Since AY 2024-25, a single missed payment deadline to a small supplier can turn into a permanent tax cost — not a timing difference. Section 43B(h) is one of the few provisions where being a day late doesn't just delay a deduction, it can disallow it altogether. Here's what every accounts payable team needs to track.
What Section 43B(h) Actually Says
Section 43B of the Income Tax Act lists certain expenses that are deductible only when actually paid, regardless of the accrual-based accounting entry (other examples include statutory dues, bonus, and leave encashment). Clause (h), added by the Finance Act 2023 effective AY 2024-25, adds a new item to this list:
Section 43B(h): Any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, is allowed as a deduction only in the year it is actually paid — not the year it accrued.
The MSMED Act Timeline It References
| Scenario | Maximum Payment Period |
|---|
| Written agreement specifying a payment date | The agreed date — but cannot exceed 45 days from the date of acceptance of goods/services |
| No written agreement | 15 days from the date of acceptance |
"Date of acceptance" generally means the date goods/services are delivered, or if there's an objection/inspection process, the date the objection is removed. The 45-day cap applies even if the buyer and supplier mutually agree to longer credit terms — the MSMED Act overrides any contractual term beyond 45 days for the purposes of this timeline.
Why This Is Different from Other Section 43B Items
Most Section 43B disallowances are timing differences — if you pay GST for March in April (after the due date for filing but before the tax return filing due date), it's typically still deductible if paid before the return filing deadline, or deductible in the year actually paid otherwise. The deduction isn't lost permanently; it just shifts to a later year.
Clause (h) is harsher in practice for one key reason: the MSMED Act timeline (15-45 days) is far shorter than the income tax return filing deadline (typically October/November of the following year for businesses requiring audit). An amount unpaid at year-end that gets paid in, say, June (within the tax filing deadline but beyond the 45-day MSMED window) is still disallowed for that year — it can only be claimed in the year it's actually paid, creating a real cash-tax timing cost even though it eventually gets deducted.
Worked Example
| Event | Date |
|---|
| Goods accepted from a registered Small Enterprise supplier | 10 Feb 2026 |
| Written agreement specifies payment in 60 days — but MSMED caps at 45 | Effective due date: 27 Mar 2026 |
| Fiscal year-end (amount still unpaid, accrued as expense) | 31 Mar 2026 |
| Actual payment made | 15 Apr 2026 |
Result: Even though the expense was accrued in FY 2025-26 and the agreement allowed 60 days, the MSMED-mandated deadline of 27 Mar 2026 was missed. The deduction for this expense is disallowed in FY 2025-26 (added back to taxable income) and can only be claimed in FY 2026-27 — the year of actual payment (15 Apr 2026) — on a cash basis for this item.
Compliance Checklist for Accounts Payable Teams
- Identify MSME suppliers: Collect Udyam Registration Certificates from all vendors and flag which are classified Micro or Small (Medium is out of scope for 43B(h))
- Tag the acceptance date: Record the date of acceptance of goods/services for every MSME vendor invoice — this is the trigger date for the 15/45-day clock
- Cap payment terms at 45 days in contracts with Micro/Small suppliers — agreeing to 60 or 90 days does not extend the tax timeline, it only creates a mismatch between commercial terms and tax treatment
- Run a year-end MSME ageing report: Before closing the books, identify all MSME payables outstanding beyond 45 days (or 15 days if no written agreement) — these amounts must be added back in the tax computation
- Prioritise MSME payments in the cash flow forecast: Since late payment creates a tax cost in addition to the commercial relationship cost, MSME dues should rank ahead of non-MSME payables of similar size when cash is tight — see our 13-Week Cash Flow Forecast guide
- Disclose in the tax audit report (Form 3CD): Auditors are required to report amounts inadmissible under Section 43B, including 43B(h), based on the MSME ageing analysis
⚠ This also affects working capital planning: Because a late payment to an MSME supplier now carries a tax cost on top of any interest/penalty under the MSMED Act (which separately mandates compound interest at 3x the RBI bank rate on delayed payments), the effective cost of delaying MSME payments is significantly higher than delaying payments to larger suppliers. Factor this into how you sequence payments in a cash crunch — see our
Working Capital CFO Playbook.
Frequently Asked Questions
What is Section 43B(h) of the Income Tax Act? ▼
Effective AY 2024-25, Section 43B(h) disallows a deduction for any sum payable to a micro or small enterprise (registered under the MSMED Act) unless paid within the timeline specified in Section 15 of the MSMED Act. It is allowed only on actual payment, and unlike most expenses, a missed deadline means the deduction shifts entirely to the year of actual payment — creating a real cash-tax cost.
What is the MSMED Act payment timeline referenced in Section 43B(h)? ▼
Under Section 15 of the MSMED Act, payment is due by the date agreed in writing, capped at 45 days from acceptance of goods/services. With no written agreement, the limit is 15 days. Missing this deadline triggers disallowance under Section 43B(h) for that year, regardless of the income tax return filing deadline.
Does Section 43B(h) apply to payments to medium enterprises? ▼
No — it applies only to enterprises registered as Micro or Small under the MSMED Act, not Medium. Buyers should check a supplier's Udyam Registration Certificate to confirm classification, since Medium-enterprise dues fall outside this specific disallowance.