Section 43B(h) — MSME Payment Disallowance

By CA V. Viswanathan — FCA, ACS, CFE, IBBI Registered Valuer (IBBI/RV/03/2019/12333). Updated for FY 2025-26.

Section 43B(h), introduced by the Finance Act 2023 and effective from AY 2024-25, disallows the deduction of any expense payable to a Micro or Small Enterprise registered under the MSMED Act, 2006, if not paid within the time prescribed by Section 15 of the MSMED Act — typically 45 days (or 15 days in absence of written agreement). The disallowance is allowed back as a deduction only in the year of actual payment. This provision has dramatically tightened working-capital practices and continues to be the single biggest tax-driven supplier-payment compliance issue for FY 2025-26.

The 45-Day Rule Explained

Section 15 of the MSMED Act 2006 mandates that the buyer must make payment to a Micro or Small enterprise on or before the date agreed in writing, but in any case not exceeding 45 days from the day of acceptance or deemed acceptance of goods/services. If there is no written agreement, the timeline is 15 days. Where 'acceptance' means actual or deemed acceptance — deemed acceptance occurs when no objection is raised within 15 days of delivery. So the practical interpretation: the clock starts at delivery + objection window.

Who Is Covered — Micro and Small Only

Section 43B(h) applies only to suppliers classified as Micro or Small enterprises under the MSMED Act. Medium enterprises are NOT covered. The classification (post 1 July 2020 amendment): Micro — investment up to ₹1 crore AND turnover up to ₹5 crore; Small — investment up to ₹10 crore AND turnover up to ₹50 crore; Medium — investment up to ₹50 crore AND turnover up to ₹250 crore. Both criteria must be met (composite criteria). The supplier must hold a valid Udyam Registration Certificate to qualify. Buyers must obtain and verify the Udyam certificate of each supplier and re-verify periodically as suppliers may upgrade categories.

Operational Impact on Buyers

Implementation requires: (1) flagging Udyam-registered Micro and Small suppliers in the AP master; (2) automated 45-day payment workflow with escalation; (3) policy for written contractual agreements with MSME suppliers (otherwise 15-day rule applies, much harder to meet); (4) year-end disclosure in tax audit report (Form 3CD Clause 22) of unpaid MSME dues beyond 45 days; (5) tracking accruals where the cost was incurred in the prior year but payment slipped beyond 45 days. Most ERPs do not automatically support this — bolt-on workflow tools or custom reports are typically needed.

Tax Audit Disclosure and Form 3CD

Form 3CD (tax audit report) Clause 22 requires disclosure of: (a) total interest payable to suppliers under MSMED Act; (b) MSME dues outstanding beyond 45 days at year-end; (c) interest paid; (d) interest disallowable. The auditor must obtain the Udyam classification of each supplier. Failure to disclose attracts penalty under Section 271J on the auditor and Section 271AAB on the assessee. From AY 2024-25, AO scrutiny notices specifically check Clause 22 disclosures against ledger balances.

Interplay with MSMED Interest

Section 16 of MSMED Act mandates interest on delayed payment at 3x the bank rate notified by RBI, compounded monthly. This interest is non-deductible under Section 23 of MSMED Act (independent of Section 43B(h) disallowance). So a delayed payment triggers two consequences: (a) the principal becomes non-deductible till payment under 43B(h); (b) the interest accrues at 3x bank rate and is itself non-deductible. Combined effective cost of delayed payment to a Micro/Small supplier: easily 25-35% of the principal.

Common Mistakes

(1) Treating all small suppliers as MSME without Udyam verification — overcompliance creates working-capital strain unnecessarily. (2) Treating Medium enterprises as covered — they are not. (3) Backdating contracts to extend the 15-day default to 45-day agreed timeline — this is fraud and aggravates penalty. (4) Ignoring services suppliers — 43B(h) covers both goods and services. (5) Netting against advances to the same supplier without legal set-off documentation. (6) Treating the disallowance as 'permanent' — it reverses in the year of payment, but cash-flow timing is permanently lost.

How Virtual Auditor Delivers This

Virtual Auditor's CA-CS-IBBI Valuer team handles section 43b(h) — msme payment disallowance as an integrated engagement — no hand-offs between firms, single point of accountability, fixed-fee transparency. CA V. Viswanathan (FCA, ACS, CFE, IBBI RV) personally reviews every engagement deliverable. Offices in Chennai, Bangalore, and Mumbai serve clients across India. Free 30-minute scoping consultation available — no obligation.

Get Started — Free Consultation

Call +91 99622 60333 or email support@virtualauditor.in to schedule a free 30-minute consultation with CA V. Viswanathan. No obligation. We will give you a clear scope, timeline, and fixed-fee quote within 24 hours of the call.