Micro, Small, and Medium Enterprises (MSMEs) form the backbone of the Indian economy. This sector contributes significantly to India’s gross domestic product and plays a critical role in employment generation, innovation, and exports. As India aims to transition into a developed economy by 2047, MSMEs are expected to be a vital driving force in that transformation. Approximately 33 percent of India’s GDP is attributed to the MSME sector. These enterprises account for nearly 45 to 50 percent of India’s total exports. Over 95 percent of all business units across the country fall under the MSME category. The government recognizes the importance of MSMEs and has introduced various initiatives, including regulatory changes, tax policies, and credit facilitation schemes to support their growth.
Significance of Timely Payments to MSMEs
Despite their contributions, MSMEs face several challenges, one of the most significant being delayed payments from buyers. These delays can critically affect the working capital cycles of MSMEs, leading to cash flow constraints and, in extreme cases, the shutdown of operations. Recognizing this problem, the government has introduced several legislative measures to ensure that MSMEs receive payments promptly. Among these measures are provisions under the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act), and recent amendments under the Income-tax Act, particularly through Section 43B(h), which directly influences how and when deductions are allowed for payments made to MSMEs.
Introduction to Section 43B of the Income-tax Act
Section 43B of the Income-tax Act was enacted to ensure that certain statutory liabilities are recognized for tax deduction purposes only when they are paid, regardless of the method of accounting adopted by the taxpayer. This section overrides all other provisions in the Act and is applicable notwithstanding any method of accounting followed. Section 43B covers several types of payments, including taxes, duties, and employer contributions to welfare funds. A new clause (h) was added to Section 43B, effective from 1 April 2023, which directly relates to payments to micro and small enterprises under the MSME Act.
Legal Text of Section 43B(h)
The new clause (h) in Section 43B specifies that any sum payable to a micro or small enterprise beyond the time limit specified in Section 15 of the MSME Act shall be allowed as a deduction only in the year in which such sum is paid. This clause applies regardless of the financial year in which the liability was incurred and irrespective of the method of accounting regularly employed by the assessee. The benefit of the proviso under Section 43B, which allows certain deductions if the liability is discharged before the due date of filing the return under Section 139(1), does not extend to payments falling under clause (h). For this clause, the definitions of micro and small enterprises are derived directly from the MSME Act.
Operational Impact of Section 43B(h)
The provision became applicable from Assessment Year 2024-25, i.e., from 1 April 2023 onward. Importantly, any outstanding payments as of 31 March 2023 are not affected by this provision. If payment to a micro or small enterprise is made within the period allowed under Section 15 of the MSME Act, then Section 43B(h) does not apply. However, if the payment is made beyond the due date specified under Section 15, the deduction for that payment is deferred until the actual year of payment. This change imposes a tax cost for late payments and acts as a financial disincentive for buyers to delay settlements with MSMEs.
Relevance of Payment Timelines Under the MSME Act
Section 15 of the MSME Act mandates that buyers must pay MSME suppliers within the time frame agreed upon in writing, or within 45 days from the date of acceptance or deemed acceptance of goods or services, whichever is earlier. If no written agreement exists, the payment must be made within 15 days. Deemed acceptance occurs if no written objection is made within 15 days from the date of delivery or completion of services. These timelines are crucial for the interpretation and application of Section 43B(h) of the Income-tax Act.
Definitions Under the MSME Act
Under Section 2 of the MSME Act, a micro enterprise is defined as one that satisfies the criteria mentioned in Section 7(1)(a)(i) or 7(1)(b)(i). A small enterprise is defined under Section 7(1)(a)(ii) or 7(1)(b)(ii). These definitions are based on investment in plant and machinery for manufacturing units and investment in equipment for service units. Section 7 further classifies enterprises based on updated thresholds.
Revised Classification of MSMEs
Effective from 1 July 2020, the government revised the classification criteria for MSMEs. Under the revised rules, a micro enterprise is defined as one with an investment not exceeding one crore rupees and turnover not exceeding five crore rupees. A small enterprise has an investment not exceeding ten crore rupees and a turnover not exceeding fifty crore rupees. Notably, the distinction between manufacturing and service enterprises has been removed. These criteria are applied uniformly to all suppliers engaged in the supply of goods or services.
Inclusion of Traders Under MSME Classification
Initially, retail and wholesale traders were not considered MSMEs for most legal benefits under the MSME Act. However, through an office memorandum dated 2 July 2021, the government allowed such traders to register as MSMEs on the Udyam Registration Portal. Nevertheless, these entities are eligible only for priority sector lending benefits. They do not receive other benefits available under the MSME Act, including the benefit of Section 15. Consequently, if a trader is registered as an MSME but only qualifies under the priority lending criteria, payments made to such traders are not covered under Section 43B(h) of the Income-tax Act.
Identification of MSE Suppliers
For compliance and disclosure purposes, micro and small enterprises must identify themselves clearly on all official documents, including invoices, supply orders, and letterheads. An office memorandum dated 26 August 2008 advises MSEs to include their registration number or Entrepreneurs Memorandum (EM) number on all relevant documents to ensure that buyer entities can recognize them as registered MSEs. This identification helps auditors and the buyers themselves in making appropriate disclosures and complying with the provisions of both the Income-tax Act and the MSME Act.
Importance of Udyam Registration
Section 8 of the MSME Act provides that any person intending to establish a micro or small enterprise may file a memorandum with the relevant authority. While filing is discretionary, enterprises that have not registered themselves are not eligible for benefits under Chapter V of the MSME Act. This includes the protection of Section 15 relating to payment timelines. Therefore, for an enterprise to be recognized as a supplier under the MSME Act and qualify for protection under Section 43B(h) of the Income-tax Act, it must be registered on the Udyam portal.
Due Date Provisions Under Section 15 of the MSME Act
Section 15 establishes the obligation of the buyer to make payments to the supplier either by the agreed due date or within 45 days of acceptance or deemed acceptance of goods or services, whichever is earlier. In the absence of a written agreement, the buyer must pay within 15 days of acceptance or deemed acceptance. These payment deadlines form the basis for determining whether a tax deduction is allowed under Section 43B(h) or whether it is deferred until the actual payment is made.
Meaning of Acceptance and Deemed Acceptance
The day of acceptance is either the day of actual delivery of goods or services or the day on which an objection raised by the buyer is resolved. If no objection is raised within 15 days from the date of delivery or service, the delivery is considered as deemed accepted. These definitions play a pivotal role in determining the actual due date for payments under the MSME Act and consequently under Section 43B(h) for tax purposes.
Agreement Versus No Agreement Scenarios
If an agreement in writing exists between the buyer and the supplier, payment must be made within the period agreed in writing, or within 45 days from the date of acceptance or deemed acceptance, whichever is earlier. If there is no agreement in writing, the payment must be made within 15 days. In many cases, terms mentioned on invoices or purchase orders are considered valid written agreements to determine the due date.
Implication of Delays Beyond Permissible Period
Any delay beyond the permissible period outlined in Section 15 of the MSME Act results in disallowance of deduction under Section 43B(h) in the year the expense is incurred. The deduction becomes allowable only in the year of actual payment. This means that businesses failing to comply with payment timelines not only breach contractual or legal obligations but also incur an additional tax liability by losing the immediate deduction of the expense.
Recognition of Suppliers for Section 43B(h)
To be treated as a supplier under Chapter V of the MSME Act, the entity must be a micro or small enterprise and must have filed a memorandum under Section 8(1)(a), typically through Udyam Registration. Medium enterprises and unregistered small or micro enterprises are not covered. Hence, payments made to such entities are not subject to disallowance under Section 43B(h).
Definition of Buyer Under MSME Act
As per Section 2(b) of the MSME Act, a buyer is defined as anyone who purchases goods or services from a supplier. However, the buyer must be located in India. Foreign entities are not recognized as buyers under the MSME Act, and transactions involving foreign buyers fall outside the scope of Section 15 and, consequently, Section 43B(h) of the Income-tax Act.
Overview of Section 43B(h) in Practice
Section 43B(h) represents a significant shift in how tax deductions are treated for payments made to micro and small enterprises. Previously, under other clauses of Section 43B, payments made before the due date of filing the return could be claimed as deductions in the year the expense was incurred. However, for payments falling under clause (h), this relaxation is not available. The deduction is permitted strictly in the year of actual payment, irrespective of the due date of return filing. This change promotes stricter compliance with MSME payment obligations.
Examples of Payment Compliance Under Section 43B(h)
Understanding the real-world application of this provision requires an examination of various scenarios. For example, if an assessee procures services from a micro enterprise on 1 January 2024 and the payment terms are 30 days, then the payment should be made by 31 January 2024. If the payment is made within that period, the deduction is allowed in the year the liability was incurred. However, if the payment is made on 10 March 2024, the deduction will be postponed to the financial year 2024-25. This applies even if the return is filed before the due date under Section 139(1).
Payments to Medium and Unregistered Enterprises
It is important to note that Section 43B(h) applies only to payments made to micro and small enterprises. Payments to medium enterprises or entities that are not registered under the MSME Act are not affected. These continue to fall under the general provisions of the Income-tax Act, and the existing benefits of Section 43B’s proviso remain available for such payments. Therefore, identifying whether a vendor qualifies as an MSE is crucial.
Vendor Classification and Internal Controls
To comply effectively with Section 43B(h), businesses must implement robust internal systems to identify micro and small enterprise vendors. This involves collecting and maintaining valid Udyam Registration Certificates from suppliers. Purchase orders, invoices, and vendor records should mention the MSE status of the supplier. Finance and compliance teams should establish processes to ensure that payments to MSEs are prioritized according to due dates defined under Section 15 of the MSME Act.
Disclosure Requirements in Financial Statements
Companies are also required to disclose the amount payable to MSEs separately in their financial statements under the Micro, Small,, and Medium Enterprises Development Act, 2006. This includes principal and interest amounts remaining unpaid as of the balance sheet date. These disclosures help auditors verify compliance with both the MSME Act and the Income-tax Act, especially after the introduction of Section 43B(h).
Role of Auditors Under Section 43B(h)
Statutory auditors are expected to examine whether the assessee has made timely payments to MSEs and whether deductions have been appropriately deferred where delays exist. Auditors should request details of payments made, review vendor master data, verify Udyam registrations, and examine the timing of invoices and payments. Misclassification or lack of documentation may expose the assessee to tax disallowance and penalties.
Timely Payment Verification Techniques
One technique used by auditors is a reconciliation between invoices received from MSMEs, payment dates, and the due dates as per Section 15. Discrepancies are flagged for disallowance under Section 43B(h). In some cases, auditors also seek third-party confirmations from suppliers to verify their classification and payment status.
Handling of Disputed Invoices
Another practical concern is how Section 43B(h) applies in cases where payment is delayed due to genuine disputes over the quality of goods or services. If the buyer raises a written objection within 15 days from the date of delivery, and the supplier resolves the issue later, the due date is adjusted accordingly. The day of acceptance becomes the day the dispute is resolved. This affects the timing under Section 15 and consequently the disallowance under Section 43B(h). In the absence of timely objections, the delivery date is considered the acceptance date.
Interest Liability Under MSME Act
Section 16 of the MSME Act imposes a liability to pay interest on delayed payments to MSEs. The interest is compounded monthly at three times the bank rate notified by the Reserve Bank of India. This interest is not allowable as a deduction under the Income-tax Act, further increasing the financial consequences of payment delays. Although Section 43B(h) focuses on disallowing the principal expense, the interest under Section 16 must also be separately considered.
Non-Applicability of Proviso to Section 43B for MSEs
The general proviso to Section 43B allows a deduction for amounts paid before the due date of return filing, even if the liability was incurred in a previous year. This helps businesses manage cash flow without adverse tax consequences. However, this relaxation is not available under clause (h). For MSE payments made beyond the time limit in Section 15, deduction is allowed only in the year of actual payment. This provision ensures stricter compliance and discourages late payments to MSEs.
Strategic Implications for Tax Planning
From a tax planning perspective, businesses need to reassess how they handle payments to vendors. Previously, there was some flexibility to delay payments and still claim deductions, provided they paid before the return filing deadline. Now, this flexibility is gone for MSE-related transactions. Businesses that do not adjust their internal systems may face higher taxable income and consequent tax liabilities.
Comparative Analysis with Other 43B Items
Section 43B also covers payments like taxes, duties, and employer contributions to employee welfare funds. For most of these items, the proviso provides a relief mechanism if the amount is paid before the due date for filing the return. The distinct treatment under clause (h) sets it apart and reflects the government’s emphasis on protecting MSE interests. Unlike other items, there is no leeway or extension allowed. Compliance with Section 15 of the MSME Act becomes the sole criterion.
Implications for Contract Management
Contracts and purchase orders issued to suppliers must be drafted with clarity regarding payment terms. In the absence of a written agreement, the 15-day default period becomes applicable. Many businesses use standard terms on invoices or emails, which may be interpreted as a written agreement. Legal and finance departments should ensure that the terms specified are aligned with MSME Act requirements to avoid unintended disallowance.
Risk of Litigation and Penalty
Failure to comply with Section 43B(h) can lead to significant tax disallowance. If deductions are claimed in the wrong year, the tax authorities may reject them, leading to higher tax liability, interest, and penalties. If the business is later unable to prove that the supplier is not a registered MSE or that the payment was made on time, the case may escalate into litigation. Proper documentation and payment discipline are the only preventive measures.
Vendor Communication and Training
It is equally important to communicate these changes to vendors. Suppliers should be encouraged to share their Udyam Registration Certificates and mention their MSME status on invoices. Internal training for procurement, finance, and legal teams is also essential. These teams must understand how to identify MSE vendors, interpret agreements, calculate due dates under Section 15, and ensure timely payments.
Systemic Integration of MSME Compliance
Many enterprises are now upgrading their enterprise resource planning (ERP) systems to automatically flag MSME vendors and monitor their payment due dates. Integration of compliance checks at the time of invoice processing and before payment approval helps avoid last-minute errors. System-generated alerts can assist in ensuring that all MSME payments are processed within the statutory time limits.
Handling Hybrid Suppliers
Some suppliers operate both manufacturing and trading arms under a single legal entity. If the supplier is registered under the MSME Act for manufacturing but supplies trading goods under a separate vertical, the buyer must evaluate whether Section 15 and Section 43B(h) apply to such transactions. The nature of goods or services, along with invoice details, plays a role in determining applicability.
Grey Areas and Unresolved Issues
Certain practical challenges remain. For example, what happens when an MSE vendor fails to disclose their status or shares Udyam details late? If the buyer was unaware of the supplier’s status at the time of payment, can disallowance still be triggered? These grey areas are not yet clarified through case law or official circulars. Until more guidance emerges, buyers must adopt a conservative approach and collect MSE-related documentation at the vendor onboarding stage.
Judicial Interpretation and Expected Litigation
As with any new legal provision, Section 43B(h) may be subjected to judicial scrutiny in the coming years. Assessees may challenge the interpretation of terms such as acceptance, deemed acceptance, and written agreement. There could also be litigation around delayed vendor disclosures, ambiguous payment terms, and retrospective identification of MSMEs. Until clarity is provided by the courts or the government, a strict compliance mindset is recommended.
Role of Industry Associations and Professional Bodies
Industry bodies can play a key role in representing concerns to the government and seeking clarification Professional associations of tax consultants and chartered accountants can publish practical guides and FAQs to help businesses comply effectively. These bodies may also recommend system improvements or templates that standardize MSME documentation and compliance procedures.
Understanding the Practical Interpretation of Section 15 of the MSME Act
Section 15 of the MSME Act governs the time limit for payment to micro and small enterprises. The law mandates that if there is a written agreement between the buyer and the supplier, payment must be made on or before the date agreed in writing, which must not exceed forty-five days from the date of acceptance or deemed acceptance of goods or services. In the absence of any written agreement, the payment must be made within fifteen days from the date of acceptance or deemed acceptance. These deadlines are not merely contractual but statutory and carry implications under both the MSME Act and the Income-tax Act through Section 43B(h). Determining whether an agreement exists in writing is key to applying the correct due date for payment. If payment terms are mentioned on the invoice, purchase order, or email exchanges, these may be treated as a valid written agreement, subject to legal interpretation.
Defining Acceptance and Deemed Acceptance
The MSME Act provides specific definitions for the terms acceptance and deemed acceptance. Acceptance means either the actual delivery of goods or services or the date on which any objection raised by the buyer is resolved by the supplier. Deemed acceptance refers to a situation where no objection is made in writing by the buyer within fifteen days of delivery or rendering of service. If no objection is raised within this time frame, the date of delivery or completion of service becomes the date of deemed acceptance. These definitions are essential because the period for making payments under Section 15 is calculated from the date of acceptance or deemed acceptance, and this timeline determines the applicability of Section 43B(h) for tax deduction eligibility.
Illustrating Agreement and No Agreement Scenarios
Consider a scenario where a buyer and supplier agree in writing that payment is to be made within sixty days of invoice. Even if the payment terms exceed forty-five days, Section 15 overrides the agreement by capping the maximum permissible time to forty-five days. Thus, the due date becomes forty-five days from the date of acceptance or deemed acceptance, not sixty. If there is no written agreement, the due date is fifteen days from acceptance or deemed acceptance. Payment terms mentioned on the face of invoices or in purchase orders are generally interpreted as a written agreement. Where such documentation is absent, verbal understandings or past practices do not constitute written agreements under the MSME Act.
Role of Objections and Dispute Resolution
Timely objections play a critical role in determining the payment due date. If a buyer raises a written objection to the quality or quantity of goods or services within fifteen days from delivery, the date of acceptance shifts to the date when the supplier resolves the objection. However, if the buyer fails to object within fifteen days, the law assumes deemed acceptance. Businesses must keep proper documentation of all objections raised, their timelines, and how and when those objections were resolved. These records are crucial in determining the correct due date and for defending payment decisions under scrutiny from tax authorities.
Classification of Supplier Under Chapter V of the MSME Act
Only micro or small enterprises that have filed a memorandum under Section 8(1)(a) of the MSME Act qualify as suppliers under Chapter V. These suppliers must have completed Udyam Registration to be recognized for Section 15. Medium enterprises, or micro and small enterprises that have not registered under Udyam, do not qualify as suppliers under the Act for statutory protections, including payment time limits. As a result, such entities are also not covered under Section 43B(h). The buyer must validate the MSME status of each vendor through documentary proof, usually the Udyam Registration Certificate. This classification helps determine which payments are subject to tax deduction deferral under the Income-tax Act.
Nature of the Buyer Under the MSME Act
The MSME Act defines a buyer as any person who purchases goods or receives services from a supplier. However, this definition only includes buyers located within India. International buyers or entities located outside India are not treated as buyers under the MSME Act. Consequently, payments by foreign entities to Indian MSEs are not subject to the provisions of Section 15 of the MSME Act. For tax purposes under Section 43B(h), this distinction matters only for Indian tax residents and their payments to Indian-registered MSEs. Entities must ensure the buyer-supplier relationship is established and documented.
Contractual Versus Statutory Obligations
There is often confusion between contractual payment terms and statutory obligations. While a contract may provide sixty days for payment, the MSME Act does not permit this unless the agreement is in writing and the period is within forty-five days from acceptance or deemed acceptance. This overrides any contractual agreement that extends beyond the statutory limit. Section 43B(h) follows the statutory limit, not the contractual terms, meaning tax deductions will be disallowed if payments exceed the time limit under Section 15, regardless of what the contract stipulates.
Case Example: Written Agreement Exceeding Forty-Five Days
Suppose a manufacturing company agrees in writing to pay a micro enterprise within sixty days of delivery. Goods are delivered on 1 February 2024, and no objection is raised. Despite the sixty-day clause, the MSME Act limits the payment period to forty-five days from the date of delivery. Thus, the due date becomes 17 March 2024. If payment is made by that date, the company can claim the deduction in the same year. However, if payment is made after 17 March 2024, the deduction is allowed only in the year of actual payment. This example highlights the precedence of statutory timelines over contractual terms.
Case Example: Absence of Written Agreement
Consider a service provider who delivers work on 10 January 2024. No contract or invoice mentions specific payment terms. No objection is raised within fifteen days. The deemed acceptance date becomes 10 January 2024, and since no agreement exists, the buyer must make payment within fifteen days, i.e., by 25 January 2024. A payment made beyond this date will attract disallowance under Section 43B(h), and the deduction will be deferred to the year of actual payment. This scenario emphasizes the importance of having clear written agreements and documenting acceptance of services.
Interpretation of Invoice as Written Agreement
In many businesses, payment terms are mentioned on the invoice. For example, a supplier may print on the invoice that payment is to be made within thirty days. Courts and tax authorities have accepted that such terms constitute a written agreement if the invoice is acknowledged or accepted by the buyer. Therefore, the due date would be the earlier of the specified payment term or forty-five days from the acceptance date. Invoices must be clear and consistent in stating payment terms to avoid ambiguity and potential disputes.
Issues Arising from Delayed Registration by Suppliers
Sometimes, a supplier registers under the MSME Act after having supplied goods or services. In such cases, the applicability of Section 15 and Section 43B(h) is limited to the period after registration. If the supplier was not a registered MSE at the time of delivery, the buyer is not obligated under Section 15 to follow MSME timelines. As a result, Section 43B(h) does not apply to that transaction. Buyers must request updated registration certificates and validate that the supplier held valid MSME status at the time of the transaction.
Determining Applicability of Section 43B(h) in Mixed Supply Situations
Some vendors provide a combination of goods and services, or act as both manufacturers and traders. While manufacturers and service providers can qualify as MSMEs, traders have limited benefits. If a registered trader supplies goods, that transaction may not be covered under Section 15. Consequently, Section 43B(h) will not apply even if the trader is registered on the MSME portal. The classification of each invoice and transaction must be verified to determine whether the vendor is acting within the scope of MSME-eligible activities.
Consequences of Inaccurate Vendor Classification
If a business fails to correctly classify a vendor as a micro or small enterprise and claims a deduction in the wrong year, the tax deduction may be disallowed during assessment. This leads to additional tax liability, interest, and potentially penalties. If the classification is disputed during an audit or inquiry, the buyer must be able to produce documentation proving that the supplier was not an MSME or that payment was made within the statutory limit. Due diligence in vendor onboarding and consistent record-keeping are essential to avoid such risks.
Practical Challenges for Small and Medium Buyers
Small businesses that procure goods or services from various MSME suppliers often lack structured procurement and payment systems. Without an ERP or vendor compliance tracker, monitoring MSME-specific due dates becomes difficult. These buyers may unintentionally miss statutory payment deadlines, leading to tax disallowance and interest costs. To mitigate this, small businesses can use simple spreadsheets or accounting software with MSME compliance features to flag due dates and send payment reminders.
Impact on Working Capital and Cash Flow
From a finance perspective, complying with MSME payment deadlines may pressure working capital and cash flow. Businesses that traditionally operated with longer credit cycles now need to plan their liquidity more carefully. Payments to MSEs must be prioritized over other creditors to ensure tax efficiency. Cash flow forecasts should include separate line items for MSME dues and should reflect the shorter payment cycles mandated under Section 15.
Building a Vendor Compliance Framework
Enterprises should build a vendor compliance framework that includes procedures for verifying MSME registration at the time of vendor onboarding, regular updates to vendor master data, tagging vendors in ERP systems, calculating payment due dates automatically, and escalating overdue invoices for immediate resolution. This framework should be embedded into the procurement and accounts payable processes. Compliance dashboards and exception reports can assist management in monitoring adherence to payment timelines.
Coordination Between Legal, Finance, and Procurement Teams
Effective implementation of Section 43B(h) compliance requires coordination between multiple departments. The legal team must ensure vendor contracts do not contradict statutory timelines. Procurement must verify and record MSME status. The finance team must ensure timely payments and correct deduction claims. Cross-functional alignment, periodic training, and shared accountability are key to building a strong compliance culture.
Regulatory Audits and MSME Oversight
Regulatory authorities may conduct audits or surveys to monitor compliance with MSME payment norms. Non-compliance can result in not only tax disallowance but also reputational risk. Government bodies such as the Ministry of MSME and sector regulators may initiate inquiries based on supplier complaints. Buyers must treat compliance as a legal obligation rather than a financial convenience.
Key Case Laws and Judicial Interpretations
Section 43B(h), being newly inserted, there is currently no direct judicial precedent addressing its interpretation specifically. However, there are several rulings under both the MSME Act and prior versions of Section 43 that can offer guidance on how courts may approach these issues in the future.
Supreme Court in S.L. Mehra v. Union of India
Though not directly related to Section 43B, the Supreme Court emphasized the importance of timely payments to MSMEs, observing that the legislative intention behind the MSME Act is to protect small enterprises from delayed payment, which can seriously harm their liquidity and business viability.
Delhi High Court in Ravi Steel Company v. Union of India
The Delhi High Court has dealt with cases involving delayed payments to MSMEs, reiterating the binding nature of the payment timeline prescribed under the MSME Act and validating the jurisdiction of the Micro and Small Enterprises Facilitation Council (MSEFC).
These rulings indirectly reinforce the view that any delays beyond the specified 15 or 45-day period cannot be overlooked or bypassed by contract or business practice.
Karnataka HC in Tata Motors Limited v. Micro and Small Enterprises Facilitation Council
In this case, the High Court examined the retrospective application of MSME Act provisions and clarified that contractual agreements that override statutory provisions regarding payment timelines are not legally enforceable. This supports the interpretation that even agreed-upon extended payment timelines cannot negate the requirements under Section 43B(h).
These precedents support a strict interpretation of Section 43B(h) – timely payments are mandatory for tax deduction eligibility, regardless of contractual terms.
Accounting and Disclosure Considerations
From an accounting standpoint, Section 43B(h) imposes new challenges for companies. Accounting systems must now track MSME vendor status and payment dates more closely to prevent disallowance of expenses during tax assessments.
Identification of MSME Vendors
Businesses must develop internal mechanisms to capture whether a supplier qualifies as an MSME under the law. This includes obtaining MSME registration certificates or declarations, which should be documented and maintained.
Payment Terms and Documentation
All payment terms with MSMEs must be documented in writing and aligned with the 15-day or 45-day limits. Any deviation from these terms could trigger disallowance under Section 43B(h).
Year-End Cutoff Procedures
Accounting teams will need to reconcile all outstanding payments due to MSMEs as of the year-end and verify whether those were cleared within the allowable period. Failure to do so could mean tax disallowances and potential penalty implications.
Disclosures Under CARO and Schedule III
There are existing disclosure requirements under the Companies Auditor’s Report Order (CARO) and Schedule III of the Companies Act, 2013, which mandate that companies disclose amounts payable to MSMEs. With the introduction of Section 43B(h), these disclosures may require additional scrutiny from both management and auditors to ensure consistency and accuracy.
Possible Challenges and Practical Issues
While the objective of Section 43B(h) is clear and noble – to ensure timely payments to MSMEs – there are several practical issues that businesses might face during implementation.
Delayed Receipt of MSME Status
In many cases, suppliers may not disclose their MSME registration upfront or at the time of the transaction. If a business later receives confirmation of MSME status after making a payment beyond 45 days, there may be retroactive implications for tax disallowance.
Verification and Classification
Companies must verify the legitimacy of MSME declarations. There is a risk that suppliers may falsely claim MSME status to claim benefits under the law. Thus, due diligence and verification processes must be instituted.
Systemic Overhaul of Payables Management
ERP systems, procurement processes, and accounting frameworks must be updated to identify MSME vendors, track invoice dates, monitor payment timelines, and trigger alerts if deadlines approach. This requires investment in technology and training.
Increased Litigation Risk
Section 43B(h) could lead to more disputes with vendors and authorities. A vendor may raise complaints under the MSME Act for delayed payments, while the Income Tax Department may question deductions claimed in the tax return. This could result in dual litigation risk for the assessee.
Transitional Issues
The provision applies from FY 2023–24 onwards, but many ongoing contracts and payment arrangements with MSMEs were entered into earlier. There may be confusion about how to apply the rule to such arrangements, particularly for invoices raised before April 1, 2023, but paid afterward.
Policy Recommendations and Industry Response
The introduction of Section 43B(h) has generated significant discussion in industry forums, tax circles, and among business groups. While the provision promotes a pro-MSME stance, its rigidity may cause unintended hardship for larger companies.
Need for Clarification and Safe Harbors
Industry stakeholders have urged the Central Board of Direct Taxes (CBDT) to issue a detailed circular explaining the implementation mechanics of Section 43B(h), including definitions, exceptions, and illustrative examples. Safe harbor provisions for inadvertent delays, voluntary declarations, or minor delays could help reduce litigation.
Phase-Wise Implementation
Some industry experts advocate for a phase-wise or sector-specific implementation of Section 43B(h) so that businesses can gradually adjust their systems. They argue that a blanket application to all sectors may disproportionately affect industries with traditionally longer payment cycles.
Harmonization with the MSME Act
There is also a case for harmonizing the definitions and classifications under the Income Tax Act and the MSME Act. For example, the MSME status depends on turnover and investment thresholds, which may not be easily ascertainable by buyers. A centralized verification database could help.
Promoting Digital Invoicing
Encouraging MSMEs to adopt digital invoicing can help streamline tracking, automate compliance, and reduce disputes over invoice dates or due dates. This would support the accurate implementation of Section 43B(h) requirements.
Future Outlook
Section 43B(h) represents a significant step in aligning tax policy with social and economic policy goals. By making tax deductibility contingent on timely payments to MSMEs, the government has embedded accountability and financial discipline into the tax code.
If implemented effectively, this could create a culture of prompt payments, improve cash flow for small businesses, and reduce the dependence of MSMEs on costly working capital loans. However, this will require proactive measures by both the government and private sector to address ambiguities, reduce friction in implementation, and ensure fairness.
The success of Section 43B(h) will depend not just on enforcement but also on supportive policy frameworks that simplify compliance, encourage transparency, and incentivize ethical business practices.
Conclusion
The interplay of Section 43B(h) with the MSME Act has introduced a new layer of accountability for businesses. It places the onus on buyers to make payments to MSMEs within statutory timelines to retain tax deductions. This provision complements the MSME Act’s goal of protecting the liquidity and financial health of small enterprises by penalizing delayed payments through tax disallowance.
Though laudable in spirit, the implementation of Section 43B(h) poses several practical challenges. From identifying MSME vendors to aligning payment systems, updating accounting processes, and navigating legal uncertainties, businesses will need to reorient their compliance infrastructure.