The MSMED Act, 2005 has always commanded prompt payment: Section 15 requires a buyer to pay a micro or small enterprise supplier by the agreed date — which cannot exceed forty-five days from acceptance — or within fifteen days where no period is agreed, and Section 16 levies compound interest at three times the bank rate on default. What the Act lacked was a self-executing consequence a buyer would feel without the supplier litigating. The Finance Act, 2023 supplied one through the tax code: clause (h) of Section 43B of the Income-tax Act, 1961, effective from Assessment Year 2024-25, makes a deduction for sums payable to micro and small enterprises available only in the year of actual payment if the MSMED timeline is breached. This explainer sets out how the clause operates and how it interlocks with the recovery remedies this site has covered.
Where the clause sits in the statute
Section 43B of the Income-tax Act lists sums that, notwithstanding the mercantile system of accounting, are deductible only on actual payment — taxes, employer contributions, certain interest payments and the like. A proviso softens most clauses: payment made before the due date for filing the return of income preserves the deduction for the year of accrual. Clause (h), inserted by the Finance Act, 2023 with effect from 1 April 2024, adds sums payable to micro and small enterprises beyond the Section 15 MSMED timeline — and, critically, the softening proviso is worded so as not to extend to this clause. The result is a hard rule keyed to the MSMED clock itself.
The mechanics, step by step
What it changes in commercial reality
For suppliers, clause (h) converts a statutory right that many hesitated to litigate into leverage that operates automatically. A buyer who strings out payment past forty-five days now faces an immediate, quantifiable tax cost — the deferral of deduction inflates taxable profit for the year — and its own auditors will flag the exposure. Well-advised micro and small enterprises therefore do three simple things: register and keep the Udyam certificate current; print the Udyam number and classification on every invoice and contract; and record the date of acceptance of goods or services, since the forty-five day cap runs from acceptance, not invoice.
For buyers, the compliance answer is process: vendor masters flagged with MSME status, payment cycles shortened for flagged vendors, and written agreements fixing credit periods within the statutory cap. Attempts to contract around the regime — declarations extracted from suppliers renouncing MSME status, or artificially routed purchases — sit uneasily with Section 24 of the MSMED Act, which gives Sections 15 to 23 overriding effect notwithstanding anything inconsistent in any other law.
Interlock with the recovery toolkit
- Interest claim intact. Clause (h) does not dilute the supplier’s substantive rights: compound interest under Section 16 continues to accrue on delayed payment, and is non-deductible for the buyer under Section 23 MSMED.
- Samadhaan reference. The Facilitation Council route under Section 18 — conciliation, then arbitration — remains the enforcement channel for disputed dues; the tax clause is pressure, not adjudication.
- Negotiation timing. Buyers become unusually receptive to settlement as their financial year-end approaches; suppliers timing demands and references should know why.
- Documentation symmetry. The same records that preserve the buyer’s deduction — acceptance dates, agreed credit periods — are the records that prove or defeat a Section 18 claim. Both sides should keep them contemporaneously.
Practice note: This discussion is general information on the interaction of the MSMED Act with the tax code, not tax advice for any particular assessment. Positions on classification, traders and year-end computations should be settled with the enterprise’s chartered accountant on current CBDT guidance; the litigation-side takeaway is simpler — an MSME supplier’s invoice discipline now has a fiscal ally inside the buyer’s own books.
Frequently Asked Questions
What exactly does Section 43B(h) provide?
That any sum payable by an assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the MSMED Act is allowed as a deduction only in the previous year in which it is actually paid. Unlike other clauses of Section 43B, the usual relaxation for payment before the due date of filing the return does not apply to clause (h) — payment within the Section 15 timeline itself is what preserves the deduction in the year of accrual.
Does the clause cover medium enterprises and traders?
No on both counts, on the prevailing understanding. The clause refers to micro and small enterprises as defined in the MSMED Act; medium enterprises are outside it. Wholesale and retail traders, whose Udyam registration is recognised for limited purposes such as priority sector lending, are generally treated as outside the supplier definitions that drive Sections 15-16, and buyers commonly obtain supplier classification declarations for exactly this reason.
How does a supplier's Udyam status become relevant to the buyer's tax?
The disallowance turns on the payee being a micro or small enterprise. Buyers therefore seek Udyam Registration Numbers and classification confirmations from vendors, and suppliers should quote their Udyam status on invoices — it converts their statutory payment protection into a consequence the buyer's tax auditor will police.
Does paying late with interest restore the deduction?
Payment in a later year makes the principal deductible in that later year. The interest mandated by Section 16 of the MSMED Act stands on a different footing: Section 23 of the MSMED Act separately provides that such interest is not allowable as a deduction at all in computing income.