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, Income Tax Act 1961 (for tax years before 1 Apr 2026); s.37(2)(g), Income-tax Act 2025 applies from tax year 2026-27. Payment to a registered MICRO or SMALL enterprise supplier (MSMED s.2(h)/(m)) 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 (FY 2023-24 onward); s.37(2)(g), Income-tax Act 2025 applies from tax year 2026-27

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), Income Tax Act 1961, disallows the expense for tax years before 1 Apr 2026; s.37(2)(g), Income-tax Act 2025 applies from tax year 2026-27.

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), Income Tax Act 1961, for tax years before 1 Apr 2026; s.37(2)(g), Income-tax Act 2025 applies from tax year 2026-27. 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), Income Tax Act 1961 (for tax years before 1 Apr 2026), or s.37(2)(g), Income-tax Act 2025 (from tax year 2026-27), applicability.

Services also covered

s.43B(h), Income Tax Act 1961 (for tax years before 1 Apr 2026), and s.37(2)(g), Income-tax Act 2025 (from tax year 2026-27), apply to 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)

CA review

Whether s.43B(h), Income Tax Act 1961 (effective from AY 2024-25, FY 2023-24 onwards), applies to MSME suppliers registered after the invoice date for the relevant earlier tax years; the corresponding provision from tax year 2026-27 is s.37(2)(g), Income-tax Act 2025. 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. 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 (FY 2023-24 onward); s.37(2)(g), Income-tax Act 2025 applies from tax year 2026-27

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