Section 43B(h): the 45-day MSME payment rule that changes your year-end
Year-end profit is not the same as year-end tax deduction. If your company buys goods or services from a registered MSME and leaves the invoice unpaid beyond the permitted period, section 43B(h) can move the deduction into the year of actual payment. That turns an accounts-payabl
Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Year-end profit is not the same as year-end tax deduction. If your company buys goods or services from a registered MSME and leaves the invoice unpaid beyond the permitted period, section 43B(h) can move the deduction into the year of actual payment. That turns an accounts-payable decision into a tax-planning decision.
The rule is especially relevant during a March close because the payable can look like an ordinary accrued expense in the books while being unavailable as a deduction in the return. Finance Act 2023 — s.43B(h) provides that the provision is effective from 1 April 2024 and applicable from AY 2024-25, for FY 2023-24 onwards.
This article focuses on the rule under s.43B(h): which suppliers are covered (only micro and small — not medium), the payment window, what the add-back does, and the related MSME-1 calendar. Have your CA confirm the supplier facts before filing.
The rule in plain English
Finance Act 2023 inserted clause (h) into section 43B. Section 43B(h) provides that payment to a registered micro or small enterprise supplier (as defined in MSMED Act s.2(h)/(m)) for goods or services is deductible only in the year of actual payment when it remains outstanding beyond the MSMED Act's s.15(1) time limit. Medium enterprises are outside s.43B(h).
The MSMED Act s.15(1) time limit is:
The most important year-end question is not “did we book the expense?” It is “was the invoice still unpaid beyond the applicable period at year-end?” If yes, s.43B(h) provides that the entire amount of that invoice is disallowed under s.43B(h) for that year and allowed only in the year of actual payment.
Who is an MSME for this purpose?
S.O. 2119(E), effective 1 July 2020, uses a composite classification based on investment in plant and machinery/equipment and annual turnover. The categories under S.O. 2119(E) are:
Both criteria must be satisfied for the stated category. If either investment or turnover exceeds the limit for a category, S.O. 2119(E) provides that the enterprise moves into the next higher category. Classification is based on self-declaration through the Udyam Registration Portal, with PAN and Aadhaar linked for auto-verification of turnover from GST and ITR data.
For s.43B(h), only Micro and Small are relevant — a Medium supplier's outstanding invoice does NOT trigger the disallowance. Verify each supplier's Udyam classification before applying s.43B(h); a vendor master that records only "MSME: yes/no" is weak evidence.
⚠ Verify: S.O. 2119(E) is the operative notification under MSMED Act s.7 (as amended by the 2020 Amendment Act) — the ₹250 crore medium-enterprise turnover ceiling is part of the notified classification. Confirm current thresholds on udyamregistration.gov.in before advising.
⚠ Verify: Finance Act 2023 — s.43B(h) asks whether s.43B(h) applies where the supplier obtained Udyam Registration after the invoice date. It also states the provision does not apply before AY 2024-25. Confirm both the supplier-registration timing and the assessment-year treatment with your CA.
What actually gets disallowed?
Section 43B(h) provides that the entire amount of an invoice outstanding beyond 45 days is added back in the income-tax computation. It is not described as a permanent disallowance. It is a timing difference: add it back in the year in which the payment condition is not met, then claim the deduction in the year of actual payment.
That distinction matters to founders because the cash leaves the business later, but the tax can become payable earlier. The company may report a reasonable accounting profit while having a higher taxable profit after the add-back. If the tax team continues to calculate instalments from book profit without considering the payables register, the cash forecast can be wrong.
Do not call the add-back a “penalty.” Section 43B(h) describes a deduction timing rule. But treat it as a working-capital item: the payment decision, tax provision, and vendor relationship all sit in the same line of sight.
Example: a March invoice that misses the window
Assume your company receives a ₹12,00,000 invoice for services from a supplier with a valid Udyam Registration. There is a written credit agreement allowing 30 days. The invoice is dated 1 March 2026 and remains unpaid after the permitted period.
At the end of FY 2025-26, the amount is still outstanding beyond the agreed period. Under s.43B(h), the ₹12,00,000 is disallowed under s.43B(h) in the relevant return computation. When the company actually pays the invoice in FY 2026-27, s.43B(h) provides that the deduction becomes available in that year.
The numbers to hand to the CA are therefore not just invoice value and payment date. Provide the Udyam evidence, invoice date, written agreement, agreed period, actual payment date, and the year-end status. Those facts determine the timing treatment. Do not apply a remembered 45-day formula without checking whether the written terms and supplier registration facts fit the s.43B(h) rule.
The MSME-1 calendar runs beside the tax return
The MSME-1 due-date reference lists MSME-1 as a half-yearly return on outstanding MSME payments. It says the filing is triggered when qualifying MSME supplier dues exceed 45 days outstanding on the balance-sheet date, and it gives these FY 2025-26 dates: 30 April 2025 for the second half of FY 2024-25 and 31 October 2025 for the first half of FY 2025-26.
The MSME-1 due-date reference says that if no qualifying outstanding dues exist, no filing is required. That is a trigger question, not a blanket exemption to assume. The MSME-1 due-date reference asks the company to verify with its CS or CA whether the company has qualifying outstanding MSME dues.
The substantive penalty for MSME-1 default is under Companies Act s.405(4) — fine up to ₹25,000 on the company plus officers in default. s.403 separately imposes slab-based additional filing fees (₹100/day applies only up to 6 months' delay; higher slabs follow). Use the live MSME-1 due-date page and have the filing trigger reviewed.
⚠ Verify: MSME-1 is required only when the source conditions are met. Confirm the qualifying outstanding population and filing obligation with your CS/CA.
A founder's year-end checklist
- Export all vendor balances as of 31 March and isolate suppliers represented as MSMEs.
- Obtain or refresh the Udyam Registration evidence for each relevant supplier.
- Separate goods invoices from service invoices only for operational analysis; s.43B(h) covers both.
- For each unpaid invoice, capture invoice date, written credit terms, permitted period, and actual payment date.
- Mark every invoice that remains unpaid beyond the permitted period under s.43B(h) at year-end.
- Give the marked schedule to the tax auditor for the s.43B(h) add-back and later-year deduction tracking.
- Run the separate MSME-1 trigger test for each half-year and retain the conclusion.
- Reconcile the payable schedule to the general ledger, vendor confirmations and tax computation.
This is not a one-time annual spreadsheet. A monthly ageing report gives the business a choice: pay inside the permitted window, negotiate with better facts, or knowingly forecast the deferred deduction and cash effect.
Questions founders usually ask
Does the rule cover services?
Yes. Finance Act 2023 — s.43B(h) explicitly provides that s.43B(h) covers goods and services supplied by MSME units.
Does every MSME invoice get disallowed?
No. Section 43B(h) limits the disallowance to registered micro or small enterprise suppliers (medium enterprises are outside the section) and triggers only when payment remains outstanding beyond the MSMED s.15(1) time limit — 15 days without a written agreement, up to 45 days with a written agreement.
Is the deduction lost forever?
Section 43B(h) describes it as a timing rule. It is allowed in the year of actual payment.
Does s.43B(h) apply to a medium enterprise supplier?
No. s.43B(h) covers only registered micro and small enterprises (MSMED Act s.2(h)/(m)). A medium enterprise supplier is outside s.43B(h), regardless of how long the invoice sits unpaid.
What if the supplier registered on Udyam after the invoice?
Finance Act 2023 — s.43B(h) flags this as a verification issue. Do not decide it from a generic vendor policy; send the dates to your CA.
Statutory basis
- Finance Act 2023 — s.43B(h) insertion
- Revised MSME classification — S.O. 2119(E)
- MSME-1 half-yearly due dates
- Section 403 Companies Act — additional fee reference
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See Also
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Statute-cited, section-by-section guides covering the same ground this article does.
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