Section 43B(h) of the Income-tax Act, 1961 changed how businesses must treat purchases from small suppliers. Under this provision, an amount payable to a micro or small enterprise is allowed as a deduction in the year the expense is incurred only if it is paid within the time limit set by section 15 of the MSMED Act, 2006, which is 45 days where there is a written agreement and 15 days where there is none. If you pay later, the deduction is pushed to the year of actual payment.
For a business with many small vendors, this can inflate taxable profit and trigger unexpected tax outgo, so Section 43B(h) compliance is now a year-round discipline rather than a year-end clean-up. The provision applies from AY 2024-25 onward, which means it is fully relevant for AY 2026-27 (FY 2025-26). This guide explains who is covered, how the time limit works, how to track vendor payments, what a disallowance looks like in practice, and the checklist we use to keep clients safe.
What Is Section 43B(h) and Why Does It Matter for AY 2026–27?
Section 43B(h) is a deduction-timing rule that disallows an expense payable to a micro or small enterprise if it remains unpaid beyond the statutory period at the end of the financial year. The expense is not lost; it is simply deferred until the year in which you actually pay it.
Section 43B already made several statutory dues, such as taxes, employer provident fund contributions and bonus, deductible only on payment. The Finance Act, 2023 added clause (h) to extend the same pay-to-claim principle to dues owed to micro and small suppliers, with the aim of discouraging long credit periods that strain small businesses. It applies to expenses of any nature, including purchases, services and capital items where the payable arises from a transaction with a covered vendor.
For AY 2026-27, it means that any amount you owed to such a vendor on 31 March 2026 beyond the allowed time must be added back to income for FY 2025-26, even if you account for the cost in your books. Because the add-back is an income adjustment, it affects advance tax, the tax audit report and the final liability. Businesses filing business-income returns should also review how this adjustment flows into ITR-3 return filing.
Who Is Covered and What Is the Payment Time Limit?
Section 43B(h) covers payments to suppliers that are micro or small enterprises under the MSMED Act and that hold a valid Udyam registration. Medium enterprises are not covered. The time limit is 45 days from the day of acceptance of goods or services where a written agreement exists, and 15 days where it does not.
Micro Enterprise Covered
Investment in plant and machinery or equipment up to ₹2.5 crore and turnover up to ₹10 crore, with a valid Udyam registration.
Small Enterprise Covered
Investment in plant and machinery or equipment up to ₹25 crore and turnover up to ₹100 crore, with a valid Udyam registration.
Medium Enterprise Not covered
Medium enterprises are outside the scope of section 43B(h), so payments to them are not subject to this disallowance.
Supplies Before Udyam Registration Generally not covered
A vendor is relevant only from the date it obtained Udyam registration, so supplies made before registration are generally not caught.
Classification depends on investment in plant and machinery or equipment and on turnover. From 1 April 2025, the limits were revised upward, so a micro enterprise is one with investment up to ₹2.5 crore and turnover up to ₹10 crore, and a small enterprise is one with investment up to ₹25 crore and turnover up to ₹100 crore. Your vendor's Udyam certificate states its category, and the buyer should verify it on the official portal.
| Situation | Limit / treatment | Point to remember |
|---|---|---|
| Written agreement exists | 45 days from the day of acceptance | The cap is absolute: even if your contract allows 90 days, the limit for section 43B(h) remains 45 days |
| No written agreement | 15 days from the day of acceptance | Track the 15-day limit for such vendors |
| Clock start date | Day of actual acceptance, or deemed acceptance | Deemed acceptance applies where you do not object in writing within 15 days of delivery |
| Advance payment | Payment before the due date counts as timely | Advances made within the period protect the deduction |
| Payment after year-end but before the return due date | Does not rescue the deduction for clause (h) No relief | Unlike several other section 43B items, the payment must fall within the permitted period |
The 45-day cap is absolute: even if your contract allows 90 days, the statutory limit for the purpose of section 43B(h) remains 45 days. The clock starts on the day of actual acceptance, or the day of deemed acceptance where you do not object in writing within 15 days of delivery, and advance payments made before the due date count as timely.
Some points need care. A vendor is relevant only from the date it obtained Udyam registration, so supplies made before registration are generally not caught. Whether traders, as opposed to manufacturers and service providers, are covered has been debated, and many advisers adopt a cautious approach, so confirm the position for your vendors with your adviser. Finally, unlike several other section 43B items, a payment made after year-end but before the return due date does not rescue the deduction for clause (h); the payment must fall within the permitted period.
How Do You Track MSME Vendor Payments Step by Step?
You track MSME vendor payments by identifying covered vendors, recording their category and terms, calculating due dates automatically, and reviewing ageing every month rather than only at year-end. The following eight steps form a practical Section 43B(h) compliance checklist.
= Statutory due date for section 43B(h)
Build and Maintain an MSME Vendor Master
List every supplier, collect its Udyam registration number and certificate, and record its category, registration date and whether it supplies goods or services. Update the master whenever a new vendor is onboarded, and ask existing vendors to confirm their status at least annually.
Verify Udyam Details on the Official Portal
Do not rely on a certificate copy alone. Check the Udyam number, the enterprise name and the category on the official Udyam portal, and keep a screenshot or PDF as audit evidence.
Record Agreement Terms for Each Vendor
Note whether a written agreement exists and what credit period it specifies. Where terms exceed 45 days, cap the tracking limit at 45 days, and where there is no agreement, track the 15-day limit.
Capture the Date of Acceptance for Every Invoice
Add a field in your accounting software for the date goods were received or services accepted, not just the invoice date. This date, not the bill date, starts the clock.
Compute the Statutory Due Date Automatically
Configure your ERP or spreadsheet to calculate the due date for each bill as acceptance date plus 15 or 45 days, and flag bills that are close to breaching the limit.
Run a Monthly MSME Ageing Report
Review the report each month and schedule payments of flagged invoices in the next payment run. Escalate disputed invoices early, because a genuine dispute must be documented, not merely assumed.
Perform a Year-End Cut-Off Review
In the last two to three weeks of March, list every MSME payable that is or will be overdue on 31 March, decide which can be cleared before year-end, and quantify the add-back for the remainder.
Reconcile, Report and Document
Reconcile the payable balances with vendor statements, prepare the disallowance computation, and share the data with your tax auditor so that it can be reported correctly in the tax audit report and return.
What Happens If You Pay an MSME Vendor Late?
If you pay an MSME vendor late and the amount is still outstanding at year-end beyond the time limit, the expense is disallowed in that year and added back to your taxable income. It becomes deductible in the year you actually pay it.
Consider a simple example. A business accepts services worth ₹10 lakh from a small enterprise on 1 February 2026 under a written agreement allowing 45 days, so payment is due on or about 18 March 2026. If the amount remains unpaid on 31 March 2026, the ₹10 lakh is added back to FY 2025-26 income and the deduction is claimed in the year of payment. If the same service were accepted on 1 March 2026, the due date would fall in April 2026, so no disallowance arises for FY 2025-26 even though the amount is unpaid at year-end. If there were no agreement, the first invoice would have been due within about 15 days, and the add-back would arise.
| Scenario (₹10 lakh payable, unpaid on 31 March 2026) | Statutory due date | Result for FY 2025-26 |
|---|---|---|
| Accepted 1 February 2026, written agreement allowing 45 days | On or about 18 March 2026 | ₹10 lakh added back to income Disallowed |
| Accepted 1 March 2026, written agreement allowing 45 days | April 2026 | No disallowance for FY 2025-26 Allowed |
| No written agreement | Within about 15 days of acceptance | Add-back arises Disallowed |
The tax cost goes beyond the timing difference. Under the MSMED Act, a buyer who delays payment is liable to pay compound interest at three times the bank rate notified by the Reserve Bank of India, with monthly rests, and that interest is not deductible for income tax purposes. Companies with MSME dues outstanding for more than 45 days must also report them through the MSME return filed with the Ministry of Corporate Affairs. Tax auditors are expected to report the amount covered by section 43B(h) in the tax audit report, so the issue is visible to the department. If your audit is due, see our income tax audit services. If the department proposes an adjustment on this ground, our income tax notice support can help you respond.
How Has Delayed Payment Law for Small Vendors Evolved Over the Years?
Delayed payment law for small vendors has moved from voluntary good practice before the 1990s to statutory interest in 1993 and 2006, and finally to a tax-based deterrent in 2023.
| Period | Change |
|---|---|
| 1983 | Section 43B inserted in the Income-tax Act to curb claims for unpaid statutory dues |
| Before 1991 | Small-scale industries supported through reservation and credit policies, but no uniform legal remedy for late payment by large buyers |
| 1993 | Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 introduced after liberalisation, giving small suppliers a right to interest |
| 2006 | MSMED Act, 2006 replaces the 1993 Act, creating the present categories and, in sections 15 to 24, setting the payment time limit, the interest rate and the dispute resolution route through the Micro and Small Enterprises Facilitation Council |
| 2020 | MSME definition reworked with Udyam registration |
| 1 April 2024 | Finance Act, 2023 inserts clause (h) in section 43B, linking the MSMED Act time limit to tax deduction |
| 1 April 2025 | MSME classification limits raised again |
Before 1991, small-scale industries were supported through reservation and credit policies, but there was no uniform legal remedy for late payment by large buyers. The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 was introduced after liberalisation to give small suppliers a right to interest. It was replaced by the Micro, Small and Medium Enterprises Development Act, 2006, which created the present categories and, in sections 15 to 24, set the payment time limit, the interest rate and the dispute resolution route through the Micro and Small Enterprises Facilitation Council.
Section 43B itself had been inserted in the Income-tax Act in 1983 to curb claims for unpaid statutory dues. The definition of MSMEs was reworked in 2020 with Udyam registration, and the limits were raised again from 1 April 2025. The Finance Act, 2023 then linked the two worlds by inserting clause (h) in section 43B with effect from 1 April 2024. Udyam registration details can be checked on the official portal at https://udyamregistration.gov.in.
What Should a Section 43B(h) Compliance Checklist Include?
A good checklist covers vendor identification, terms and dates, monthly monitoring, year-end action, and documentation. Its purpose is to make late payments visible before the financial year closes, while there is still time to pay.
In practice, finance teams should confirm that the vendor master is current, that acceptance dates are captured for new invoices, that the ageing report is reviewed monthly, and that a year-end exercise quantifies the exposure. They should also ensure that payment approvals prioritise MSME invoices that are nearing the limit, and that written agreements do not promise credit periods longer than 45 days.
Strong books make this much easier, so businesses with scattered records should consider bookkeeping services or an accounting and tax compliance arrangement. Management teams that want a live dashboard of payables can also look at financial reporting and MIS and CFO services. For a broader look at errors that commonly lead to notices and delayed refunds, read our guide on the 10 common mistakes to avoid when filing ITR for AY 2026-27.
