For years, the MSMED Act, 2006 enforced its 45-day payment discipline through one instrument: compound interest at three times the bank rate under Section 16, recoverable through the Facilitation Council. The Finance Act, 2023 added a second, quieter enforcer — the Income-tax Act. Clause (h) of Section 43B, effective from Assessment Year 2024-25, provides that any sum payable to a micro or small enterprise beyond the time limit specified in Section 15 of the MSMED Act is deductible only in the year of actual payment. Unlike the other clauses of Section 43B, the usual escape — paying before the return-filing due date — does not apply to clause (h). A buyer who finishes the financial year with overdue micro and small supplier balances pays tax on income it never retained, until the year it actually pays.
The mechanism in one view
What buyers are now doing — and should be
- Vendor classification files: obtaining Udyam registration numbers and declarations from every vendor, refreshed annually, because the disallowance turns on the supplier\'s micro/small status.
- Ageing by statute, not habit: accounts-payable systems re-cut to flag the 15/45-day MSMED windows, not the commercial credit period the buyer would prefer.
- Contract hygiene: written agreements fixing the permissible period — remembering that a clause beyond 45 days is ineffective for this purpose, since Section 15 caps the agreed period.
- Quarter-four discipline: the balances that matter are those crossing the statutory window around year-end; March payment runs now routinely prioritise micro and small vendors.
What suppliers should take from it
The clause has changed negotiating dynamics in the supplier\'s favour in a way Section 16 interest never quite did, because the counterparty\'s own tax team now polices the deadline. A micro or small enterprise chasing payment should ensure the buyer\'s records can classify it correctly: quote the Udyam number on every invoice, state the MSMED status in the contract, and respond to vendor-classification requests promptly. In a dispute, the same documentation that preserves the buyer\'s deduction — acceptance dates, invoices, the written credit period — is the supplier\'s evidence before the Facilitation Council. And where a buyer seeks a certificate or confirmation that dues are not MSMED-covered, a supplier should understand exactly what it is being asked to sign away.
Points of friction to watch
Several recurring questions are working themselves out in assessments and advance planning: the treatment of amounts disputed in good faith (the MSMED interest provisions have their own logic for disputed sums, but clause (h) speaks of sums payable); the position of traders, who are brought into Udyam for limited benefits but whose coverage under the Chapter V definitions has its own contours; and year-end provisioning for unbilled supplies. These are fact-specific, and positions should be taken with contemporaneous documentation rather than assumed. The safe harbour, in every scenario, is the same: pay micro and small suppliers within the statutory window.
Practice note: This article describes the interface of two statutes in general terms and is not tax advice; assessments turn on individual facts, and positions on disputed or borderline items should be settled with the enterprise\'s tax advisors. On the recovery side, the MSMED machinery — demand, Section 18 reference, conciliation, arbitration — remains the supplier\'s operative remedy, and timelines there are unforgiving of delay.
Frequently Asked Questions
Which suppliers are covered by Section 43B(h)?
Micro and small enterprises as classified under the MSMED Act — not medium enterprises. Coverage follows the supplier's status, which is why collecting and updating Udyam registration details of vendors has become a standard year-end exercise for buyers.
What is the payment deadline the clause enforces?
The Section 15 MSMED timeline: the date agreed in writing, which cannot exceed 45 days from the day of acceptance or deemed acceptance, and 15 days where there is no written agreement. Payment within that window keeps the deduction in the year of accrual; payment beyond it defers the deduction to the year of actual payment.
Does paying before the income-tax return due date save the deduction?
No. The proviso to Section 43B that protects payments made before the return-filing due date expressly does not extend to clause (h). The test is the MSMED timeline itself — a structural difference from the treatment of taxes, provident fund and similar liabilities.
Does Section 43B(h) replace the supplier's MSMED remedies?
No. The Section 16 interest liability — compound, monthly rests, three times the bank rate, and non-deductible for the buyer under the MSMED Act — and the Section 18 Facilitation Council reference continue unaffected. The tax rule adds commercial pressure; it does not substitute for recovery proceedings.