Section 43B(h) MSME Disallowance Estimator

Section 43B(h) was inserted into the Income-tax Act 1961 by the Finance Act 2023 and became effective from Assessment Year 2024-25 (Financial Year 2023-24 onwards). Section 43B is the umbrella provision that deals with certain deductions being allowable only on actual payment. Clause (h), inserted in 2023, extends the actual-payment rule to sums payable to Micro and Small Enterprises registered under the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act 2006). The mechanic: any sum payable by the assessee to a registered Micro or Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act 2006 shall be allowed as a deduction only in the previous year in which such sum has actually been paid, notwithstanding any accounting method followed by the assessee. Section 15 of the MSMED Act 2006 fixes the payment window at 45 days from the date of acceptance or deemed acceptance of goods or services where there is a written agreement, and 15 days where there is no written agreement. From FY 2023-24 close (31-March-2024) onwards, every buyer that has procured from a registered Micro or Small Enterprise and not paid within the Section 15 window is exposed to the Section 43B(h) disallowance for the year-end. The provision has run through FY 2024-25 (AY 2025-26) and FY 2025-26 (AY 2026-27) with no amendment in the Finance Act 2024 or the Finance Act 2025 as passed. This tool projects the year-end disallowance exposure from an AP ageing snapshot as of any date in the financial year.

Section 43B(h) applies to sums payable to enterprises registered as Micro or Small under the MSMED Act 2006 — the classification is based on the Section 7 read with the MSMED (Amendment) Act 2020 criteria which combined investment in plant and machinery or equipment with turnover thresholds. Micro: investment up to Rs 2.5 crore and turnover up to Rs 10 crore. Small: investment up to Rs 25 crore and turnover up to Rs 100 crore. Medium enterprises are explicitly excluded from Section 43B(h) — only Micro and Small qualify. Traders are also excluded from the disallowance scope (though they can hold Udyam registration for other benefits); Section 43B(h) applies to Micro and Small manufacturers and Micro and Small service providers. Buyer verification runs through the Udyam Registration portal (udyamregistration.gov.in), which is the MSMED Act's central register post the 2020 amendments. The MSME supplier issues a Udyam Registration Number (URN) — a 19-character identifier structured UDYAM-STATE-DISTRICT-serial — and the buyer's accounts-payable process should capture the URN, verify it against the Udyam portal for currency and classification (Micro/Small versus Medium), and tag the AP ledger accordingly. The verification is the buyer's responsibility — the tax auditor under Section 44AB will ask the AP team in Form 3CD Clause 22 to state the amounts payable to Micro and Small enterprises beyond the Section 15 time limit, and the tax auditor's opinion in Clause 22 flows straight into the tax return preparation and the Section 43B(h) disallowance line in the return of income.

Section 15 of the MSMED Act 2006 mandates that the buyer of goods or services from a Micro or Small Enterprise shall make payment on or before the date agreed upon in writing between the buyer and the supplier, and where no date is so agreed, before the appointed day — the appointed day is defined as the day immediately following the expiry of fifteen days from the day of acceptance or the day of deemed acceptance of the goods or services. The proviso then caps the agreed date at forty-five days from the day of acceptance or the day of deemed acceptance. Effect: (a) where there is a written agreement between buyer and MSME supplier specifying a payment date, that date applies, subject to a hard maximum of 45 days from acceptance; (b) where there is no written agreement (or the agreement does not specify a payment date), the 15-day default applies. Acceptance is defined by Section 2(a) — the day on which the buyer accepts the goods or services after inspection. Deemed acceptance is defined by Section 2(b) — where the buyer does not raise a written objection within 15 days of delivery, acceptance is deemed. This tool defaults to the 45-day rule for the primary ageing bucket, on the assumption that most buyer-MSME relationships operate under a written PO or contract that specifies a payment term at or under 45 days. Buyers who transact with MSME suppliers without a written agreement should tighten the exposure line — the 46-90 day bucket in this tool substantially understates their exposure if the underlying agreement position is silent, because the 15-day default would push a much larger population of invoices past Section 15.

The Section 43B(h) disallowance is not permanent — it is a deferral. The mechanic mirrors the other clauses of Section 43B (statutory dues, employer PF/ESI contribution, interest to banks, and so forth): the deduction is disallowed in the year in which the sum ought to have been paid but was not, and the deduction is allowed in the year in which the sum is actually paid. So if an FY 2025-26 MSME payable of Rs 50 lakh is unpaid at 31-March-2026 beyond the Section 15 window, it is added back to the taxable income of FY 2025-26 (increasing the tax for AY 2026-27), and it is then allowed as a deduction in FY 2026-27 when the payment is actually made (reducing the tax for AY 2027-28). The cash impact is the accelerated tax outflow in year 1 and the tax reduction in year 2 — a working-capital hit for one full tax cycle, not a permanent tax cost. Two qualifications. First, no interest on the deferred deduction is allowed to the buyer — the buyer cannot claim any imputed cost of the accelerated tax outflow. Second, the buyer separately owes interest to the MSME supplier under Section 16 of the MSMED Act 2006 (three times the RBI Bank Rate compounded monthly on the overdue amount) — that MSMED interest is itself not deductible in computing the buyer's income under Section 23 of the MSMED Act 2006, so it is a permanent tax cost on top of the deferral cost of Section 43B(h). Illustrative — verify the current MSMED Rate cycle and Section 16 interest computation with your indirect-tax counsel; the base rate the RBI publishes and the triple-of-that rate change over time.

The two provisions apply to the same buyer-MSME transaction stream but address different legs. Section 194Q of the Income-tax Act 1961 (payment code 1031 under the successor Section 393 payment-code architecture of the Income-tax Act 2025, effective April 2026) applies to any buyer with turnover above Rs 10 crore in the preceding financial year that has purchased goods from a resident seller for aggregate value exceeding Rs 50 lakh in the current financial year — the buyer must deduct 0.1 percent TDS on the excess above Rs 50 lakh per PAN, at the time of credit of the purchase to the seller's account or at the time of payment, whichever is earlier. Section 43B(h) applies to any buyer that has procured from a Micro or Small Enterprise and not paid within the Section 15 window — the disallowance operates at the year-end tax computation stage, not at the transaction stage. Interaction: (a) the same MSME goods purchase may trigger both Section 194Q TDS at the invoice-booking stage and Section 43B(h) disallowance at the year-end if the payment is not made within the Section 15 window; the two are independent and both apply; (b) the 43B(h) disallowance is computed on the gross unpaid amount owed to the MSME supplier, not net of TDS — the TDS deducted at booking has been paid to the government and is no longer owed to the supplier, and only the net-of-TDS amount actually outstanding to the supplier is the amount to test against Section 15. This tool inputs the outstanding unpaid AP as the base — that base should be captured as the amount actually owed to the supplier at the ageing date (net of TDS already deducted and paid to the government under 194Q code 1031). The tool does not apply any 194Q adjustment itself; that netting is upstream, at the AP ageing extract from the ledger. Illustrative — the interaction between 43B(h), 194Q code 1031 and the buyer's TCS obligations under 206C(1H) code 8004 for MSME sellers above the threshold is a live area where CBDT circular guidance and departmental positions continue to evolve; verify with your tax counsel before finalising any year-end 43B(h) computation.