Section 43B(h): what the 45-day MSME rule means for your payables process
Payments to micro and small enterprises now carry a tax consequence and a compounding interest clock. The fix is a process change, not a year-end adjustment.
Section 43B(h) of the Income Tax Act changed the economics of paying small vendors late. Payments owed to registered micro and small enterprises must be made within 15 days, or within 45 days where a written agreement exists. Miss the deadline and the expense is not deductible in the year it was booked; the deduction moves to the year of actual payment.
The two clocks
There are two separate consequences, and they run on separate logic.
The tax clock. Under 43B(h), an expense owed to a micro or small enterprise and unpaid beyond the 15/45-day limit is disallowed for the year. If the financial year ends with the amount still unpaid, the deduction is deferred. For a company in the 25 percent bracket, Rs 1 crore of disallowed expense defers Rs 25 lakh of tax benefit.
The interest clock. Separately, under the MSMED Act, delayed payments accrue interest at three times the RBI bank rate, compounded monthly. This interest is itself not deductible. On Rs 1 crore outstanding for a year at current rates, the accrued interest is in the range of Rs 20 to 27 lakh, none of it deductible.
| Item | Rs 1 crore unpaid past deadline |
|---|---|
| Tax benefit deferred (25% bracket) | Rs 25,00,000 |
| MSMED interest accrued over 12 months (approx.) | Rs 20,00,000 to 27,00,000, non-deductible |
| Combined first-year impact | Roughly Rs 45,00,000 to 52,00,000 |
The identification problem
The rule applies to micro and small enterprises registered on the Udyam portal. It does not apply to medium enterprises. Most accounts payable teams do not know which of their vendors fall in scope, and vendor classification changes as vendors grow or re-register. A payables process cannot comply with a rule it cannot see.
Process changes that work
- Enrich the vendor master. Collect Udyam registration numbers at onboarding and verify classification (micro, small, medium). Re-verify annually; classifications move.
- Run separate ageing buckets. In-scope vendors need 15-day and 45-day buckets aligned to acceptance date, not invoice date. Standard 30/60/90 ageing hides the deadline that matters.
- Alert before the boundary. An alert at day 35 of 45 gives the team time to act. An exception report at day 50 is a record of the loss, not a control.
- Resolve disputes formally. The clock pauses only where objections to goods or services are raised in writing within the statutory window. Verbal disputes do not stop the clock.
- Reconcile before the year end. A quarter-by-quarter review of in-scope outstandings, with the auditors' methodology agreed in advance, avoids the March scramble.
Summary
43B(h) converts late payment to small vendors from a working-capital choice into a tax and interest cost. The fix is operational: know which vendors are in scope, age them on the statutory clocks, and surface the deadline before it passes rather than after.