Section 43B is a rule in India’s tax law that says some expenses only become tax-deductible when they are actually paid—not when they are recorded. Clause (h) is a new addition that focuses on payments to small businesses (MSMEs).
Why clause (h) was introduced in Budget 2023
In Budget 2023, the government added clause (h) to encourage big companies to pay MSMEs quickly, so they don’t suffer from money troubles. This started from April 1, 2024.
Importance of timely payments to MSMEs
When small businesses get paid late, they can’t run smoothly. Paying them quickly (within 15 or 45 days) helps them stay strong, grow, and borrow less money at high cost.
Understanding the Provision
What Section 43B(h) states
If a business buys from an MSME, it can only claim that cost as a tax deduction in that financial year if the payment is made:
- within 15 days if there’s no written agreement, or
- within 45 days if there is a written agreement (whichever is earlier).
Applicability to buyers dealing with MSMEs
The rule applies even if only the seller is registered as an MSME. The buyer doesn’t have to be registered.
Connection with the MSMED Act, 2006
Section 15 of the MSMED Act already required such timely payments. Now clause (h) ties that requirement to tax benefits.
Definition and Scope of MSMEs
Classification of MSMEs (Micro, Small, Medium)
- Micro: Investment up to ₹1 crore, turnover up to ₹5 crore
- Small: Investment up to ₹10 crore, turnover up to ₹50 crore
- Medium: Investment up to ₹50 crore, turnover up to ₹250 crore
Eligibility criteria under the MSMED Act
MSMEs must be registered under the MSMED Act (often via Udyam registration) to be eligible for these rules.
Difference between registered and unregistered MSMEs
Only registered MSMEs qualify for this provision. If they are not registered, clause (h) doesn’t apply.
Payment Rules under Section 43B(h)
15-day vs. 45-day payment rule explained
- No written agreement → Pay within 15 days.
- With agreement → Pay by the agreed date or within 45 days of acceptance, whichever is earlier.
How due dates are determined as per agreements
The due date is whichever comes first: the fixed date in the agreement or 45 days from acceptance. If the buyer raises a written objection within 15 days, the “acceptance” may shift.
Treatment of delayed payments
If payment isn’t made in time, that expense cannot be deducted in that year. Instead, deduction happens only in the year when payment is actually made.
Tax Implications for Businesses
- Disallowance of expenditure on delayed payments
Late payments lead to the corresponding expense being disallowed (not deducted) in that year.
- Impact on profit computation and taxable income
Without deducting the expense, profits appear higher and taxable income increases.
- When the deduction is allowed in subsequent years
The deduction is allowed only in the year when payment is actually made—even if accounting was done earlier.
Compliance Requirements
- Maintaining proper agreements and records
Businesses must keep clear agreements and payment records to prove compliance.
- Verification of supplier’s MSME registration
Buyers should check MSME registration on the Udyam portal or obtain supplier declarations.
- Role of auditors in reporting compliance
Auditors should check that payments to MSMEs are within the 15/45-day window and report disallowances if any.
Benefits of the Provision
- Encouraging financial discipline in large businesses: Ensures timely payments become part of good business habits.
- Ensuring steady cash flow for MSMEs: Helps them run operations smoothly and plan better.
- Promoting ease of doing business: Builds trust and healthier relationships between buyers and MSMEs.
Challenges and Concerns
- Burden of compliance on buyers: Adjusting payment systems can be hard and costly.
- Risk of disputes over MSME status and due dates: Especially in long or mixed contracts.
- Cash flow strain on businesses with tight margins: Paying early can stress buyers themselves.
Practical Examples and Case Studies
Illustration of timely payment compliance
If goods are accepted on February 10 and payment is done by March 27 (within 45 days), deduction is allowed in that year.
Scenario showing disallowance for delayed payment
If payment happens on April 15 when due was March 27, the deduction shifts to the next year.
Real-world impact on businesses and MSMEs
Fulfilling the 45-day rule means smoother cash, less borrowing, and lower taxes—for both MSMEs and buyers.
Expert Tips for Businesses
- How to structure agreements with MSMEs: Always include a clear due date, capped at 45 days.
- Importance of verifying MSME registration on Udyam Portal: Validates eligibility for clause (h).
- Strategies to avoid tax disallowances:
- Track invoice dates carefully.
- Automate reminders for payments.
- Resolve disputes quickly to not reset acceptance timelines.
Conclusion: This rule (Section 43B(h)) brings both benefits and challenges. It supports MSMEs by ensuring timely payments, but requires disciplined systems from buyers. In the long run, it strengthens the business ecosystem. My advice: set up well-documented, timely payment processes—and don’t forget to check MSME registration.
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