Section 43B(h) Of Income Tax Act: Applicability, Date, Limit, Example

Section 43B(h) stipulates that any sum owed to Micro and Small enterprises for goods supplied or services rendered will be allowed as a deduction in the same financial year if it is paid within the deadline stipulated by the MSMED Act, 2006. However, delayed payments will be allowed as a deduction in the financial year in which the payment was made. It addresses the issue of working capital scarcity in the MSME industry and promotes prompt payments to micro and small businesses.

MSME Section 43B(h): New MSME 45 Days Payment Rule

The newly added clause (h) states that any sum paid by an assessee to a Micro & Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum has been actually paid (irrespective of the accounting method employed).

In simple words, any payment due to a Micro & Small Enterprise if paid within 45 days will be allowed as a deduction in the same financial year. However, if the payment is made after 45 days it will be allowed as a deduction in the financial year in which the payment is made. 

MSME Turnover Limit

Micro and Small Enterprises are classified on the following basis:

Micro Enterprises, means an entity having an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises, on the other hand, should invest in plant & machinery not exceeding 10 Crores and turnover not exceeding 50 Crores.

Section 43B(h) Applicability

This clause is applicable when an enterprise is buying goods or taking services from Micro and Small Enterprises registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006 is not mandatory. Clause (h) of Section 43B comes into effect from April 1, 2024.

Example: Mr A (Unregistered under the MSMED Act) purchased Goods from Mr B (Registered under the MSMED Act). Whether section 43B(h) applicable.?

Yes, section 43B(h) applicable as a supplier is registered under the MSMED Act.

Section 43B(h) Applicability On Traders

As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. So, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of enterprise.

Example: Mr. A purchased Goods from Mr. B, a trader. Is section 43B(h) applicable?

No, section 43B(h) is not applicable as the supplier is a trader. It is only applicable to Manufacturing and service providers.

Section 43B(h) Effective Date

Section 43B(h) is applicable from April 1, 2024. This amendment applies from Assessment Year (AY) 2024-25.

Example: Mr. A purchased Goods from Mr. B on 31.03.23. Whether section 43B(h) is applicable?

No, section 43B(h) is Not applicable for the purchases made before 31.03.2023.

Section 43B(h) Time Limit

Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In case there is no written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.

Example Of Section 43B (h) 

Penalties For Failure To Pay MSMEs 

In the case of late payment to an MSME, interest is applicable.

Rate of interest: Compound interest at the 3 times the bank rate notified by the Reserve Bank of India (RBI).

Date from which interest is payable: The date as per the agreement or the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier (appointed day), as the case may be.

The deduction of this interest is not allowed as an expense, as per the Income-tax Act (ITA), 1961.

Benefits Of Clause(h) Of Section 43B

Benefits for MSMEs: 

• Smooth Payment Cycle: Section 43B(h) incentivises large companies or entities to settle dues with MSMEs within the specified time frame, which is 15 days without a written agreement and 45 days with an agreement. This way, MSMEs are assured of timely cash flow, which is important for their sustainability and growth.
• Better Bargaining Power: The provision ensures better bargaining power for MSMEs when negotiating payment terms with larger enterprises or entities. It is possible for them to confidently push for deadlines aligned with the stipulated time frame, as they remain assured of consequences in case of delayed payments. 
• Reduced Disputes: Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues, are minimised. Thus saving time and resources for both MSMEs and larger businesses alike. 

Benefits For Larger Enterprises: 

• Tax Planning: While adhering to the stipulated timelines, larger enterprises or companies can claim deductions for payments provided to MSMEs in the same year, resulting in reduced tax liabilities. 
• Compliance and Transparency: Income-Tax Section 43B(h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.
• Strong MSME Ecosystem: Ensuring prompt payments to MSMEs incentivises a robust MSME ecosystem. In the bargain, benefiting larger entities through a vibrant supply chain and ease of access to various resources.

In short, if invoices between 01.04.2024 to 15.02.2025 were paid before 31.03.2025, then Expenses are allowable in FY 2024-2025.

If Invoices between 16.02.2025 to 31.03.2025 were paid within 45 days, then expenses are allowed in FY 2024-2025 (Assuming a written agreement of 45 Days is present between buyer & Supplier)

If it is not paid within the due date, then it is allowable in the year of Payment only. For Example, If invoices purchased in March 2025 were paid in June 2025, it is allowable as expenses in FY 2025-26.

How To Check MSME Registration Status

You can check your MSME Registration Status by visiting the Udyam Registration website.  

Final Word

It is important for buyers to make timely payments to Micro and Small Enterprises suppliers to claim a deduction for the expense in the relevant financial year. However, in case of late payment or payments after the specified due date the expenses can be claimed as a deduction in the financial year in which the payment was made.