What is Section 43B(h) of the Income Tax Act?

Section 43B(h) is a tax compliance provision that disallows deduction of expenses for payments outstanding to Udyam-registered Micro and Small Enterprises if not paid within the statutory limits (15 or 45 days). The deduction is allowed only in the financial year the actual payment is made.

Does Section 43B(h) apply to purchases from traders?

No. The MSMED Act's payment protection applies only to manufacturers and service providers. While traders (wholesalers/retailers) can register under Udyam for priority sector bank lending, they are excluded from the Section 43B(h) payment disallowance rules.

What are the 15-day and 45-day limits under the MSMED Act?

If there is a written agreement between the buyer and supplier, payment must be made within the agreed period, not exceeding 45 days. If there is no written agreement, payment must be made within 15 days of receiving the goods or services.

Are Medium enterprises covered under Section 43B(h)?

No. Section 43B(h) applies strictly to payments outstanding to Micro and Small enterprises. Medium enterprises (turnover up to ₹250 Crores) are exempt from this disallowance rule.

Section 43B(h) MSME Payment Rules: 15 and 45-Day Time Limits

To protect the cash flows of small businesses and promote timely payments, the government introduced a strict tax compliance amendment under **Section 43B(h)** of the Income Tax Act.

Effective from FY 2023-24 (AY 2024-25) onwards, this rule mandates that corporate and partnership buyers must pay their micro and small suppliers within statutory deadlines. Failure to do so results in the outstanding payment being disallowed as a business expense for that year, significantly increasing the buyer's taxable income and tax liability. In this comprehensive guide, we cover classification limits, payment timelines, tax impacts, real-world examples, and Tally Prime configurations.

Which Suppliers are Covered under Section 43B(h)?

Section 43B(h) applies only to suppliers registered as **Micro** or **Small** enterprises under the government's **Udyam Portal**:

Micro Enterprises: Businesses with an investment in plant & machinery of **up to ₹1 Crore** and an annual turnover of **up to ₹5 Crores**.
Small Enterprises: Businesses with an investment in plant & machinery of **up to ₹10 Crores** and an annual turnover of **up to ₹50 Crores**.
Exclusions:
- Medium Enterprises: (Investment up to ₹50 Crores, turnover up to ₹250 Crores) are not covered.
- Traders: Wholesalers and retailers registered on the Udyam portal are excluded from these payment rules. Only manufacturers and service providers qualify.
- Unregistered Suppliers: Suppliers without a valid Udyam Registration Certificate are not covered.

The Statutory Payment Deadlines

Under Section 15 of the MSMED Act, 2006, the payment deadline is determined by the presence of a written purchase agreement:

Agreement Type	Statutory Deadline	Starting Point of Calculation
Written Purchase Agreement / Contract	Within the agreed timeline, but not exceeding 45 days	The date of actual delivery of goods or services.
No Written Agreement / Contract	Within 15 days	The date of actual delivery of goods or services.

Practical Scenarios & Disallowance Timelines

To understand how the disallowance mechanism affects your annual tax filings, examine these two standard scenarios:

Scenario A (Payment delayed but made within the same FY): You buy raw materials worth ₹5 Lakhs from a registered micro enterprise on November 1st. The payment is made on January 15th (after 75 days, violating the 45-day limit). Since the payment was cleared before the end of the financial year (March 31st), the ₹5 Lakhs expense is **allowed as a deduction** for that year. However, you are still liable to pay interest under Section 16 of the MSMED Act.
Scenario B (Payment outstanding beyond FY end): You buy services worth ₹10 Lakhs from a registered small enterprise on February 15th. No payment is made by March 31st (violating the 45-day limit). The payment is finally cleared on May 10th of the next financial year. In this case, the ₹10 Lakhs expense is **disallowed** for the current financial year and added back to your taxable income. You can claim the ₹10 Lakhs deduction only in the subsequent financial year when the payment was actually cleared.

Tax Disallowance Impact and Interest Penalty

If a payment to a micro or small supplier remains outstanding at the end of the financial year beyond the 15 or 45-day limit, the tax impacts are:

Tax Disallowance: The outstanding purchase amount is added back to the buyer's net profit. The buyer must pay income tax on this disallowed expense (e.g. at 30% plus surcharges for corporate entities).
Compound Interest Penalty: Under Section 16 of the MSMED Act, the buyer is liable to pay compound interest to the supplier at **three times the bank rate** notified by the RBI. This interest paid to the MSME is strictly non-deductible as a business expense under the Income Tax Act.

Tracking MSME Due Dates in TallyPrime

To maintain compliance, set up credit terms and track due dates in Tally Prime:

Go to Ledger alteration for your supplier. Set **Maintain balances bill-by-bill** to Yes.
Under statutory details, enter the supplier's **Udyam Registration Number** and set their enterprise type (Micro or Small).
Set the default credit period to 45 days (or 15 days depending on agreements) in the ledger master.
When recording purchases, Tally will automatically track outstanding dues. Check the aging details under **Gateway of Tally > Display More Reports > Statements of Accounts > Outstandings > Bills Payable** to spot invoices nearing their limits.

Primary Focus: TrulyInvoice Purchase Automation

Maintaining Section 43B(h) compliance requires recording all supplier invoices on their exact delivery dates with correct credit terms. If invoice dates or supplier details are entered incorrectly due to typing mistakes, your aging reports will be incorrect, leading to tax disallowance errors during annual audits.

To prevent these compliance errors, use **TrulyInvoice**. TrulyInvoice reads your supplier bill PDFs and scanned invoice images using layout-aware OCR. The platform automatically extracts invoice dates, vendor details, and tax splits, and syncs formatted F9 purchase vouchers directly into Tally Prime. This eliminates manual data entry mistakes for a flat subscription of **plans starting at ₹399/month**, keeping your creditor aging reports accurate and audit-compliant.