Section 43B(h) Explained: Timely MSE Payments Guide Administrator Feb 16, 2026 Tax share Facebook Twitter Google + LinkedIn Pinterest Email Share... Understanding Section 43B(h): Why Timely Payments to MSEs Matter This February Section 43B(h) of the Income Tax Act has significantly changed how businesses must treat payments made to Micro and Small Enterprises (MSEs). As financial year-end approaches, February becomes a critical month for reviewing outstanding vendor dues. Failure to make timely payments to registered MSE suppliers can directly impact your tax deductions. This provision links tax deductibility to compliance with the payment timelines prescribed under the MSMED Act. In simple terms, if you delay payment beyond the permitted period, you lose deduction for that expense in the current financial year. What Is Section 43B(h)? Section 43B generally allows certain deductions only on actual payment basis. Clause (h), introduced recently, specifically covers payments due to Micro and Small Enterprises registered under the MSMED Act. Under this clause, any sum payable to a registered Micro or Small Enterprise will be allowed as a deduction only if it is paid within the time limits prescribed under the MSMED Act. If payment is delayed beyond the prescribed timeline, the deduction is allowed only in the year in which actual payment is made. The 15-Day and 45-Day Rule Explained The MSMED Act defines strict timelines for payments to MSEs: 15 days – If no written agreement exists between buyer and supplier. 45 days – If there is a written agreement specifying payment terms. Even if both parties mutually agree to a longer credit period, it cannot exceed 45 days for registered Micro and Small Enterprises. This means businesses must carefully review vendor contracts and invoice dates to determine compliance with the correct timeline. Why February Is Critical for Compliance February is strategically important because businesses typically close books and assess outstanding payables before March 31. Any unpaid MSE invoices that cross the 15 or 45 day threshold before year-end can result in disallowance under Section 43B(h). Identifying and clearing such dues before the financial year closes helps protect legitimate tax deductions. Tax Impact: How Deduction Gets Deferred Example 1: Payment Within 45 Days Invoice raised: 1 January 2025 Payment made: 10 February 2025 Timeline allowed: 45 days Result: Deduction allowed in FY 2024-25. Example 2: Payment After 45 Days Invoice raised: 1 January 2025 Payment made: 25 March 2025 (beyond 45 days) Result: Deduction not allowed in FY 2024-25. It will be allowed only in FY 2025-26 when payment is actually made. This can significantly increase taxable income for the current year. Who Is Affected by Section 43B(h)? Companies purchasing goods or services from registered Micro and Small Enterprises Partnership firms and LLPs dealing with MSE vendors Businesses claiming expense deductions in profit and loss statements It applies only to Micro and Small Enterprises registered under Udyam. Medium enterprises are not covered under this clause. Practical Steps to Ensure Compliance This February Reconcile Outstanding PayablesGenerate ageing reports and identify all invoices pending beyond 30 days. Verify Vendor Registration StatusCheck whether vendors are registered as Micro or Small Enterprises under Udyam. Review Written AgreementsConfirm whether payment terms are documented to determine if 45-day rule applies. Prioritise High-Impact PaymentsClear dues that may cause deduction disallowance before March 31. Maintain DocumentationKeep proof of payment, vendor registration details, and contract terms for audit trail. Using structured compliance tools such as GST Filing Software helps track vendor invoices and reconciliation efficiently. Accounting and Audit Implications Auditors are now closely examining disclosures related to outstanding MSE dues. Companies are required to disclose delayed payments in financial statements. Interest under the MSMED Act (three times the RBI bank rate) may apply for delayed payments, and such interest is not tax deductible. Finance teams should also ensure proper TDS compliance through reliable TDS Filing Software to avoid compounding compliance risks. Common Mistakes Businesses Make Ignoring vendor Udyam registration status Assuming extended credit terms override MSMED Act timelines Failing to reconcile ageing reports monthly Not adjusting tax computation for disallowed expenses Section 43B(h) Month-End Compliance Checklist Download updated vendor master list Identify all registered MSE suppliers Review invoice dates vs payment dates Clear overdue amounts before March 31 Update tax computation schedules Document payment proofs How Technology Helps Manage 43B(h) Compliance Automated systems can flag invoices nearing 45 days and help prevent deduction disallowance. Businesses should integrate vendor tracking, tax computation, and reconciliation workflows. Tools like Income Tax Filing Software assist in accurate tax adjustments, while payroll and compliance modules ensure seamless financial reporting. Frequently Asked Questions What is Section 43B(h)? Section 43B(h) allows deduction for payments to Micro and Small Enterprises only if they are paid within MSMED Act timelines. What happens if payment is delayed beyond 45 days? The deduction is disallowed in the current financial year and allowed only in the year of actual payment. Does this apply to Medium Enterprises? No, it applies only to Micro and Small Enterprises registered under Udyam. Can businesses agree on longer credit terms? No. Even with agreement, payment period cannot exceed 45 days under MSMED Act. Is interest on delayed payment deductible? No. Interest payable under MSMED Act is not allowed as a tax deduction. Final Thoughts Section 43B(h) strengthens payment discipline toward Micro and Small Enterprises while aligning tax deductibility with timely compliance. As February progresses, businesses must proactively review outstanding vendor dues and clear payments within prescribed timelines. Taking early action protects tax deductions, strengthens vendor relationships, and reduces audit risk. Structured compliance processes and automated tools ensure you stay ahead of Section 43B(h) obligations.