Section 43B(h): What Every Business Must Know Before 31st March 2026

With 31st March 2026 just around the corner, businesses across India face a critical compliance deadline under Section 43B(h) of the Income Tax Act. This provision, introduced by the Finance Act 2023 and effective from FY 2023-24, makes it mandatory for companies to clear dues owed to Micro and Small Enterprises (MSEs) within a prescribed time limit – or risk losing the tax deduction entirely. In this article, we explain what Section 43B(h) means, who it applies to, what the consequences of non-compliance are, and the exact steps you need to take before the financial year ends.

Key Facts at a Glance

What Is Section 43B(h)?

Section 43B(h) is a clause added to the Income Tax Act, 1961 by the Finance Act 2023. It came into effect on 1st April 2023 (AY 2024-25 onwards). The provision links your tax deduction on purchases directly to when you actually pay your MSME supplier – not just when you book the expense in your accounts.

In simple terms: if you owe money to a registered Micro or Small Enterprise and you do not pay within the deadline, you cannot claim that expense as a deduction in the current financial year. The deduction is only available in the year the payment is actually made.

Who Does Section 43B(h) Apply To?

The rule applies to any business – regardless of its size or registration status – that purchases goods or services from a supplier registered under the MSMED Act, 2006. The buyer does not need to be an MSME itself for this provision to kick in.

The supplier, however, must:

1. Hold a valid Udyam Registration Certificate
2. Be classified as a Micro Enterprise or Small Enterprise (not Medium)
3. Be engaged in manufacturing or service provision (not pure trading)

MSME Classification for Reference

* Section 43B(h) applies ONLY to Micro and Small Enterprises. Medium Enterprises are excluded.

Payment Timelines Under Section 43B(h)

The payment deadlines are governed by Section 15 of the MSMED Act, 2006. Here is how they work:

1. No written agreement: Payment must be made within 15 days of the date of acceptance of goods or services.
2. With a written agreement: Payment must be made within the agreed period, which cannot exceed 45 days.

If the payment is not made within these timelines, the outstanding amount cannot be claimed as a deduction for that financial year. It is added back to your taxable income, increasing your tax liability.

Practical Example

Suppose your company purchases raw materials worth Rs. 40 lakhs from a Micro Enterprise in February 2026. There is a written agreement of 45 days in place. The payment is due by mid-April 2026.

If you clear the dues before 31st March 2026, you can claim the Rs. 40 lakh deduction in FY 2025-26. If you delay and pay in April or May 2026, the deduction shifts to FY 2026-27 and you end up paying tax on that Rs. 40 lakh for the current year.

Consequences of Non-Compliance

Missing the deadline under Section 43B(h) has two direct financial consequences:

1. Disallowance of Tax Deduction

The unpaid amount is added back to your taxable income. For a company in the 30% tax bracket, this can mean a significant and entirely avoidable tax outgo. The deduction is not lost permanently – it shifts to the year of actual payment but it hurts cash flow and tax planning in the current year.

2. Compound Interest Under MSMED Act

Late payment to MSMEs automatically attracts compound interest at 3 times the RBI’s notified bank rate. This interest begins from the day immediately after the due date. To make matters worse, this interest is not allowed as a tax deduction, making the effective cost of delay even higher.

Action Checklist Before 31st March 2026

Here is what your accounts and compliance team should be doing right now:

1. Pull out a complete list of all outstanding vendor payments
2. Identify which suppliers hold a valid Udyam Registration Certificate – verify on the official Udyam portal
3. Classify each MSME supplier as Micro or Small (not Medium or Trader)
4. Check whether a written payment agreement is in place (15-day rule vs. 45-day rule)
5. Calculate the due date for each invoice and prioritise accordingly
6. Clear all overdue MSME payments before 31st March 2026
7. Obtain MSME declaration and Udyam Certificate copy from each vendor and keep on file
8. Document all payments with bank transfer records and invoice acknowledgements

Practical Tips for Ongoing Compliance

Section 43B(h) is not a one-time fix – it demands a change in how you manage vendor payments throughout the year. Here are some tips to stay compliant going forward:

1. Update your vendor master: Add an MSME flag for each Udyam-registered supplier in your ERP or accounting software.
2. Set payment alerts: Use your accounts payable system to flag MSME invoices that are approaching the 15 or 45-day deadline.
3. Formalise agreements: If you deal with MSME suppliers regularly, enter into written agreements that specify a 45-day payment period. This gives you more flexibility than the default 15-day rule.
4. Conduct quarterly reviews: Do not wait for year-end. A quarterly MSME payables audit prevents last-minute scrambles.
5. Train your finance team: Ensure everyone involved in payables understands the consequences of a missed MSME payment deadline.

Conclusion

Section 43B(h) is one of the most impactful tax compliance requirements for businesses dealing with MSME suppliers. With the 31st March 2026 deadline approaching, the time to act is now – not at the start of April. Clear your outstanding dues, verify your suppliers’ Udyam registrations, and put in place a year-round payment monitoring system. Businesses that treat this as a one-time year-end scramble will continue to face avoidable tax penalties. Those that build it into their regular accounts payable process will benefit from cleaner books, better supplier relationships, and a healthier tax position year after year.

Frequently Asked Questions (FAQs)

Q1. Does Section 43B(h) apply if my vendor is an MSME trader (not a manufacturer)?

No. The provision applies only to Micro and Small Enterprises engaged in manufacturing or providing services. MSME traders are excluded.

Q2. What if the MSME supplier is registered after the invoice date?

The key date is the supplier’s Udyam registration status at the time of the transaction. If they were not registered when the invoice was raised, Section 43B(h) may not apply. However, it is best to verify and document this carefully.

Q3. Is the deduction lost permanently if payment is delayed?

No. The deduction is not lost – it is simply deferred to the financial year in which the actual payment is made. However, this defers your tax benefit and increases your tax liability in the current year.

Q4. Does the provision apply if there is no written agreement?

Yes. In the absence of a written agreement, the payment window is just 15 days. If you miss this, the disallowance provisions apply.

Q5. Is the interest paid on delayed MSME payments tax deductible?

No. The compound interest charged under the MSMED Act for late payment to MSMEs is specifically not allowed as a tax deduction. This makes delayed payments doubly expensive.