The rule that changed how payables to small suppliers need to be managed
Before the Finance Act, 2023, a business on the accrual basis could claim a deduction for an expense in the year it was incurred, regardless of whether the supplier had actually been paid. Section 43B(h) changed that specifically for payments owed to micro and small enterprises: if the payment isn't made within the MSMED Act's timeline — 15 days without a written agreement, or up to 45 days with one, and never longer than 45 days even if the agreement says otherwise — and it's still unpaid as of 31 March, the deduction is disallowed for that year and only becomes available in the year the payment is actually made.
This is stricter than most other items under Section 43B: for many of those, paying before the income tax return's due date still preserves the deduction for the earlier year. That relief specifically does not apply to Section 43B(h) — once the 45-day (or 15-day) deadline passes and the amount is still unpaid on 31 March, the deduction is deferred to the year of actual payment, even if payment is made well before the return is filed. Separately, delayed payment also attracts compound interest under the MSMED Act itself, at a rate significantly higher than typical commercial borrowing, and that interest is not deductible either.
What accounts payable and receivable management covers
- Payables tracking — what's owed, to whom, and by when, with specific flagging of MSME-registered suppliers and their payment deadlines.
- Receivables ageing — how much is owed by customers and for how long, so collection efforts are prioritised toward what's genuinely overdue.
- MSME supplier identification — confirming which suppliers are registered as micro or small enterprises, since the 43B(h) rule applies specifically to that status, not to every vendor.
- Payment scheduling — prioritising payments to MSME suppliers within their statutory deadline, ahead of other payables where cash flow requires sequencing.
- Collections follow-up — tracking overdue receivables and following up systematically, rather than reactively.
- Reconciliation — payable and receivable balances reconciled regularly against supplier and customer records, catching disputes early.
How we manage accounts payable and receivable
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Classifying suppliers
Suppliers are identified by MSME registration status where relevant, since the Section 43B(h) deadline only applies to those classified as micro or small enterprises under the MSMED Act.
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Setting up payment tracking with deadlines
Payables are tracked with the applicable payment deadline attached — 15 or 45 days for MSME suppliers, standard commercial terms for others — so nothing drifts past its deadline unnoticed.
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Prioritising payments around statutory deadlines
Where cash flow requires sequencing which payables get settled first, MSME supplier deadlines are given priority given the tax consequence of missing them, not just their commercial due date.
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Receivables monitoring
Customer balances are tracked by age, with follow-up prioritised toward the oldest and largest outstanding amounts.
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Year-end review
Ahead of 31 March, outstanding MSME payables are specifically reviewed, since any that remain unpaid past their deadline at that date trigger the disallowance for the year.
Practical notes from our engagements
- MSME status not confirmed at the time a vendor is onboarded. Knowing which suppliers are registered as micro or small enterprises before the first invoice is due is far more useful than discovering it during a year-end scramble to check outstanding payables.
- Written agreements assumed to extend the deadline beyond 45 days. Even where a supplier agreement specifies 60 or 90-day terms, the tax deadline is capped at 45 days regardless — the agreement's longer term doesn't protect the deduction.
- Payment made just after year end, assumed to be fine because it's "before the return is filed." Unlike most Section 43B items, this specific relief doesn't apply here — payment after 31 March, even well before the return's due date, still defers the deduction to the year of actual payment.
- Traders mistakenly treated as covered by the rule. The 43B(h) timeline applies to enterprises engaged in manufacturing or providing services, registered under the MSMED Act — not to wholesale or retail traders, even where a trader holds Udyam registration for other purposes.
How we handle accounts payable and receivable
We confirm MSME registration status for suppliers as part of onboarding, not as a year-end exercise, and track payment deadlines specifically for those suppliers rather than lumping them in with general commercial terms. Ahead of each financial year end, outstanding MSME payables are reviewed specifically, since that's the point at which an unpaid amount past its deadline becomes a disallowed expense rather than simply a late payment.
Related services
Frequently asked questions
What is Section 43B(h), in plain terms?
It's a rule that disallows a tax deduction for an expense owed to a micro or small enterprise supplier if it isn't paid within the MSMED Act's timeline — 15 days without a written agreement, or up to 45 days with one — and remains unpaid at the end of the financial year.
Does this apply to all our suppliers?
No — only to suppliers registered as micro or small enterprises under the MSMED Act and engaged in manufacturing or providing services. Medium enterprises and traders aren't covered by this specific rule.
If we pay a late MSME invoice before filing our tax return, is the deduction still allowed for that year?
No — this is the key difference from most other Section 43B items. The relief that normally allows payment before the return's due date to preserve the earlier year's deduction specifically doesn't apply to Section 43B(h).
Can a written agreement extend the payment deadline beyond 45 days?
No — 45 days is an absolute cap under the MSMED Act, regardless of what a written agreement specifies. An agreement for 60 or 90 days doesn't protect the deduction beyond the 45-day limit.
What happens to the disallowed expense — is it lost permanently?
No — it becomes deductible in the year the payment is actually made, so it's a timing deferral rather than a permanent loss, but it still means paying tax on income in one year that a normal accrual-basis deduction would otherwise have offset.
Is there a separate cost beyond the tax disallowance for paying an MSME supplier late?
Yes — the MSMED Act itself imposes compound interest on the delayed amount, at a rate well above typical commercial borrowing costs, and that interest is not tax-deductible either.
How do we know if a supplier is registered as a micro or small enterprise?
Ask for their Udyam registration certificate, which specifies their classification — this is worth confirming at the time a supplier relationship begins, not discovered later.