पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 15 · Build

Section 43B(h): paying MSME vendors on time or losing the deduction

Pay a micro or small supplier later than the law allows and the expense leaves this year’s tax computation. The rule has moved to section 37(2)(g) of the 2025 Act. The forty-five days have not moved.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

The interior of a metalworking machine shop with lathes and tools arranged along the floor. — Photograph: J E · Pexels

A startup accepts ₹8 lakh of fabrication work from a small Pune workshop on 10 March and pays on 9 May, sixty days later, which by most startups’ habits is prompt. The workshop is a registered micro enterprise. The ₹8 lakh is therefore not deductible in the year ending 31 March; it moves to next year, the company pays about ₹2 lakh more tax this year than it planned, and it owes the workshop interest at 17.25 per cent a year for every day beyond the forty-five.

The rule that does this was section 43B(h) of the Income-tax Act 1961. Since 1 April 2026 it is section 37(2)(g) of the Income-tax Act 2025. This lesson explains what it says and whom it covers, how the forty-five-day clock runs, why March is the month that hurts, and the vendor-master checks that decide the deduction. It also covers the other side of the rule, because many startups are themselves micro enterprises and are owed the same protection.

What the rule does

The Finance Act 2023 added clause (h) to section 43B, the list of expenses that are deductible only when actually paid. It covers any sum payable to a micro or small enterprise beyond the time limit in section 15 of the Micro, Small and Medium Enterprises Development Act 2006. In a Rajya Sabha reply of 21 July 2026 the Ministry of Finance confirmed that the provision now corresponds to section 37(2)(g) of the 2025 Act, and described its purpose: to protect the working capital of small suppliers by disallowing the buyer’s deduction until payment is made.

Two features make it sharp. The deduction follows the payment: an expense paid late is deductible only in the year it is actually paid, whatever the accounts say about when it was incurred. And the rule does not depend on the buyer’s intent or on any dispute about the invoice. If the period lapsed and the money had not gone, the deduction moves.

Who counts as a micro or small enterprise

Classification depends on investment in plant, machinery or equipment and on turnover, and both tests must be met. From 1 April 2025 the Udyam portal applies these limits: a micro enterprise has investment up to ₹2.5 crore and turnover up to ₹10 crore; a small enterprise up to ₹25 crore and ₹100 crore; a medium enterprise up to ₹125 crore and ₹500 crore. The limits were roughly doubled from the earlier ₹1 crore, ₹10 crore and ₹50 crore investment bands.

Hands setting a cutting tool against a metal part on a lathe. — Investment in plant and machinery and turnover decide the category. The Udyam certificate is the evidence the buyer should hold. Photograph: Tima Miroshnichenko · Pexels

The rule protects only micro and small enterprises. A medium enterprise registered on Udyam has the MSMED Act’s general protections but not this tax lever. The revised limits matter in practice: a supplier with ₹80 crore of turnover was medium before April 2025 and is small now, so a vendor master tagged three years ago is probably wrong. Registration is the evidence. More than 7.83 crore enterprises had registered on the Udyam and Udyam Assist platforms by 28 February 2026, so a large share of any startup’s small suppliers will hold a certificate whether or not they have mentioned it.

The clock: forty-five days from acceptance

Section 15 of the MSMED Act requires the buyer to pay on or before the date agreed in writing, and the agreed period cannot exceed forty-five days from the day the goods or services were accepted. Three details decide most disputes. The clock starts at acceptance, not at the invoice date, so record acceptance: a goods receipt note, a sign-off email, a milestone approval. A contract term of sixty or ninety days does not extend the limit; the law caps it at forty-five. And a contract that is silent on payment does not leave the buyer free; agree a period in writing with every micro and small vendor so that the statute’s fallback never becomes the question.

Late payment costs more than the deduction. Section 16 makes the buyer liable to pay the supplier compound interest with monthly rests at three times the bank rate notified by the Reserve Bank. With the bank rate at 5.75 per cent on 10 October 2026, that is 17.25 per cent a year, compounding monthly. The supplier can refer the dispute to the state’s Micro and Small Enterprise Facilitation Council, which is to decide a reference within ninety days. The MSME Samadhaan portal exists to make that a few clicks.

The year-end trap

The tax effect lives at 31 March. An invoice accepted in October and paid seventy days later, in December, is late; the supplier is owed interest, but the payment still falls in the same year and the deduction survives. An invoice accepted on 10 March and paid on 9 May is late and crosses the year: the expense leaves the year in which it was incurred and lands in the year it was paid. The company pays tax on a profit it did not make, a year early, and books the deduction twelve months later. For a profitable company at an effective rate near 25 per cent, ₹8 lakh of late March payables is ₹2 lakh of tax brought forward. For a company with a carried-forward loss it is smaller in cash but still a misstatement the auditor has to report on.

Move the figure’s sliders. The month of acceptance and the days taken to pay decide whether the expense moves; the amount decides how much it hurts; the interest is owed either way. Notice that paying on day forty-four in March costs nothing at all, while paying on day forty-six costs both the interest and the year.

The Udyam checks that decide the deduction

The rule turns on a fact about the supplier that the buyer has to know: whether it is a registered micro or small enterprise, and of which kind. That fact belongs in the vendor master, not in the head of the person who pays bills. Ask every new vendor for its Udyam registration number at onboarding, and record the category and the date it was checked. Registration is free, needs only an Aadhaar number, requires PAN and GSTIN since 1 April 2021, takes investment and turnover directly from the tax databases and has no renewal; because the figures come from the supplier’s own returns, its category can change as it grows. Recheck every vendor once a year after the new financial year’s data flows in, and at least for every vendor you pay more than a few lakh.

Then put the clock in the payables process. Tag micro and small vendors in the accounting system; set their payment terms to the agreed period, never more than forty-five days; and run a report every week of their open invoices by days since acceptance. Edge cases, such as a supplier whose registration describes it as a trader, or a vendor who registers after the invoice, are questions for the chartered accountant; write down the answer so the same question is not asked twice.

When your startup is the micro enterprise

The same rule protects the startup when it sells. A software company with modest investment in equipment and turnover under ₹10 crore is a micro enterprise. Registering on Udyam is free and fast, and once the certificate is on the first page of every proposal, a large customer’s finance team knows that paying beyond forty-five days costs them interest and, near the year end, their deduction. Put the Udyam number on the invoice. Put a forty-five-day term in the contract. When a customer’s procurement form asks for ninety days, the law gives the founder a polite reason to say no.

Forty-five days is not a credit term. It is a legal ceiling with a tax deduction and an interest bill attached.

The month-end MSME run

On the last working day of each month, pull every open invoice from a vendor tagged micro or small and sort it by days since acceptance. Pay anything that will cross its agreed date before the next run. Any invoice already late goes on a list with the interest computed at three times the bank rate, so the accrual is booked and the supplier is not surprised. In March the run happens weekly, and on 25 March every micro and small invoice accepted since mid-February is either paid or explicitly accepted as a deduction moving into next year, with the tax effect written down. Once a year, refresh the Udyam category of every active vendor. The work is two hours a month. The alternative is a disallowance found by the auditor in September.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.