Direct Tax & MSME Compliance Manual

The Promoter’s Guide to Section 43B(h) MSME Disallowance: 45-Day Payment Deadlines, Compound Interest u/s 16 & Year-End Tax Optimization

Author: CA. Anil K. Sharma, FCA & CA. Pankaj Jain, FCA • Published: August 2026 • 8 min read • Statutory Tax Guide

Executive Compliance Rule

Under Section 43B(h) of the Income-tax Act, 1961 (effective Assessment Year 2024–25 onwards), any sum payable by an assessee to a registered Micro or Small enterprise beyond the statutory time limit specified in Section 15 of the MSMED Act, 2006 is strictly disallowed as an expense in the year of accrual and added back to net taxable profits.

1. Scope of Application: Who is Covered?

Section 43B(h) applies exclusively to purchases and services procured from suppliers registered under the MSMED Act, 2006 holding a valid Udyam Registration Certificate, categorized as:

Micro Enterprise (Covered) Investment in Plant & Machinery ≤ ₹1 Crore AND Annual Turnover ≤ ₹5 Crore.
Small Enterprise (Covered) Investment in Plant & Machinery ≤ ₹10 Crore AND Annual Turnover ≤ ₹50 Crore.
Medium Enterprise (EXEMPT) Turnover > ₹50 Crore. Section 43B(h) does NOT apply.
Traders (Wholesale/Retail) (EXEMPT) Suppliers registered under NIC Codes 45, 46, or 47 (Traders) are explicitly exempt from Section 43B(h) benefit.

2. Statutory Payment Windows: 15 vs 45 Days

Section 15 of the MSMED Act sets strict payment timeframes:

  • No Written Agreement: Payment must be discharged within 15 days from the date of acceptance or deemed acceptance of goods/services.
  • With Written Agreement: Payment can be made as per agreed terms, but the agreed period cannot exceed 45 days under any circumstances. Any contractual clause specifying payment beyond 45 days is legally void.

3. Compounding Monthly Interest under Section 16 MSMED

Delayed payment beyond statutory limits triggers mandatory penal interest under Section 16 of the MSMED Act at 3 times the RBI Bank Rate, compounded on a monthly basis.

Section 23 Non-Deductibility Warning:

Under Section 23 of the MSMED Act, interest paid or payable to MSME vendors on delayed payments is 100% non-deductible as a business expense under the Income-tax Act, 1961.

4. Year-End Action Plan for Corporate CFOs

  1. Collect and verify Udyam Registration Certificates for all active suppliers before March 31.
  2. Identify suppliers classified strictly as Manufacturers or Service Providers (exclude wholesale/retail traders).
  3. Ensure all outstanding supplier invoices outstanding on March 31 are paid within their respective 15-day or 45-day limits before the close of the financial year to claim full tax deduction.

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