The tax compliance world in India has changed significantly due to the mandatory requirements introduced under Section 43B(h) MSME Compliance of the Income Tax Act, 1961, as amended from time to time. Effective from 1st April 2024 (AY 2024-25), this regulation has created a major shift in how businesses must handle payments to Micro and Small Enterprises registered under the MSMED Act.

This guide has been designed to help Business Owners, Accountants, CFOs and Compliance Officers understand what Section 43B(h) entails, why timely MSME payments are now critical, and how to implement full compliance in a practical and user-friendly manner.

Significance of Section 43B(h) for Your Organisation

The purpose of Section 43B(h) of the Income Tax Act 1961 has been to create the following positive outcomes for businesses based in India:

• To support large-scale companies in making timely payments to their MSME suppliers or providers of services,
• To increase cash flow for MSMEs that supply products and/or services by enabling them to generate working capital through improved turnover,
• To hold large-scale companies accountable for their ability to make timely payments to MSMEs,
• To limit the flexibility of large-scale companies' ability to claim tax benefits based on their timely payments to MSMEs.

Under the provisions of this section, any expense claimed by a business for tax deduction cannot be allowed if any payment(s) made by that business to MSMEs occur later than the specified time limits of 15 days or 45 days from the date specified in either a written or oral agreement. Importantly, if you have been able to deduct a particular expense for tax purposes because you have made a payment on the day you incurred it, the only way you can deduct it subsequently is if you... have made a payment within the time specified for your deduction.

Classification of MSMEs According to the MSMED Act

Section 43B(h) only applies to those suppliers whose registration as Micro or Small enterprises was through Udyam Registration.

MSME Classification According to the MSMED Act 2006

🔹 Medium Enterprises are not included under Section 43B(h).

🔹 Retailers and wholesale suppliers will also not qualify to claim the benefits under Section 43B(h), even if they hold a Udyam Registration.

Legal Framework: Section 15 of the MSMED Act in conjunction with Section 43B(h) of the Income Tax Act

Section 43B (h) relies on the definition of legally permitted times for payment as set forth in Section 15 (MSMED Act 2006).

3.1 Timelines for Payments under Section 15 of the MSMED Act (2006).

a. The Payment Terms of an Agreement (maximum 45 days) Buyers and suppliers agree to mutually-set payment terms of the agreement cannot be longer than forty-five (45) days.

Consequently, neither MSME contracts may require payments within sixty (60) or ninety (90) days of acceptance/delivery.

b. If no written agreement is present, the payment should occur no later than fifteen days from the date of the acceptance, or delivery of the items/services.

What is the Day of Acceptance?
The day on which the items or services were delivered. If the buyer has any issues or concerns regarding the Delivery and they raise the matter in writing within fifteen days of acceptance/delivery, the date when the buyer resolves their issue or concern is considered "the day of acceptance".

3.2 The tax effects of section 43B(h)

Expenses (i.e. A deductible expense) : Where payments made within the 15 to 45 days of the due date (including any portion before the due date), the financial year of the payments shall be deemed to be the year of the deduction.

Non-Expenses (i.e. Not a deductible expense): Where payments made after the 15 to 45 days of the due date, the financial year of the payments shall be deemed to be the year of the payment. You cannot utilize payments prior to the filing of your tax return as per the provisions of section 43B of the Income Tax Act.

An Example to Illustrate

An electronic invoice is sent to a Purchaser on 01-03-2025

Seller Name: A Small Business (with a registered status in India)
Understanding Date of Invoice: 45 days from the date of invoice
Amount of Invoice: ₹100,000.00 (Indian Rupee)

A). Payment made on 10-04-2025

1. Payments made within 45 days

2. Payments dated after end of the financial year

3. Payments are included in financial year 2024-2025

B) Payments made on 01-05-2025

1. Payments made outside of 45-day period

2. Payments made are not allowed in the financial year 2024-2025

3. Payments can only be claimed in the financial year 2025-2026.

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Period of Interest for Delay in payment

If a buyer delays payment, the law requires them to pay interest at three times the RBI Bank Rate (as on year-end), compounded monthly.

The above interest will not be tax deductible under Section 80C of Income Tax Act.

Compliance Checklist for Businesses :

Businesses must act NOW to minimize their year-end disallowances.

6.1 Supplier Verification :

• Collect Udyam Registration Certificates from your suppliers
• Maintain a vendor master list containing your suppliers' MSME status
• Update your vendor classification every six (6) months
• Confirm all suppliers are Micro or Small (not Medium)

6.2 Agreements and Documentation :

• Each of your MSME vendors must have a written agreement
• Your Vendors payment term must be 45 days or less
• There should be no verbal agreements (the default payment term is 15 days).

6.3 Automated Tracking System :

• All vendors' invoice acceptance dates must be tracked
• All the vendors' invoices must have a deadline of 15 days and 45 days
• Set automatic reminders to send alerts 5–10 days before the due date.
• Escalation alerts to be sent to your financial head

 6.4 Review Periodically to Determine Tax Effect :

• You must review your MSME vendors' outstanding balances on a monthly basis.
• You must conduct a 43B(h) disallowance simulation.
• You must have your final review of all your MSME vendors during the months of February and March.

6.5 Tax Audit Reporting - Form 3CD Clause 22 :

It is required that businesses must disclose the following:

• Outstanding Principal Amount for MSME vendors
• Outstanding Interest for MSME vendors
• Total Breakdown of Micro and Small Amounts Due to MSME Vendors.

Common Risks of Non-Compliance

1. Have not established formal business agreements → 15 Day Credit will be forced  to make payment.
2. Have not obtained an Udyam verification → Incorrectly classified under the wrong category.
3. Have not made payments within a single business day of receipt → Full year payment will be disallowed.
4. Year End cash flow stress →  Delayed payments
5. Reporting incorrectly on Form 3CD → At-risk of an audit

Managing payments under the MSMEs' Act is no longer an option; it is now required by law.

Book My Accountant Can Help You Reach 100% Compliance

Book My Accountant (BMA) is a specialist in the area of Vendor Management and MSME compliance w.r.t. 43B(h) advisory services, as well as tax audit documentation.

Within that scope, we provide the following services:

 1. Udyam Certificates/Vendor Due Diligence

• Obtaining valid Udyam Certificates.
• Mapping to the MSME Status.
• Updating vendor classifications as needed.

2. Agreements Drafted and Standardized

• Legally compliant contracts – minimum of 45-day contracts.
• Protection from a default within the minimum of 15-day rule.
• Documentation following the requirements of the MSMED Act.

 3. Automated Invoice Tracking

• Real-time monitoring.
• Alerts when due dates are approaching.
• Dashboards showing invoices due for escalation.

4. Simulations of the 43B(h) at Year-End

• Predicting potential disallowances for a subsequent tax year.
• Identifying invoices which require immediate payment.
• Avoiding the risk of unexpected tax liabilities.

5. Tax Audit/Form 3CD Reporting (Clause 22)

• Providing accurate MSME disclosures.
• Providing calculations of interest.
• Providing audit support and representation to clients.

Tips for Business Owners :  

Section 43B(h) is non-negotiable and strictly applied. You must pay within 15 or 45 days to claim the deduction; otherwise, the tax authorities will disallow the expense and add it to your taxable income. MSME interest cannot be deducted. The period from February to March could have the highest risk for business owners. Further, audit report preparation requires clean documentation.

Compliance Plan For FY 2024-2025 And FY 2025-2026

• Identify Vendors of MSME
• Written Agreements (within 45 Days)
• Vendor Master Updated
• Daily Invoice Tracking
• Payment Prioritised for Due Date Approaching
• Review MSME for Feb to March
• Accurate reporting on 3CD
• If we stay disciplined now, we will avoid large tax losses in the future.