Most of the Finance Act 2023 went unnoticed by Indian factory owners. Section 43B(h) was different. Six months after it went live, our launch-customer in Ahmedabad called: their auditor had just reported an ₹82 lakh disallowance because two of their casting suppliers were Small enterprises and the buyer was running them at 75-90 day payment terms. That ₹82 lakh was added back to taxable income, the tax outgo jumped by about ₹21 lakh that year, and the deduction will come back only in FY 2025-26 when they pay. A one-year hit on cash flow they never planned for.
This post is the briefing I now give every launch factory in onboarding. The rule, who it applies to, the math, the six mistakes I see most often, and how to set your supplier master and payment cadence so 31 March 2027 doesn’t become an unpleasant surprise.
What Section 43B(h) actually says
Section 43B of the Income Tax Act 1961 has historically been the “pay first, deduct later” clause for things like statutory dues, employee contributions, bonus and interest on bank loans. The Finance Act 2023 added a new clause (h) which extends the same logic to one specific commercial relationship: the buyer’s obligation to pay a Micro or Small enterprise within the MSMED Act’s statutory time limit.
The exact language: “any sum payable by the assessee 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 allowed as a deduction only in the previous year in which such sum is actually paid.
Other 43B clauses have a proviso: if you pay before the due date of filing your return (typically 31 October), the deduction stays in the original year. Clause (h) has no such proviso. The cut-off is the balance-sheet date (31 March). If it’s unpaid on that date and past the MSMED limit, it is disallowed for that year — period.
The Section 15 (MSMED Act) clock that 43B(h) hooks into
Section 43B(h) doesn’t invent a payment rule — it imports the one already in Section 15 of the MSMED Act 2006. That rule has two scenarios:
- No written agreement on credit period: payment is due within 15 days from the day the buyer accepts (or is deemed to accept) the goods or services.
- Written agreement exists: the period agreed in the contract applies, but cannot exceed 45 days. Any contract clause that says “Net 60” or “Net 90” with a Micro or Small supplier is legally treated as 45 days.
“Day of acceptance” is typically the date the buyer takes delivery and confirms (often the GRN date in your ERP). For services, it’s the date the buyer accepts the deliverable. There’s no allowance for “awaiting QC approval” or “sample testing” unless that rejection is communicated in writing within 15 days.
Who counts as “Micro” or “Small” in 2026
The classification comes from the MSMED Act, last revised by the central government in 2020 (and tweaked in 2024 for Medium-enterprise threshold). For 43B(h) purposes only Micro and Small matter. Medium is explicitly excluded.
| Category | Plant & Machinery / Equipment Investment | Annual Turnover | 43B(h) applies? |
|---|---|---|---|
| Micro | up to ₹ 2.5 crore | up to ₹ 10 crore | YES |
| Small | up to ₹ 25 crore | up to ₹ 100 crore | YES |
| Medium | up to ₹ 125 crore | up to ₹ 500 crore | NO |
(Investment and turnover limits were revised upward by the Finance Act 2025 — the table above reflects the 2025-onwards thresholds.)
Both limits must be satisfied. A supplier with ₹3 crore investment and ₹8 crore turnover is Small (not Micro) because investment crosses the Micro ceiling even though turnover is within. The classification is the supplier’s, on its own Udyam Registration certificate.
Suppliers self-register on the Udyam portal (free, online, takes 15 minutes). The certificate carries a 19-character Udyam Registration Number (URN) and explicitly says “Micro” / “Small” / “Medium”. As a buyer, your only safe source of truth is this certificate. Collect it at onboarding before issuing the first PO.
Worked example — what ₹30 lakh of overdue payables actually costs
Numbers make the rule concrete. Suppose your factory’s payables ledger at 31 March 2027 looks like this:
| Supplier | MSME class | Outstanding (₹) | Oldest invoice age | Within 15/45 days? | 43B(h) disallowance |
|---|---|---|---|---|---|
| Ahmedabad Castings | Small (written agreement) | 18,40,000 | 72 days | No (past 45) | 18,40,000 |
| Surat Plating Services | Micro (no agreement) | 6,20,000 | 22 days | No (past 15) | 6,20,000 |
| Pune Bearings | Small | 12,80,000 | 32 days | Yes (within 45) | 0 |
| Mumbai Steels Ltd | Medium | 26,00,000 | 90 days | N/A — Medium | 0 |
| National Couriers (LLP) | Not registered | 4,80,000 | 50 days | N/A — not MSME | 0 |
| Coimbatore Job-Work | Small (written 30-day agreement) | 5,40,000 | 38 days | No (past 30) | 5,40,000 |
| Total disallowance under 43B(h) | 30,00,000 |
Reading the table:
- Ahmedabad Castings: Small with a 45-day agreement. 72 days = 27 days past the limit. Full ₹18.4 lakh disallowed.
- Surat Plating: Micro with no written agreement so the 15-day rule applies. 22 days = 7 days past. Full ₹6.2 lakh disallowed.
- Pune Bearings: Small, within the 45-day window. Safe.
- Mumbai Steels: Medium classification — 43B(h) doesn’t apply at all, no matter how overdue.
- National Couriers: not MSME-registered. The buyer is under no 43B(h) obligation.
- Coimbatore Job-Work: Small with a 30-day written agreement. The agreed period is the limit (since it’s less than 45). 38 days = 8 days past. Full ₹5.4 lakh disallowed.
The ₹30 lakh of disallowance gets added to taxable income. At a 25% effective corporate tax rate, that’s an extra ₹7.5 lakh of tax the factory pays in FY 2026-27. The deduction reverses only in FY 2027-28 when the bills are actually paid — meaning a one-year acceleration of cash to the income-tax department, plus working-capital that was already tight because the supplier wasn’t paid.
Six mistakes Indian SMEs make on 43B(h)
I see the same things at almost every audit. Each is fixable in under a week of operational discipline.
Mistake 1 · Treating supplier status as “not my problem”
Many factories assume “the supplier should tell us if they’re MSME.” The CBDT has clarified that the onus of getting it right sits with the buyer. If you don’t verify, the assumption defaults against you in any audit query.
Fix: add a mandatory “MSME classification (Micro / Small / Medium / Not registered) + Udyam Registration Number” field to your supplier onboarding form. Make it a hard gate before any PO can be raised.Mistake 2 · Confusing “invoice date” with “day of acceptance”
The clock starts the day you accept the goods (typically GRN date) or the service deliverable. If your accounts team treats the invoice date as the trigger, you may shave 3-10 days off the deadline you actually have. In a tight 15-day window that matters.
Fix: configure your payables ageing report off GRN date (not invoice date) for MSME-tagged suppliers.Mistake 3 · “Net 60” clauses in supplier contracts with Small enterprises
Procurement contracts standard across the industry routinely use 60 or 90-day terms. With a Small enterprise on the other side, that clause is legally void beyond 45 days — the 43B(h) clock fires anyway. Several factories think they have a 60-day buffer; they have 45.
Fix: when issuing a PO to a Micro or Small supplier, either accept the 45-day max or use a non-MSME vendor for items where you genuinely need longer terms.Mistake 4 · Year-end “pay everything” sprint with the wrong shortlist
Finance teams routinely do a March-end payable cleanup. If they sort by amount or by ageing without filtering for MSME-Micro / MSME-Small, they may pay a ₹50 lakh non-MSME bill (zero 43B(h) impact) and skip a ₹5 lakh MSME bill (full disallowance). The wrong ₹55 lakh worth of cash got deployed.
Fix: the 31-March priority queue should be filtered MSME-Micro / MSME-Small first, sorted by ageing-vs-deadline. Anything past the limit gets paid before anything else, regardless of supplier size.Mistake 5 · Disputed invoices left in the payable ledger
Genuine quality / quantity disputes are a valid reason to delay payment, but only if the dispute is communicated to the supplier in writing within 15 days of acceptance. If you sit on an invoice for 60 days while “internal review” is pending, the clock has already run.
Fix: any invoice with a quality or quantity dispute gets a formal written notice to the supplier within 15 days. The accounts team holds the email proof.Mistake 6 · Forgetting service providers
43B(h) covers services too. Print vendors, transporters, security agencies, contract-labour suppliers, software vendors — if any are MSME-Small or MSME-Micro and you owe them past the limit, the same disallowance applies. Most factories remember to check material suppliers and forget services entirely.
Fix: extend the MSME-tag discipline to the services / overheads ledger, not just procurement.How to actually comply — a 5-step operational routine
Tag every supplier with MSME status
Add three fields to your supplier master: MSME classification (Micro / Small / Medium / Not registered), Udyam Registration Number, and the date you last verified the certificate. Re-verify annually — a Small supplier can move up to Medium (escaping 43B(h)) or a previously-unregistered supplier can register and now be in scope.
Standardise the payment-terms clause in your POs
For MSME-Micro / Small suppliers: cap the agreement period at 45 days. For non-MSME suppliers: use commercial terms as before. The PO template should auto-pick the right credit-period clause based on the supplier’s MSME flag.
Run a weekly MSME-payables ageing report
Filter for MSME-Micro and MSME-Small only. Sort by days-since-GRN against the applicable limit (15 or 45). Three buckets: green (within limit), amber (within 7 days of limit), red (past limit). The amber bucket goes into the next payment run; the red bucket goes into today’s payment run.
Document disputes in writing within 15 days
For any invoice you intend to delay or reject, send the supplier a written communication (email is fine) within 15 days of acceptance, citing the specific issue. Save the proof in the supplier file. This is the only legal way to stop the 43B(h) clock while a dispute is genuinely open.
March pre-close MSME sweep
In the first week of March each year, generate the full MSME-payables ageing report. Anything that won’t clear the deadline by 31 March goes into the March payment plan. Treasury allocates cash to MSME-overdue first, then other priorities. The CFO signs off — this becomes the auditor’s baseline document for Form 3CD clause 22.
What changes in your tax audit
Form 3CD — the statutory tax-audit report — was updated post the 43B(h) amendment. Clause 22 now requires the auditor to disclose any sum payable to Micro or Small enterprises that is overdue per Section 15 of the MSMED Act as on the balance-sheet date. Two reports the auditor will ask for:
- MSME-classified supplier ledger as on 31 March, with Udyam number and category against each.
- Payables ageing report for the same suppliers, with the 15 / 45-day threshold and days-overdue flagged.
If you can produce both in 20 minutes from your ERP, the audit closes cleanly. If you have to reconstruct them across Excel files and a Tally trial balance, the audit drags and your CA bill grows.
Section 16 of the MSMED Act also empowers the Micro or Small supplier to claim compound interest at 3x the RBI bank rate on overdue amounts — even without going to court. While most suppliers don’t pursue this, the legal exposure exists. Combined with 43B(h), the cost of running an MSME supplier at 60+ days is no longer just a working-capital benefit — it’s a real cash and tax leak.
How OEMup handles MSME ageing automatically
This isn’t a feature we set out to build — we built it because two launch customers got blindsided by the FY 2023-24 disallowance and asked us to wire it in for FY 2026-27. Three things were tuned for Indian SMEs:
- MSME tag at the supplier master. Three required fields at onboarding (classification, URN, verification date). PO creation blocks if the tag is missing for any supplier with a turnover above ₹5 lakh in the last 12 months.
- Auto-applied payment terms. The PO template picks the credit-period clause based on the MSME flag. Micro / Small defaults to “within 15 days from GRN” (or 45 with an attached agreement); other suppliers use commercial terms.
- MSME ageing dashboard. One screen, MSME-Micro and MSME-Small only, three colour buckets (green / amber / red) against the 15 or 45-day deadline. Treasury runs this every Tuesday before the payment run. March pre-close generates the Form 3CD clause 22 backup pack in one click.
The point isn’t the dashboard. The point is that 43B(h) compliance is a discipline problem, not a software problem. The software just makes the discipline operationally cheap. Without it, the discipline tends to slip exactly in the months before 31 March when everything else is also urgent.
See your real MSME-payables ageing — in 15 minutes
Bring an export of your supplier master and your March payables trial balance. We’ll show you what your 43B(h) exposure would be if today were 31 March, and how to set up the ageing routine going forward.
Book a Demo →The bottom line
Section 43B(h) isn’t a complicated rule. It is a simple incentive: pay your small suppliers within their statutory window, or pay the income-tax department instead. The arithmetic is unforgiving but predictable.
What trips most factories is operational, not legal. The supplier master doesn’t carry an MSME tag, the PO templates default to commercial terms, the ageing report doesn’t filter by MSME-class, and the 31-March payment sprint focuses on the largest invoices instead of the legally-binding ones. Each of those is a 1-day fix. Together they prevent the kind of ₹82 lakh surprise that one of our customers absorbed last year.
If you’re running on Tally + Excel and have more than 50 suppliers, the ageing report is the next routine to put on rails. Whether you do that in OEMup or anywhere else, do it before March arrives — not in the first week of April when the auditor asks for the MSME ledger.
Companion reads: Job Work and ITC-04 for how job-worker payments interact with both GST and 43B(h); Factory Payroll in India for the other major statutory-payment discipline that hits the same year-end; How to Migrate from Tally to a Manufacturing ERP for setting up the supplier master cleanly in a system that supports MSME tagging from day one.
FAQ
What is Section 43B(h) of the Income Tax Act?
A clause added by the Finance Act 2023, effective FY 2023-24. It disallows the deduction of any expense to a Micro or Small enterprise supplier that remains unpaid past the MSMED Act’s 15 or 45-day limit as on the balance-sheet date. The deduction reverses only in the year of actual payment.
Does 43B(h) apply to Medium enterprises?
No. Only Micro and Small. Medium enterprises (turnover up to ₹500 crore, investment up to ₹125 crore as of 2025) are explicitly excluded.
What’s the difference between 15 and 45 days?
15 days when there is no written credit-period agreement. Up to 45 days when there is a written agreement (any clause above 45 is legally void for MSME-Small / Micro suppliers).
Does it apply to services too?
Yes. The MSMED Act covers both goods and services. Print, transport, contract-labour, security, software — same rule.
What if my supplier doesn’t share their Udyam Registration?
Without proof, 43B(h) doesn’t apply. But CBDT expects buyers to collect a written declaration. Best practice: make Udyam number / declaration a mandatory onboarding field.
Does the deduction come back when I pay?
Yes — but in the year of actual payment, not retroactively. The effect is a one-year acceleration of tax outflow.
Is the 43B(h) deadline relaxed if I pay before ITR filing date?
No. Unlike other 43B clauses, 43B(h) has no proviso. The cut-off is strictly the balance-sheet date (31 March).
Where does this show up in my tax audit?
Form 3CD clause 22. The auditor reports the overdue payable amount to Micro and Small enterprises as on 31 March.