MSME 45-day payment rule (section 43B(h)): what it means

Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 comes first, chronologically and logically. It says a buyer must pay a supplier by the date agreed in writing, and that agreed date can never be later than forty-five days from the day the goods or services were accepted. Where there is no written agreement at all, the payment is due within fifteen days of acceptance. That is the whole payment rule, and it existed years before anyone was talking about section 43B(h).

Section 43B(h) of the Income-tax Act, 1961, added by the Finance Act, 2023 and in effect for the assessment year 2024-25 and every year since — in practice, for amounts payable relating to the financial year that began on 1 April 2023 onward — is the tax consequence bolted onto that existing payment rule. It says: any sum a business owes to a micro or small enterprise, if it is still unpaid once the section 15 window has closed, cannot be deducted as a business expense in the year it was incurred. The deduction is not lost. It is deferred to whichever year the business actually pays the amount.

Read separately, each section is fairly plain. Read together, they turn a commercial payment term that used to live entirely between two businesses into something a buyer's own tax computation now has to track, per bill, per supplier.

It is worth being precise about what changed and what did not. The obligation to pay a micro or small supplier within forty-five (or fifteen) days already existed under the MSMED Act, and a supplier already had a remedy — interest, discussed below — if a buyer missed it. Section 43B(h) did not touch that. What it did was add a new item to the existing list of expenses in section 43B that the Income-tax Act only lets a business deduct on a paid basis rather than an accrual basis — the same list that already covers things like certain statutory dues, bonus, and leave encashment.

The practical effect is that a payable to a registered micro or small enterprise now behaves, for tax purposes, less like an ordinary trade payable and more like those other paid-basis items. A business can still book the expense on its books when it is incurred, the normal way. Whether that expense reduces taxable income in the same year now depends on one additional fact that has nothing to do with accrual accounting: did the actual payment reach the supplier inside the window the MSMED Act sets.

Section 43B, taken as a whole, has long had a first proviso that softens its own harshness: for most of the items on its list, a business still gets the deduction in the year the expense was incurred as long as it actually pays before the due date for filing that year's return under section 139(1). This is the exception that lets, say, a bonus accrued in March still count for that financial year if it is paid before the return is filed, months later.

Clause (h) is specifically carved out of that proviso. This is the detail that catches businesses that assume every item in section 43B works the same way. For a payable to a micro or small enterprise, paying it late but still before the income tax return is filed does not preserve the same-year deduction. Only actual payment inside the fifteen- or forty-five-day window set by section 15 of the MSMED Act does that. Miss the window, and the deduction moves to the year of actual payment regardless of how quickly the business files its return afterward.

The window runs from acceptance, not from the invoice date and not from delivery alone. The MSMED Act defines two starting points. The day of acceptance is the day the buyer actually signs off on the goods or services as received and in order. The day of deemed acceptance is what applies when the buyer says nothing at all — if no written objection is raised within fifteen days of the goods being delivered or the service being rendered, that fifteenth day's starting point, the original delivery, is treated as the day of acceptance by default.

The forty-five-day cap in section 15 applies even where a written agreement tries to set something longer. A buyer and a micro or small supplier can agree to net-30 or net-45 and have that agreed date govern, but they cannot validly agree to net-60 or net-90 and have the later date protect the buyer's position under this rule — the Act caps what an agreement can push the date to, regardless of what is actually signed.

Section 43B(h) names micro and small enterprises specifically. A medium enterprise is outside it, and so is a supplier who has not registered under the MSMED Act at all — the protections in section 15, and the deduction-timing consequence that rides on top of them, generally follow a supplier's registered status, established through Udyam Registration, not a buyer's assumption about how big or small the business seems. A single vendor list can genuinely contain unregistered suppliers, registered micro enterprises, registered small enterprises and registered medium enterprises side by side, each governed differently.

This is exactly the kind of fact that has to be recorded once, correctly, against each vendor rather than assumed at the point a bill is booked. This article explains the mechanism of the rule; it does not, and cannot, tell a reader whether a specific supplier is covered. That is a documentation question — the supplier's own Udyam registration and category — worth settling directly with the supplier and confirming with an accountant before it affects a filing.

None of this can be handled by memory once a business has more than a handful of vendors. A payables record that is actually built for this needs, per bill: whether the supplier is a registered micro or small enterprise, the date the goods or services were accepted (which is not always the invoice date), whether a written agreement exists and what date it names, and a running count of days against the fifteen- or forty-five-day cap. That is a ledger and payables-tracking problem before it is a tax-return problem — the return only reflects a decision that should already have been visible, bill by bill, throughout the year. A payables tracker built to hold a due date, an agreed term and a running age per bill, the way Laxmi's does (automixai.in/docs/laxmi), and a ledger that keeps every posted entry exactly as it was written, the way Khata's does (automixai.in/docs/khata), are the two places this kind of tracking actually has to live — not a spreadsheet rebuilt from memory every March.

Missing the window also is not only a tax-timing question. Section 16 of the MSMED Act separately makes a buyer liable to the supplier for compound interest, with monthly rests, at three times the bank rate the Reserve Bank of India notifies, running from the day after the window closes. That liability exists independently of, and in addition to, the deferred deduction under section 43B(h) — missing the window is two separate consequences, not one, and the interest side is owed to the supplier regardless of what the buyer's own tax computation ends up doing.