or email ID linked to your MSME registration for authentication.

Step 5: Enter the OTP received on your registered mobile or email and click on the "Validate OTP" button.

Step 6: Once verified, the system will display the MSME registration status, including validity and details.

Step 7: If the status shows unregistered or incorrect details, contact the MSME helpdesk or update the information accordingly.

What is Section 43B(h) of Income Tax Act?

Section 43B(h) disallows deductions for payments due to MSMEs unless cleared within the prescribed timeframe. Payments must be made within 15 days (without an agreement) or 45 days (with an agreement) to qualify for deduction in the same financial year.

Who is eligible for  Section 43B(h)?

This provision applies to businesses making payments to MSMEs registered under the Udyam portal. Any entity purchasing goods or services from MSMEs must ensure timely payment; otherwise, the deduction is allowed only in the year of actual payment.

What is the 45 days payment rule for MSME?

If an MSME and a buyer have a written agreement, payments must be made within 45 days. Without an agreement, the due period is 15 days. Payments beyond this timeframe result in disallowance of the expense under Section 43B(h) until settlement.

Can I carry forward payments made after the due date for the deduction?

Yes, but the deduction is postponed. If payments to MSMEs are made after the due date, the expense is allowed in the financial year when the actual payment occurs rather than the year of purchase.

What is the circular on 43B H of Income Tax Act?

The circular clarifies the provision's applicability, reinforcing that payments to MSMEs must comply with the prescribed timeline for deduction eligibility. It also stresses maintaining accurate records of payment agreements to ensure compliance and avoid disallowance.

What is the appointed day?

The appointed day refers to 15 days from the date of delivery of goods or services to the buyer. If no written agreement exists, payments must be made within this period to avoid interest penalties and disallowance under Section 43B(h).

Is it compulsory for businesses to register under the Udyam portal?

No, the registration is not mandatory. Getting a declaration from the supplier will also do the job and is considered valid proof for recognizing the Micro and Small Enterprises for this purpose of the Section.