Clause (h) of Section 43B of the Income-tax Act, 1961, inserted by the Finance Act, 2023 with effect from assessment year 2024-25, does something no other clause of that section does. It denies the deduction and does not restore it on payment before the return due date.
That single structural difference is what makes it a payables problem rather than a tax problem, and why it cannot be managed in March.
1. What the clause says, and what it leaves out
Section 43B permits deduction of certain sums only in the year of actual payment. The first proviso relieves that rigour for most of those sums: if payment is made on or before the due date for furnishing the return under Section 139(1), the deduction is allowed in the year of accrual.
Clause (h) — any sum payable to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 — is expressly excluded from that proviso. Pay late and the deduction moves to the year of actual payment. There is no cure by paying before the return is filed.
2. The time limit is not always 45 days
Section 15 of the MSMED Act sets the period by reference to the agreement between the parties:
- Where there is a written agreement, the date agreed — but in no case more than 45 days from the day of acceptance or deemed acceptance
- Where there is no written agreement, 15 days from the day of acceptance or deemed acceptance
"Acceptance" is not the invoice date. It is the day of actual delivery of goods or rendering of services, unless the buyer objects in writing within fifteen days, in which case it runs from the day the objection is removed. A purchase order that is silent on payment terms therefore attracts the fifteen-day period, not forty-five — a distinction that catches buyers who assume the longer window applies by default.
3. Which suppliers the clause covers
Three filters apply, and all three must be satisfied before the clause bites:
| Filter | Position |
|---|---|
| Classification | Micro and small enterprises only. Medium enterprises are outside the clause. |
| Registration | The supplier must be registered under the MSMED Act. An unregistered enterprise that would qualify by size is not covered. |
| Nature of activity | Manufacturing and service enterprises. Traders registered for the limited purpose of priority sector lending are, on the position taken by the administering Ministry, outside Section 15. |
This is precisely why the vendor master, and not the ledger, is where the work has to be done. The classification is a fact about the supplier that the buyer must establish and record, and it can change — an enterprise can move from small to medium, and the covered status changes with it.
4. What the buyer has to build
A payables process that survives this clause has five components. None is complicated; the difficulty is that they must be in place before the transaction, not after.
- Vendor master field. Udyam registration number, classification, and the date the declaration was obtained. Refreshed annually, not once at onboarding.
- Written terms. A purchase order or agreement stating the payment period. Silence costs thirty days of runway.
- Acceptance date capture. The goods receipt or service completion date recorded in the system, because that — not the invoice — starts the clock.
- An ageing report that ages from acceptance, flags covered suppliers separately, and is reviewed weekly in the last quarter.
- A March cut-off review identifying every covered balance whose due date falls on or before 31 March and confirming payment before it.
A disallowance under clause (h) is never discovered by the auditor. It is created by the accounts payable clerk, eleven months earlier, releasing a payment in the wrong week.The AKV working rule
5. The interest liability that sits alongside
Section 16 of the MSMED Act provides that a buyer who fails to pay within the Section 15 period is liable to pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank — irrespective of any agreement to the contrary, and irrespective of whether the supplier demands it. Section 23 of that Act then denies any deduction for that interest in computing income.
So a late payment can generate two adverse consequences in the same year: the principal deduction deferred under Section 43B(h), and an interest liability that is itself not deductible.
6. Where it becomes visible
The exposure surfaces in three places, and they must agree with one another:
- Clause 22 of Form 3CD, which requires the amount of interest inadmissible under Section 23 of the MSMED Act
- Clause 26 of Form 3CD, reporting sums referred to in Section 43B
- The half-yearly return in MSME Form I under the Companies Act, 2013, disclosing amounts outstanding to micro and small suppliers beyond forty-five days
A company that files MSME Form I showing substantial overdue balances, and a tax audit report showing no disallowance under clause (h), has published a contradiction across two statutes. That contradiction is visible without any investigation at all.
7. What we suggest doing now
If the process described above is not in place, the sequence that recovers the position fastest is: collect declarations and Udyam numbers from the entire vendor base; tag the covered vendors in the accounting system; re-run the payables ageing from acceptance dates for the current year to date; and identify what is already overdue, because that quantum is a known deferral rather than a surprise. Then fix the purchase order template so the next year does not repeat it.
Scope of advice. This firm advises on the Indian tax, exchange-control and regulatory position. Where a matter also turns on the law of the country in which you are resident or in which an entity is incorporated, we set out the Indian position and coordinate with your adviser in that jurisdiction; we do not render advice on foreign law.
Discussing your position. If any part of this affects a transaction you are contemplating, the useful conversation is the one that happens before it is executed. A scoping call is the appropriate first step.
This article is general commentary on the law as it stands and is not advice on any specific facts. Positions in tax, corporate and exchange-control law change with amendments, notifications and judicial decisions; please confirm the current position with the firm before acting.