In short. Section 43B(h) of the Income-tax Act, 1961 is what people call the 43B(h) MSME rule. If a buyer pays a micro or small enterprise later than the 15 or 45 days that Section 15 of the MSMED Act allows, it can deduct that purchase only in the year it actually pays. So dues still unpaid past the limit on 31 March cost the buyer tax that year. It applies from 2023-24 and carries on under Section 37 of the Income-tax Act, 2025. Your move as a supplier is simple. Make sure every buyer has your Udyam details well before March.
Is this your situation?
- You're a micro or small unit, your buyers have paid in 90 or 120 days for as long as you can remember, and you've just put up with it.
- A buyer's vendor team has emailed a form asking you to confirm your MSME status. Or worse, to sign that you aren't one.
- Someone at a trade association meeting said buyers 'lose their tax deduction' if they pay MSMEs late. You want to know if that's true, and whether it does anything for you.
- It's April. Three invoices from last year are still sitting unpaid and you're wondering if 31 March changed anything.
- You trade in goods, or you've grown into the medium category, and nobody can tell you straight whether the rule covers you.
- You run the accounts of a buying company and want to know what suppliers can fairly ask of you, and what they can't.
So what does Section 43B(h) actually say?
It's a tax rule, and it's aimed at the buyer. Ordinarily a business claims the cost of goods or services in the year it incurs the expense, paid or not. The Finance Act, 2023 added clause (h) to Section 43B and pulled one kind of bill out of that general rule: any sum payable to a micro or small enterprise beyond the time limit in Section 15 of the MSMED Act. For those bills the buyer gets the deduction only in the year it actually pays. The rule runs from financial year 2023-24 (assessment year 2024-25) onwards.
The time limit is borrowed straight from the MSMED Act. Payment has to come within the period agreed in writing, and that period can't go beyond 45 days from the day of acceptance. Nothing agreed? Then it's 15 days from acceptance. So picture a buyer that accepted goods from a registered micro or small supplier and still hasn't paid within that limit when the financial year closes. It can't deduct that purchase for that year. The cost shifts to whichever year the money finally goes out.
One detail gives the rule its teeth. The other clauses of Section 43B cover things like GST, provident fund, bank interest and bonus, and for those, paying before the return's due date saves the deduction. Clause (h) is expressly left out of that relief. Pay the supplier in May, just before the return is filed, and the earlier year's deduction is still gone if the 45 days had already run. That's where the 43B(h) MSME rule bites.
Why would a tax rule make a buyer pay faster?
Because it lands on the buyer's tax bill, and a slow-paying habit suddenly has a number attached to it. Say a company has Rs 2 crore of purchases from micro and small suppliers that are past the 45-day limit and still unpaid on 31 March. That Rs 2 crore goes back into its taxable income. At a corporate rate of roughly 25 percent, it's about Rs 50 lakh of extra tax that year. Yes, the company gets the deduction back next year when it pays. Strictly, it's a timing difference. But the cash leaves the company all the same, and it shows up in the tax audit and in the accounts.
The deduction follows the payment. That's the whole idea behind the MSME payment tax deduction rule. A finance team that wants to avoid the hit can clear MSE dues before 31 March or, better, pay inside the Section 15 limit all year round. Since 2024 we've watched many large buyers in Delhi NCR start tagging MSE vendors separately in their vendor masters, running month-end ageing reports on them and pushing bulk payments out in the second half of March. The Union government told Parliament that Section 43B(h) was meant to enforce the 45-day timeline. Frankly, at year end it has done more for prompt payment than the interest provisions managed in years.
Be clear about what it doesn't do. There's no penalty on the buyer. Not a rupee goes to you. And interest a buyer pays a supplier under the MSMED Act is a different matter altogether, because Section 23 of that Act already says such interest is never deductible for income tax.
Which provisions sit behind Section 43B(h)?
Section 43B(h), Income-tax Act, 1961
When a sum payable to a micro or small enterprise is paid beyond the Section 15 limit of the MSMED Act, the buyer can deduct it only in the year of actual payment. The pay-before-the-return relief doesn't apply to this clause. It governs financial years 2023-24 to 2025-26.
Section 37, Income-tax Act, 2025
The Income-tax Act, 2025 took over from the 1961 Act on 1 April 2026 and replaced the previous year and assessment year with a single 'tax year'. The MSE payment rule carries on in substance inside Section 37 (reported as clause (g) of sub-section (2)), and once again the pay-before-return relief doesn't cover it. Section numbers under the new Act are still settling. Check the current text with your tax adviser.
Sections 2(b) and 15, MSMED Act, 2006
These define the day of acceptance (actual delivery, or the day a written objection raised within 15 days is removed) and deemed acceptance (delivery, where no written objection comes within 15 days). Section 15 then sets the payment limit at 45 days at most, or 15 days if nothing was agreed.
Sections 16, 22 and 23, MSMED Act, 2006
Section 16 gives the supplier compound interest at three times the RBI bank rate. Under Section 22, buyers whose accounts are audited must disclose unpaid principal and interest owed to micro and small suppliers. Section 23 says that interest can't be deducted for income tax.
MSMED (Amendment) Act, 2026
Partly in force from 15 October 2026. It brings in a warning, and then penalties, for buyers who skip the Section 22 disclosure. It recasts classification under Section 7 on investment and turnover together, and writes TReDS routing of CPSE invoices into the Act itself. Section 43B(h) is left alone.
How do you count the 45 days for tax?
People talk about a '45 days income tax' rule, but income tax has no period of its own here. It just takes whatever limit Section 15 of the MSMED Act sets for that particular bill. If the purchase order says 30 days, the limit is 30 days. If it says 90, the limit is still 45, because Section 15 won't allow more. No written credit term at all means 15 days. And every one of these limits runs from the day of acceptance or deemed acceptance. Not the invoice date. Fixing acceptance gets trickier when a buyer raises quality objections, and our note on the 45-day payment rule for MSMEs walks through how that works.
Year end plays out like this. Goods are accepted on 10 March with an agreed 45 days, so payment is due by 24 April. On 31 March the limit hasn't expired. If the buyer pays by 24 April, the purchase is deductible in the year ending 31 March as usual, since it was never paid late. If it pays in June, the payment was beyond the limit, and the generally accepted reading is that the deduction then moves to the year of payment. Bills accepted in January or early February on a 45-day limit are the ones really exposed. Their limit runs out before the year does.
That's why delivery and invoice dates matter so much. Invoice ahead of delivery, or send challans with no date on them, and nobody (the buyer's auditor included) can say for sure when the clock started.
Who's covered, on each side?
On the supplier's side, only micro and small enterprises. A medium enterprise is outside the rule even if it holds a Udyam registration. Classification follows the thresholds notified by the Ministry of MSME. From 1 April 2025, a micro enterprise is one with investment in plant, machinery or equipment up to Rs 2.5 crore and turnover up to Rs 10 crore, and a small enterprise goes up to Rs 25 crore of investment and Rs 100 crore of turnover. The 2026 amendment recast Section 7 of the MSMED Act, so check whether fresh thresholds have been notified. Your Udyam certificate shows the category year by year. Buyers usually go by it.
Traders are the grey area. In 2021 the MSME Ministry let retail and wholesale traders register on Udyam, but only for priority sector lending. Most tax advisers take the view that purchases from a pure trader aren't protected by Section 15, which puts them outside the tax rule too. Some disagree. We've set out both sides in our piece on whether a trader can go to the Facilitation Council. An unregistered micro unit is on weak ground as well, since Section 15 talks of a 'supplier' and the MSMED Act defines that word by reference to registration.
On the buyer's side, it reaches any business that claims expenses as deductions. That's companies, LLPs, partnership firms and proprietors. A buyer taxed on a presumptive basis (a small business declaring income under Section 44AD, for instance) barely feels it, because it doesn't deduct purchases one by one. Most advisers also treat purchases of capital assets as outside the rule, since the purchase price isn't directly deducted. Buyers should confirm that with their own tax adviser.
Where does it actually help you get paid?
It helps most when the buyer knows what you are. An accounts team can only flag you as a micro or small vendor if its vendor master says so. Suppliers who sent the Udyam certificate at vendor registration, print the Udyam number on every invoice and reconfirm their category each April tend to end up on the 'pay before March' list. Suppliers who never told the buyer usually get paid on its normal 90-day cycle. Often the buyer genuinely hasn't spotted the tax problem until its auditor asks.
It also hands you a polite reason to chase overdue bills in January and February. Send a short email. Say the listed invoices are from a registered micro enterprise, that they're past the Section 15 limit, and that if they're still unpaid on 31 March the buyer loses the deduction for the year. That isn't a threat. It's something the buyer's finance head would want to know anyway. Plenty of suppliers find this letter gets a quicker answer than one more reminder about interest.
Advocate B.K. Singh's suggestion is to send that note to the finance or accounts head, not to the purchase manager who placed the order. In his experience the purchase side rarely knows the tax rule exists. Finance is already tracking MSE dues for the auditor. It can release a payment that's been parked.
Has it backfired on small suppliers?
In some ways, yes. Be ready for it. In 2024 some buyers moved orders to medium enterprises or traders, whose bills fall outside the rule. Others asked their micro and small vendors to sign 'not MSME' declarations, or letters accepting longer credit and giving up interest. A few went as far as asking suppliers to cancel their Udyam registration.
A declaration like that doesn't change the law. Section 15 applies notwithstanding any agreement to the contrary, so you can't contract out of the 45-day limit or the interest. But the buyer will still produce that paper before the Facilitation Council and argue that you held yourself out as outside the Act. It can hurt your credibility. If you're asked for one, reply in writing, attach your Udyam certificate and state your category. Advocate B.K. Singh tells clients plainly not to sign such letters. Keep a copy of the request, too. If the matter ever reaches the Council, a written request to waive statutory protection tends to help the supplier, not the buyer.
Cancelling your Udyam registration to keep a customer is your business call. Just know what goes with it: the 45-day limit, Section 16 interest at three times the bank rate, and the Council route. Whether a contract term can take away MSMED interest is a separate question, and we've dealt with it in our note on whether an MSME can still get interest when the contract says no interest.
Can you claim money under Section 43B(h) itself?
No. It's part of the buyer's tax computation and nothing more. The Income Tax Department doesn't collect anything on your behalf, and there's nothing you can file under the Income-tax Act to force payment. If a buyer is happy to swallow the tax cost and still pay late, the tax law won't stop it.
Your remedies are still in the MSMED Act. There's interest at three times the bank rate under Section 16 (see our guide on claiming interest at three times the bank rate), and a reference to the Facilitation Council under Section 18, covered in how the MSME Facilitation Council works. What the tax rule adds is pressure. And paper. The buyer's Section 22 disclosure of MSE dues in its accounts, the figures in its tax audit, and the half-yearly MSME return a company files with the Registrar can all become evidence of what the buyer itself recorded as owed.
Think of Section 43B(h) as a reason for the buyer to pay. It isn't a remedy. It works before a dispute starts. Once a buyer has made up its mind not to pay, you're in an ordinary MSME recovery case.
Using Section 43B(h) to get paid on time, step by step
Check your category first
Download your Udyam certificate and see whether it shows you as micro or small for this year. If you've grown into medium, the rule won't help you any more.
Tell every buyer, in writing
Email the certificate to each buyer's vendor registration or accounts team and ask them to update the vendor master. Keep that email. It proves the buyer knew.
Get the terms on paper
Ask for purchase orders with a payment term of 45 days or less. Print your Udyam number and the Section 15 due date on every invoice.
Keep acceptance dates safe
Hold on to signed challans, goods receipt notes or service sign-offs, so nobody can argue later about when the clock started.
Send a statement in January
In January, send the buyer's finance head a statement of overdue invoices and mark the ones already past the Section 15 limit.
Chase in February and March
A short reminder in late February that unpaid MSE dues hit the year's deduction tends to reach the right desk before the year-end payment run.
After 31 March, decide on recovery
If invoices are still unpaid, send a demand with Section 16 interest and think about a reference to the Facilitation Council. The tax rule has done all it can.
The dates that matter, and who bears what
| When | What happens | Cost to the buyer | Cost to the supplier |
|---|---|---|---|
| Day of acceptance | Goods delivered or service done; the 15-day window for objections opens | Nothing | Nothing |
| Day 15 or day 45 (the Section 15 limit) | Payment falls due; Section 16 interest starts running if it isn't paid | MSMED interest builds up and can't be deducted for tax | Nothing; interest runs in the supplier's favour |
| 31 March | Dues past the limit and still unpaid get picked out for the year | No deduction for those purchases this year; extra tax at the buyer's rate | Nothing |
| Return and tax audit filing (check the current due dates) | The disallowance goes into the tax audit report and the return | Tax paid on the amount disallowed | Nothing |
| Payment in the following year | Deduction allowed in the year the money is actually paid (under Section 37 of the 2025 Act from tax year 2026-27) | Timing cost, plus interest on any tax shortfall | Nothing |
| Council reference if still unpaid | Conciliation first, then arbitration under Section 18 | Principal, Section 16 interest and its own legal costs | Lawyer's fee agreed in writing; usually several months to more than a year |
An invented example: a Faridabad job-work unit and a Noida assembler
This one is made up. A heat treatment job-work unit in Sector 24, Faridabad, registered on Udyam as a micro enterprise, hardens gears and shafts for an electronics and motors assembler in Sector 80, Noida. The purchase order says '90 days from invoice'. By January 2026, Rs 36 lakh of invoices for work accepted between August and December 2025 are unpaid. The unit sent its Udyam certificate years ago. Only to the purchase manager.
In mid-January the owner emails the assembler's finance controller. Attached are a statement of the invoices, the acceptance dates taken from signed delivery challans, the Section 15 due date for each one (45 days, not 90) and the Udyam certificate. The email adds a single line saying these invoices are from a registered micro enterprise and, if unpaid by 31 March, will be disallowed for the year under Section 43B(h). The controller has an audit committee meeting in April. He gets the vendor reclassified, and Rs 30 lakh is paid in the third week of March. The other Rs 6 lakh concerns a lot the assembler says was over-hardened. That one's disputed.
The unit is left with a smaller, cleaner dispute, and the payment advice is a written record of which invoices were cleared. It decides to go to the Haryana Council for the Rs 6 lakh plus interest on the late payments, using the emails to show the buyer knew its status. None of this happened to a real client. But the way things moved after a well-timed January statement is a familiar pattern.
What does a buyer's finance team check, and why should you care?
A buyer that takes the rule seriously does a few things. It checks each vendor's Udyam registration and category on the portal. It notes whether there's a written credit period and caps it at 45 days in its system. Each invoice gets tied to a goods receipt or service acceptance date. Near year end it draws up a list of MSE dues past the limit, and the auditor tests that list. These amounts have to appear in the tax audit report. A company also reports MSE dues outstanding beyond 45 days in its half-yearly MSME return, which we explain in our note on MSME Form 1 in a payment dispute.
Every one of those checks runs on information you control. Maybe your Udyam certificate carries the wrong activity code. Maybe your category changed and nobody told the buyer, or your challans were never signed. Any of these, and the buyer's system may treat your invoices as outside the rule. They'll drift back to the normal payment cycle. Fifteen minutes each April sending buyers your current certificate is time well spent.
The 2026 amendment also sharpens the disclosure side. A buyer that fails to disclose MSE dues in its accounts under Section 22 now faces a warning and then penalties. So companies are getting more careful about what they record as owed to you.
Papers to keep for Section 43B(h)
- Your current Udyam certificate, showing your category for each year you supplied
- The email or vendor form where you gave the buyer your Udyam details, with its date
- Purchase orders or agreements that show the credit period
- Invoices with your Udyam number and the due date printed on them
- Signed delivery challans, goods receipt notes, or the emails where the buyer accepted your service
- Every statement of overdue invoices you sent, and whatever the buyer wrote back
- Payment advices showing which invoices each payment cleared
- Any request from the buyer to declare yourself non-MSME or give up interest, and your written reply to it
Mistakes people make about Section 43B(h)
- 'It covers every MSME.' Only micro and small. Medium enterprises are out, and traders are a grey area at best.
- 'If the buyer pays before filing the return, it keeps the deduction.' Not under this clause. The pay-before-return relief doesn't extend to MSE dues.
- 'Our PO says 90 days, so 90 days it is.' The limit is 45 days whatever the contract says, and 15 days where nothing's agreed in writing.
- 'The rule gets me interest.' It doesn't. Interest comes from Section 16 of the MSMED Act and you have to claim it separately.
- 'The rule died with the 1961 Act.' It carries on under Section 37 of the Income-tax Act, 2025, from tax year 2026-27.
- 'Only companies need to worry.' Any buyer claiming business expenses is caught, firms and proprietors included. In practice, buyers on presumptive taxation are the exception.
And if the buyer still hasn't paid after 31 March?
Then the tax rule has done its work for that year. You're in a recovery case. Maybe the buyer chose to take the tax hit. Maybe it really disputes the bill. Either way, the next steps are the same as for any MSME delayed payment claim, a demand with interest and then a reference to the Facilitation Council. Get your papers together first, using our list of the top 10 documents needed for an MSME delayed payment case.
If you aren't a micro or small enterprise, or you registered after the contract was signed, the Council route may be shut. A commercial suit then becomes the main option. The commercial court page on recovering unpaid invoices explains that route, and if you're torn, our comparison of the MSME Council and a commercial court may help you choose.
For future contracts, a clear agreement still protects you better than anything else. Our guide on contract clauses that help MSMEs avoid payment disputes shows how to draft a payment term, an acceptance procedure and a notice clause that work with Section 15, not against it.
The Income-tax Act, 2025, and what comes next
Since 1 April 2026 the Income-tax Act, 2025 has governed, and the old 'previous year' and 'assessment year' have given way to one 'tax year'. For MSE payments it's mostly a change of numbering. Purchases in financial year 2025-26 are still assessed under Section 43B(h) of the 1961 Act. From tax year 2026-27 the same rule sits in Section 37 of the new Act, reported as clause (g) of sub-section (2). Check the current provision. Buyers' tax audit reports and returns will cite the new section, so if you quote the law in your letters, mention both until the old years are out of the system.
The 2026 amendment to the MSMED Act is coming into force in stages. The parts on classification, TReDS for central PSUs, Council numbers and disclosure penalties started on 15 October 2026. Changes to the Section 18 dispute process had no start date when we wrote this. None of it touches the 45-day limit that Section 43B(h) depends on. Even so, check the latest notifications before relying on any new provision.
What to do this week
Pull up your Udyam certificate and check your category. Then list every buyer who owes you money more than 45 days after acceptance, and against each name note whether you've ever sent them your Udyam details in writing. Any buyer who hasn't had it gets the certificate now, sent to its finance or accounts head along with a short statement of overdue invoices.
Has a buyer asked you to sign a non-MSME declaration or an interest waiver? Don't sign it until you've taken advice. If you'd like your invoices, purchase orders and buyer emails looked at, or you want to keep track of how the Income-tax Act, 2025 and the MSMED amendments affect your dues, write to Advocate B.K. Singh's team through the contact page.
Frequently asked questions
Does Section 43B(h) cover payments to medium enterprises?
No. Only micro and small enterprises, as classified under the MSMED Act. A medium enterprise's invoices stay deductible in the normal way, however late they're paid.
My buyer pays me in April for a February delivery. Does it lose the deduction?
That turns on the due date. If the 45 days from acceptance ran out before 31 March and payment came after that, the deduction shifts to the year of payment. If the limit runs into April and the buyer pays inside it, the deduction stays in the earlier year.
Can a buyer get around Section 43B(h) by agreeing 120 days' credit with me?
No. Section 15 of the MSMED Act caps any agreed period at 45 days from acceptance, and the tax rule follows that cap. Writing a longer term into the contract doesn't stretch it.
Do I need Udyam registration for the rule to apply to my buyer?
Practically, yes. The MSMED Act's payment protection is tied to a registered supplier, and buyers check status through the Udyam certificate. An unregistered micro unit is on shaky ground.
Is Section 43B(h) still in force after the new Income-tax Act?
The 1961 Act was replaced from 1 April 2026, but the rule carries on under Section 37 of the Income-tax Act, 2025. Confirm the exact clause with your tax adviser. For years up to 2025-26, Section 43B(h) still applies.
Can I complain to the tax department that a buyer paid me late?
There's no complaint route for suppliers under this rule. The disallowance happens through the buyer's own tax audit and return. For late payment, your remedy lies in the MSMED Act.
Does it cover job work and services, or only goods?
Both. Section 15 of the MSMED Act applies to goods and services alike, so the rule covers sums owed to micro and small enterprises for either. A job-work unit registered as micro or small is covered.
A buyer wants me to cancel my Udyam registration. Should I?
Think hard first. You'd give up the 45-day protection, Section 16 interest and access to the Facilitation Council. Ask the buyer to put the request in writing, and take advice before you do anything.
Advocate B.K. Singh
Founder of B.K. Singh & Associates. MCA, LL.B., LL.M. More than twenty years in practice before the Supreme Court, the Delhi High Court, district and commercial courts in Delhi NCR, and tribunals.
This guide explains the law in general terms and is not legal advice. For advice on your own papers, contact the team.