MSME Sec 43B(h) — the 15-day rule that quietly disallows your expenses
Section 43B(h) was inserted by the Finance Act 2023 with effect from FY 2023-24. It links your expense deduction under the Income-tax Act directly to your supplier-payment behaviour under the MSMED Act. Most CFOs are still under-reporting the disallowance and under-providing for the Sec 16 interest. Here is the field guide.
What Sec 43B(h) actually says
In plain English: if you owe money to a Micro or Small enterprise and you don't pay within the time limit specified by Section 15 of the MSMED Act, your expense gets disallowed for the year it was incurred. You only get the deduction in the year you actually pay.
Critically — this is not the general Sec 43B treatment where merely paying before the ITR due date saves you. For MSME dues, the clock starts on the date of acceptance / deemed acceptance of goods or services.
The 15-day / 45-day clock
Section 15 of the MSMED Act 2006 sets two windows depending on whether there is a written agreement:
| Scenario | Maximum payment period |
|---|---|
| No written agreement on payment terms | 15 days from acceptance / deemed acceptance |
| Written agreement specifies a period | The agreed period, capped at 45 days |
Acceptance is the day the buyer accepts the goods / services. Deemed acceptance is 15 days from delivery if no objection is raised in writing.
Who counts as Micro or Small?
Only Micro and Small enterprises trigger Sec 43B(h). Medium enterprises do not. After the Budget 2025 amendment effective 1 April 2025, the limits are:
| Category | Investment in P&M / equipment | Turnover |
|---|---|---|
| Micro | ≤ ₹2.5 Cr | ≤ ₹10 Cr |
| Small | ≤ ₹25 Cr | ≤ ₹100 Cr |
| Medium | ≤ ₹125 Cr | ≤ ₹500 Cr |
The classification is determined by the higher of the two limits. The supplier must be Udyam-registered for Sec 43B(h) to apply — an MSE that hasn't registered does not trigger the disallowance, though it can still claim Sec 16 interest separately.
How the disallowance actually works
Walk through an example:
- You buy raw material from a Small enterprise on 1 January 2026 — invoice ₹10,00,000.
- No written agreement → 15-day clock → due 16 January 2026.
- You pay on 28 March 2026 — 86 days after invoice (71 days late).
Result:
- For FY 2025-26 (year of accrual): expense disallowed. Profit increases by ₹10,00,000. You pay tax @ 30% (assume corporate rate) → ₹3,00,000 + cess on this disallowance.
- For FY 2025-26 also: the expense is allowed only in the year of payment. Since you paid in FY 2025-26 itself (i.e. before year-end), it gets allowed in the same year — net effect: zero disallowance.
But if you had paid on 5 April 2026 (after year-end):
- FY 2025-26: expense disallowed, tax payable on ₹10 L.
- FY 2026-27: expense allowed in year of payment.
This creates a permanent timing mismatch — extra tax in the year of accrual, recovered as a deduction next year. Effectively a 1-year interest-free loan to the government on your tax liability.
MSMED Sec 16 — the interest exposure that bites separately
This is the second hit and it is often missed. Section 16 of the MSMED Act says that any delay beyond the Sec 15 window attracts compound interest at 3 × RBI bank rate, compounded monthly. The current bank rate is ~6.5%, so the effective rate is ~19.5% p.a. compound.
Two important features of Sec 16 interest:
- The buyer cannot deduct Sec 16 interest as a business expense (it is specifically disallowed u/s 23 of MSMED).
- The interest accrues whether or not the supplier raises a claim — it is automatic.
Use our MSME Sec 43B(h) tracker to model the disallowance + interest for any pending invoice list.
What the tax audit report (Form 3CD) now asks
From AY 2024-25, Form 3CD clause 22 asks two questions:
- Amount of interest inadmissible u/s 23 of MSMED Act.
- Sum payable to Micro/Small enterprises beyond the prescribed time as at year-end.
Your tax auditor must report both. If you don't disclose, the AO can re-open assessment under Sec 147. If you under-disclose, penalty u/s 270A is on the table.
The compliance checklist
- Vendor master clean-up. Tag every vendor with Udyam status (Micro / Small / Medium / Not MSME / Unregistered). Get their Udyam Certificate on file.
- PO / agreement template. Add a standard payment-term clause to every PO — explicitly stating the agreed period (capped at 45 days). This shifts you from the 15-day default to a 45-day agreement window.
- Aging tracker. Run a weekly report of MSE invoices crossing the 10-day and 40-day marks. Pay before breach.
- Year-end discipline. Clear every MSE invoice with a March / April invoice date before 31 March. The disallowance only bites if payment happens after year-end.
- Quantify Sec 16 interest. For any breach already happened, compute the Sec 16 interest exposure and provide for it. Disclose in tax-audit report.
- Communicate. Tell your suppliers you are tracking this. They appreciate being paid faster, and you build supplier loyalty.
Where it goes from here
Expect the next round of amendments to:
- Possibly extend Sec 43B(h) to Medium enterprises (currently only Micro and Small).
- Tighten Form 3CD disclosure with vendor-wise tables.
- Add automated cross-checks via GSTR-2B and Udyam database — a buyer who claims ITC on an MSE invoice but hasn't paid in time will be flagged.
None of this is law yet, but the direction of travel is clear.