Section 43B(h) and MSME payments: the 15 and 45 day rule explained before year-end

Section 43B(h) of the Income-tax Act says that what you owe to a micro or small enterprise supplier is deductible only when you actually pay it, if you pay later than the legal time limit. If you are closing the half-year books, the practical question is which supplier bills are close to that limit and what to do about them before 31 March 2027.

What section 43B(h) actually says

Normally a business on the mercantile system claims an expense in the year it accrues. Section 43B lists exceptions where the deduction depends on payment. Clause (h) covers sums payable to a micro or small enterprise for goods supplied or services rendered. It applies from assessment year 2024-25 (financial year 2023-24) onwards.

• If you pay within the time limit allowed under section 15 of the MSMED Act, 2006, the expense is deductible in the year it accrues, as usual.
• If you pay later than that limit, the deduction moves to the year in which you actually pay.
• If you pay after year-end but on or before the due date for filing your return under section 139(1), the deduction is still allowed in the year of accrual.

Medium enterprises are not covered by clause (h). Only micro and small enterprises are.

The 15-day and 45-day limits

Section 15 of the MSMED Act sets the time limit for paying a micro or small supplier:

• With a written agreement: the period agreed, but never more than 45 days from the day of acceptance of the goods or services.
• Without a written agreement: 15 days from the day of acceptance (or deemed acceptance).

So an unwritten understanding of "30 days credit" does not help you. Without a written agreement, the 15-day limit applies. A short purchase agreement or a clearly accepted purchase order that states the credit period can make a real difference here.

Who counts as a micro or small supplier?

The status comes from the supplier's registration on the Udyam portal, not from your own judgement of how big they look. Ask each supplier for their Udyam registration number and classification, and keep a copy. Remember that the classification can change, so refresh it once a year. A supplier that has not registered is generally outside the scope of the rule, but confirm with your CA if the position is unclear.

A worked example

Suppose a manufacturer buys packaging worth Rs 2,00,000 from a small enterprise. The goods are accepted on 10 March 2027 and there is no written agreement.

• The limit is 15 days, so payment is due by 25 March 2027.
• If the manufacturer pays on 20 March, the Rs 2,00,000 is deductible in FY 2026-27.
• If it pays on 15 April 2027, the limit is missed. The deduction moves to FY 2027-28, unless payment is made on or before the due date for filing the FY 2026-27 return under section 139(1) (the exact date depends on whether the audit provisions apply to you).

The example is simplified. Check the dates against your own facts and ask your CA how the rule applies to you.

Interest and MSME-1 on top of the tax effect

Late payment has two further consequences. Section 16 of the MSMED Act provides for compound interest with monthly rests on delayed payments, at three times the bank rate notified by the Reserve Bank of India. Separately, companies that owe a micro or small enterprise for more than 45 days file the half-yearly MSME-1 return with the MCA. The April to September return is due by 31 October, and we have covered it in our MSME-1 guide if it is on your list.

A practical half-year checklist

1. List every supplier and mark which ones hold a Udyam registration, and their category.
2. For those suppliers, pull all unpaid bills and calculate the days since acceptance.
3. Check whether a written agreement fixes a credit period (45 days at most) and keep the document with the bill.
4. Pay the bills that are about to cross the limit first, and prioritise the ones that fall near 31 March.
5. Record the acceptance date, not only the invoice date. The clock runs from acceptance.
6. Show the overdue balance separately in your working papers, so your tax auditor can reconcile it with the tax audit report.

This sits well alongside your half-year book closing checklist and a regular look at purchase register reconciliation, since both depend on knowing exactly what is unpaid.

Common mistakes to avoid

• Counting from the invoice date. The limit runs from the day of acceptance of goods or services, which may differ from the bill date. Keep goods receipt notes and service completion records.
• Assuming a verbal credit term is enough. Only a written agreement can stretch the limit beyond 15 days, and even then not past 45 days.
• Ignoring small bills. The rule applies to every bill from a micro or small supplier, so many small unpaid amounts can add up to a meaningful disallowance.
• Treating part-payment as full payment. Only the amount actually paid is deductible in the later year, so track payments bill by bill.
• Waiting for the tax audit. Your auditor reports on these dues, so it is far easier to sort them out in October than in September of the next year.

Key takeaways

• Section 43B(h) ties the deduction for dues to micro and small enterprises to actual payment when you are late.
• The limit is 15 days without a written agreement and at most 45 days with one.
• Get and file the Udyam details of each supplier, and track the acceptance date.
• Paying before the return filing date under section 139(1) can still save the deduction in the earlier year.

A dated calendar of reminders helps you stay ahead of these limits, and the AICOUNTLY compliance calendar is one place to keep your statutory dates together. Do confirm the specifics for your business with a chartered accountant.

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