Delayed payments have long been one of the biggest challenges faced by India’s micro and small businesses. When payments are held up for months, MSMEs often struggle with cash flow shortages, delayed expansion plans, and difficulties in meeting operational expenses.
To address this issue, the government introduced Section 43B(h) through the Finance Act, 2023. The provision strengthens existing MSME rules by encouraging timely payments from buyers and linking payment compliance with income tax deductions.
For businesses purchasing goods or services from registered MSMEs, understanding the MSME payment rule is now essential. Non-compliance can impact both tax liability and working capital management, making timely vendor payments more important than ever.
MSME 45 Days Payment Rule
Introduced under Section 43B(h) of the Income Tax Act through the Finance Act, 2023, the MSME 45-day payment rule aims to ensure prompt settlement of dues owed to Micro and Small Enterprises (MSEs). The newly established rule states that any payment due to MSMEs, if paid within the timeline of 46 days, is eligible for deductions in the same financial year.
However, if payments are delayed and made after 45 days, the deductions will be allowed for the financial year in which the payment was made. The objective behind introducing this provision is to:
- Improve cash flow for MSMEs
- Encourage prompt settlement of invoices
- Reduce payment-related disputes
- Promote a healthier business ecosystem
While commonly referred to as the “45-day rule”, the actual payment timeline may be shorter depending on the contractual arrangement between the buyer and supplier.
Also Read – List of Businesses under MSME
What is Section 43B(h) of the Income Tax Act?
Section 43B(h) of the Income Tax Act is a provision introduced through the Finance Act, 2023, to ensure timely payments to Micro and Small Enterprises (MSEs). This section directly links tax deductions with the payment timeline for dues owed to MSME suppliers.
As per Section 43B(h), any expense incurred by a business towards a registered micro or small enterprise can only be claimed as a deduction if the payment is made within the prescribed time limit under the MSMED Act, 2006. If the payment is delayed beyond this limit, the expense will not be allowed as a deduction in the same financial year and can only be claimed in the year in which the actual payment is made.
The key objective behind introducing Section 43B(h) is to improve cash flow for MSMEs by discouraging delayed payments and enforcing stricter compliance among buyers. It ensures that businesses prioritise timely settlements rather than extending credit periods at the expense of small suppliers.
Applicability of Section 43B(h)
Section 43B(h) does not apply to all businesses or all suppliers.
The provision applies when:
- The supplier is classified as a Micro or Small Enterprise
- The supplier holds a valid Udyam Registration
- Goods or services are supplied by the registered MSME
The provision applies to all categories of buyers, including:
- Companies
- LLPs
- Partnership firms
- Proprietorship businesses
However, Medium Enterprises are not covered under Section 43B(h).
MSME Turnover Limit
Since Section 43B(h) applies only to specific categories of MSMEs, businesses should be familiar with the latest MSME classification limits.
| Enterprise Category | Investment Limit | Annual Turnover Limit |
| Micro Enterprise | Up to ₹2.5 crore | Up to ₹10 crore |
| Small Enterprise | Up to ₹25 crore | Up to ₹100 crore |
| Medium Enterprise | Up to ₹125 crore | Up to ₹500 crore |
Only Micro and Small Enterprises fall within the scope of Section 43B(h). Payments made to Medium Enterprises are not covered under this provision.
MSME 45 Days Payment Rule for Traders and Turnover Limits
A common area of confusion relates to traders registered under Udyam.
While wholesale and retail traders can obtain Udyam Registration for certain benefits, the applicability of Section 43B(h) depends on the supplier’s MSME classification and registration status.
Therefore, buyers should not assume that every supplier with a Udyam certificate automatically falls under the provision. It is important to verify the enterprise category before applying the MSME payment rule.
Maintaining updated supplier records can help businesses avoid compliance errors and tax disputes.
Section 43B(h) Time Limit and MSME Payment Due Dates
The MSME payment timeline is governed by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 and is reinforced by Section 43B(h) of the Income Tax Act.
A buyer is required to make payment to a Micro or Small enterprise within the following time limits:
- 15 days from the date of acceptance of goods or services, where no written agreement exists
- Maximum 45 days from the date of acceptance, where a written agreement exists
The payment timeline is calculated from the date of acceptance or deemed acceptance of goods or services, not merely the invoice date.
If payment is not made within the prescribed time limit, it is treated as a delayed MSME payment. Such a delay may lead to both:
- Interest liability under the MSMED Act
- Tax disallowance under Section 43B(h) of the Income Tax Act
Example of Section 43B(h)
Consider a business that purchases goods from a registered small enterprise.
- Invoice Date: 1 January 2026
- Written Agreement: Yes
- Due Date Under MSMED Act: 15 February 2026
- Actual Payment Date: 30 April 2026
Since the payment was made beyond the prescribed 45-day limit, the expense cannot be claimed as a deduction in the year it accrued. Instead, the deduction will be allowed only in the financial year in which the actual payment is made.
This is the key tax implication of Section 43B(h).
Interest and Penalties for Delayed MSME Payments
Apart from tax disallowance, delayed payments may also attract interest under Section 16 of the MSMED Act. The interest is calculated at three times the RBI bank rate and is payable from the due date until the date of actual payment.
A few important points should be noted:
- Interest liability arises automatically under the law
- Contractual agreements cannot override this requirement
- The interest paid is not allowed as a tax deduction under the Income Tax Act
As a result, delayed payments can significantly increase the overall cost of procurement for businesses.
Section 43B(h) Effective Date
Section 43B(h) was introduced through the Finance Act, 2023 and became effective from 1 April 2024. The provision applies to transactions covered under the new framework and requires businesses to evaluate their payment practices carefully to avoid tax disallowances.
Since implementation, many organisations have updated their vendor management and payment tracking systems to ensure compliance with the revised MSME rules.
Benefits of the MSME 45-Day Payment Rule
Here is how the MSME payment rule enforcement helps.
- Improved Cash Flow: Receiving payments within the deadline ensures liquidity for MSMEs.
- Faster Reinvestment: Businesses can reinvest earnings in operations instead of struggling with the late payments that small businesses face.
- Financial Stability: A steady cash flow helps businesses qualify for a same-day business loan when needed.
- Strengthened Business Relationships: Ensure trust between MSMEs and larger firms, improving business e-transactions.
Impact of Disallowance of Expenses When Bills are Overdue Under Section 43B(h)
One of the most significant consequences of non-compliance is the disallowance of expenses. When payment to a registered MSME supplier is not made within the prescribed timeline, the expense cannot be claimed as a deduction in that financial year. This can lead to:
- Higher taxable income
- Increased tax liability
- Additional cash flow pressure
The deduction becomes available only when the payment is actually made.
For businesses dealing extensively with MSME vendors, even a few delayed payments can have a noticeable impact on tax planning and profitability.
Key Points as Per Recent Amendments
Businesses should keep the following points in mind while complying with Section 43B(h):
- Effective Date: Section 43B(h) became effective from 1 April 2024 and applies from FY 2024-25 (AY 2025-26) onwards.
- Applicability: The provision applies only to payments made to Micro and Small Enterprises registered under the MSMED Act with a valid Udyam Registration. Medium enterprises are excluded.
- Actual Payment Basis: If payment is not made within the prescribed MSMED timelines, the expense can be claimed as a deduction only in the year in which the payment is actually made.
- Vendor Classification: Businesses should identify and maintain records of MSME suppliers to determine whether Section 43B(h) applies to a particular transaction.
- Udyam Verification: Buyers should obtain and retain the supplier’s Udyam Registration details as part of their compliance and documentation process.
- Payment Monitoring: Organisations should track invoice ageing and payment due dates carefully to avoid tax disallowances and interest implications under the MSMED Act.
Challenges and Concerns of the MSME Payment Rule
While the provision benefits MSMEs, businesses have faced several practical challenges in implementation.
- Lack of Awareness: Many businesses remain unaware of rules, missing out on benefits like a small business loan scheme.
- Dispute Resolution Complexity: Lengthy resolution processes impact operations, delaying access to a startup loan.
- Enforcement Issues: Weak implementation allows larger firms to delay payments despite the law.
How to Check MSME Registration Status?
Businesses should verify whether a supplier qualifies as a Micro or Small Enterprise before applying Section 43B(h).
The verification process generally involves:
- Obtaining the supplier’s Udyam Registration Certificate
- Checking the Udyam Registration Number
- Confirming the enterprise category
- Maintaining records for audit and compliance purposes
Periodic review of supplier information is recommended to ensure continued compliance.
Steps to Ensure Compliance with the Rule
Here is how to comply with the MSME 45-day payment rule without much hassle.
- Clear Contract Terms: Clearly define payment schedules in agreements to avoid disputes.
- Invoice Management: Keep records of your payment due dates to streamline operations.
- Regular Follow-Ups: Consistent communication prevents overdue invoices from affecting working capital.
- Payment Reminders: Automate reminders to ensure on-time payments and prevent reliance on business loans online.
- Document Everything: Keep records to provide compliance, protecting eligibility for a business loan for MSMEs.
- Dispute Resolution Mechanisms: Establish structured systems to resolve payment issues quickly.
Conclusion
The MSME 45-day payment rule under Section 43B(h) has significantly changed how businesses manage payments to MSEs. By linking tax deductions to timely payments, the provision encourages stronger payment discipline while helping MSMEs maintain healthier cash flow and financial stability.
For buyers, compliance is no longer just an accounting requirement; it has become an important part of tax planning and working capital management. Identifying eligible MSME suppliers, tracking payment timelines, and maintaining proper records are essential to avoid disallowance of expenses and additional financial liabilities.
As businesses adapt to these requirements, having access to adequate working capital can also help prevent payment delays. In situations where cash flow gaps affect day-to-day operations, financing solutions from Lendingkart can help businesses manage short-term funding needs and maintain smoother vendor payment cycles while supporting overall business growth.
FAQs
1. What is the MSME 45-day payment rule?
The MSME 45-day payment rule requires buyers to make payments to Micro and Small Enterprises within 45 days of receiving goods or services if there is a written agreement. If no agreement exists, payment must be made within 15 days.
2. What is Section 43B(h) of the Income Tax Act?
Section 43B(h) is a provision introduced through the Finance Act, 2023, that allows tax deduction of MSME-related expenses only when the payment is made within the time limit prescribed under the MSMED Act.
3. What happens if MSME payments are delayed beyond 45 days?
If payment is delayed beyond 45 days, the expense is not allowed as a tax deduction in the same financial year. The deduction is allowed only in the year in which the payment is actually made.
4. Does Section 43B(h) apply to all MSMEs?
No, it applies only to Micro and Small Enterprises registered under the MSMED Act with a valid Udyam Registration. Medium enterprises are not covered under this provision.
5. What is the MSME payment timeline under the MSMED Act?
The MSME payment timeline is:
- Within 15 days if no written agreement exists
- Within 45 days if a written agreement exists
6. Is Udyam Registration required for Section 43B(h)?
Yes, the provision applies only if the supplier is registered under Udyam as a Micro or Small Enterprise.
7. Can expenses be claimed if payment is made late but within the same financial year?
Yes, if payment is made within the same financial year, the expense can still be claimed as a deduction, even if it exceeds the 15-day or 45-day limit.
8. Does Section 43B(h) impose a penalty on delayed payments?
Section 43B(h) does not impose a direct penalty. However, delayed payments lead to interest liability under the MSMED Act and tax disallowance until payment is made.
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