For years, MSME payment terms were a polite suggestion: the MSMED Act set time limits, but late payment carried little real cost to the buyer. Section 43B(h)of the Income-tax Act, effective from FY2023-24, changed the incentive. It links a buyer’s tax deduction to actually paying its Micro and Small suppliers on time.
The rule, in one line
Any amount payable to a registered Micro or Small enterprise is deductible only in the year it is actually paid, unless it is paid within the MSMED Act time limit — 45 days where there is a written agreement, 15 dayswhere there isn’t. Miss the window, and the expense is disallowed in the year it was incurred and allowed only in the later year you settle it.
Why that bites
A disallowed deduction means higher taxable income — and a higher tax outflow — in the current year. The expense isn’t lost forever; it shifts to the year of payment. But the timing cost is real, and it falls in the year the buyer can least explain it. For a supplier, that is the point: the buyer now has a tax reason, not just a relationship reason, to pay on time.
Who it covers — and who it doesn’t
- Covered: amounts payable to suppliers registered as Micro or Small enterprises (Udyam-registered, in the relevant turnover/investment bands).
- Not covered: Medium enterprises, and unregistered suppliers — the 15/45-day disallowance doesn’t apply, though ordinary payment discipline still does.
- Agreement vs none: a written agreement extends the limit to 45 days; without one, the clock is 15.
Turning the rule into action
Two practical responses follow. First, know your deadlines: the 43B(h) payment-timeline calculator works out the limit, the days remaining and the disallowance window for a given invoice. Second, if you can pay early anyway, do it on terms that earn — that is what dynamic discounting (AssurePayEarly) turns into: margin rather than just compliance.
This is an explainer, not tax advice — confirm the treatment for your situation with your professional advisor.