The Finance Act 2023 inserted a new clause (h) into Section 43B of the Income Tax Act — a dormant-looking amendment that became the most commercially disruptive change for procurement teams in a decade. It mandates a simple idea with severe consequences: if you have not paid your Micro or Small Enterprise supplier within the time limits prescribed under the MSMED Act, 2006, the outstanding amount is not deductible from your taxable income in that year. It carries forward to the next year as a deduction — but only when you actually pay.
Section 43B(h), Income Tax Act 1961 (inserted by Finance Act 2023)
Any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 shall be allowed as a deduction only in computing the income of that previous year in which such sum is actually paid.
Statutory Reference
Understanding the MSMED Act's Section 15 is non-negotiable. The provision is nuanced: if there is a written agreement between buyer and supplier specifying payment terms, the deadline is any date agreed upon, subject to a hard ceiling of 45 days from the date of acceptance (or deemed acceptance) of goods or services. If there is no written agreement — which is true of most informal vendor relationships — the payment deadline is a flat 15 days from acceptance.
Payment Deadline Scenarios
No written agreement
Payment must be made within 15 days of acceptance of goods/services. Even a 30-day credit term verbally understood is irrelevant — the statute overrides it.
Written agreement specifying terms
Payment must be made within the agreed period, subject to an absolute maximum of 45 days. An 80-day credit term in a purchase order is void and unenforceable against the statute.
Disputed goods / services
Where goods are disputed and rejected, the "acceptance" clock does not start. But the company must document the rejection formally and immediately — silent retention of disputed goods triggers deemed acceptance.
The disallowance mechanics are harsh in a tax-efficiency sense. Assume a company has ₹2 crore of purchases from Micro/Small suppliers that remain unpaid at year-end (31st March 2024). The entire ₹2 crore is disallowed as a deduction in AY 2024-25. For a company in the 22% domestic tax regime, this represents an additional ₹44 lakh of tax payable immediately — on income that hasn't been received yet because the underlying revenue is often outstanding too. The cash flow damage can be existential for mid-size companies.
This is not a penalty for bad behaviour — it is a timing disallowance. But timing, when it cascades across a year-end with a large MSME creditor base, is a liquidity trap.
— Sami Tax Corporate Tax Brief, March 2024
The first critical step is identifying which of your suppliers are actually classified as Micro or Small enterprises. This is not always self-evident. Classification is based on investment in plant and machinery (or equipment) AND annual turnover — the MSMED Act uses a composite criterion. Many small-looking suppliers may actually be Medium (not covered by 43B(h)) or may not be officially registered on the Udyam portal. Importantly, only registered MSME suppliers are covered — but the burden of verification falls on the buyer during an assessment.
MSME Classification (As Per MSMED Amendments 2020)
Investment ≤ ₹1 crore AND Turnover ≤ ₹5 crore.
Investment ≤ ₹10 crore AND Turnover ≤ ₹50 crore.
Investment ≤ ₹50 crore AND Turnover ≤ ₹250 crore. NOT covered by Section 43B(h).
Strategic Adjustments for FY 2024-25
- Build a Udyam-verified vendor master — collect Udyam Registration Numbers from all suppliers and verify their classification quarterly (MSME status can change).
- For all Micro/Small suppliers, convert verbal payment terms into written credit limit agreements explicitly capping credit at 45 days.
- Before 31st March each year, run an "MSME Creditor Sweep" — clear all outstanding balances beyond 30 days to all MSME suppliers.
- Where early payment creates a cash flow problem, structure payment in advance to MSME suppliers against confirmed purchase orders.
- The tax cost of disallowance almost always exceeds the financing cost of early payment at normal interest rates.