Paying MSMEs in 45 days: what Section 43B(h) means for your P&L
Under India’s Income-tax Act, late payments to micro and small suppliers can cost you the tax deduction for that year. Here is how the rule works in outline, and how to know which invoices are at risk before year end.
Section 43B(h) of India’s Income-tax Act links your tax deduction for an expense to how quickly you pay certain small suppliers. Pay late and the deduction can move to the year you actually pay. For companies with many small vendors, that can change the tax bill noticeably.
This article is a plain-English outline, not tax advice. Check how the rule applies to you with your tax adviser.
The rule in outline
- It applies to amounts owed to micro and small enterprises registered under the MSMED Act. Medium enterprises are outside it.
- The MSMED Act sets the time to pay: up to 15 days where there is no written agreement, and no more than 45 days where there is one.
- If you pay after that time limit, the expense is allowed as a deduction only in the year you actually pay.
- Separately, the MSMED Act provides for interest on late payment at three times the bank rate notified by the Reserve Bank of India, compounded monthly, and that interest is not deductible.
Why it is hard in practice
- Vendor status is not in the vendor master. Many ERPs don't record whether a supplier is micro, small or medium, or when that status was checked.
- The clock starts at acceptance. The time limit runs from when goods or services are accepted, which may not be the invoice date in your system.
- Agreements differ. Payment terms in a purchase order may not match what the law allows.
- Year end concentrates the risk. Invoices unpaid on 31 March are the ones that matter most.
A practical checklist
- Classify every vendor. Collect and verify registration details, and record the category and the date it was checked.
- Record the acceptance date for goods and services, not only the invoice date.
- Cap payment terms for micro and small suppliers at what the law allows.
- Watch the ageing every week, with a list of invoices close to their limit.
- Before year end, value the deduction at risk for anything still unpaid.
| What to monitor | Why |
|---|---|
| Vendors without a verified category | You can't tell whether the rule applies |
| Invoices within 7 days of the limit | Still time to pay |
| Invoices past the limit | Deduction and interest exposure |
| Terms longer than 45 days | A setup problem that repeats every month |
Make it a control, not a scramble
The difference between a calm and a stressful March is whether this runs every week. Our compliance and penalties work sets it up as a standing control, with every invoice at risk listed by vendor, value and days remaining.