Section 43B(h) — Disallowance of Payments to Micro/Small Enterprise Suppliers Beyond MSMED s.15(1) Time Limit

Finance Act 2023 — s.43B(h) insertion

Finance Act 2023 inserted clause (h) to s.43B: payment to a registered MICRO or SMALL enterprise supplier (MSMED s.2(h)/(m)) for goods/services is deductible only in the year of ACTUAL payment when it remains outstanding beyond the MSMED s.15(1) time limit — 15 days without a written agreement, up to 45 days with a written agreement. Medium enterprises are OUTSIDE the section.

Issued: 2023-03-31
Effective from: 2024-04-01
Act: Income Tax Act 1961 s.43B

What it says

The MSMED s.15(1) time limit

Under MSMED Act s.15(1): buyer must pay a micro/small supplier within 15 days of acceptance/deemed acceptance where there is no written agreement; where there is a written agreement, within the agreed period subject to a 45-day outer cap. If payment is not made by that time limit, s.43B(h) disallows the expense for that year.

What triggers disallowance

At the end of a financial year, if any registered micro/small enterprise supplier invoice remains unpaid beyond the applicable MSMED s.15(1) time limit (15 or 45 days), the entire amount of that invoice is disallowed under s.43B(h). It is allowed only in the year of actual payment.

Add-back in ITR

Disallowed amount must be added back in the ITR (under Schedule BP, disallowances). This increases taxable income for the year. Deduction is claimed in a subsequent year when payment is made.

Only for registered MSME suppliers

Disallowance applies only when the supplier has a valid Udyam Registration. Buyer must verify Udyam certificate before booking the expense to determine s.43B(h) applicability.

Services also covered

s.43B(h) covers both goods and services supplied by MSME units. Not limited to manufacturing purchases.

Medium enterprises are outside s.43B(h)

The section refers to "any sum payable by the assessee to a micro or small enterprise" — a medium enterprise (turnover between ₹50 cr and ₹250 cr) is not caught by s.43B(h), no matter how long the invoice sits unpaid. Verify each supplier is Micro or Small under S.O. 2119(E) before applying the disallowance.

Affected forms and returns

ITR-6 / ITR-3 (Schedule BP)
Form 3CD Clause 26 (disallowance details)
MSME-1 (half-yearly ROC return on outstanding dues)

⚠ VERIFY

Whether s.43B(h) applies to MSME suppliers who are registered after the invoice date — if the supplier obtained Udyam Registration AFTER invoice date, the earlier invoice may not be subject to s.43B(h) for that year. Also, whether s.43B(h) applies to the period before AY 2024-25 — it does NOT; it is effective from AY 2024-25 (FY 2023-24 onwards). Confirm with your CA. ALSO: (a) the no-written-agreement default under MSMED s.15(1) is 15 days, not 45; (b) medium enterprises are not covered by s.43B(h). Do not extend the disallowance to medium suppliers.

Primary source

Finance Act 2023 — s.43B(h) insertion — issued by Parliament of India under Income Tax Act 1961 s.43B

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