The Finance Act, 2023 introduced a new clause (h) under Section 43B of the Income Tax Act, 1961, reshaping how payments made to micro and small enterprises are treated for tax deductions. Effective from Assessment Year 2024–25, this amendment mandates that if such payments are not made within the time limits specified in the MSMED Act, the deduction will only be allowed in the year of actual payment. This blog breaks down the new provision, its practical application, conditions for disallowance, and the immediate steps businesses must take before the financial year ends.
1. Background
Section 43B of the Income Tax Act outlines certain expenses that can only be deducted on a payment basis, not on accrual. With the Finance Act, 2023, a new clause (h) was introduced to ensure timely payments to micro and small enterprises.
Under this clause, any payment beyond the MSMED Act’s due date will be disallowed as a deduction unless actually paid during the year. This rule applies regardless of the accounting system followed (cash or accrual).
This change makes it critical for businesses to reassess how and when they settle outstanding payments to such enterprises.
2. Overview of the MSMED Act, 2006
As per the Micro, Small and Medium Enterprises Development (MSMED) Act, the due dates for payments are:
- If there is a written agreement: Payment must be made within the period agreed, but not exceeding 45 days from the date of acceptance (delivery of goods or services).
- If there is no written agreement: Payment must be made within 15 days from the date of acceptance.
So even if the parties agree on 60 days credit in writing, the MSMED Act caps it at 45 days legally.
3. Analysis of Clause (h) Under Section 43B
The new clause sets a strict standard:
- Any payment made beyond the MSMED time limits will not be allowed as a deduction in the year of accrual.
- Instead, it will only be deductible in the year the payment is made.
Here’s the key shift:
The usual proviso to Section 43B (which allows deduction if payment is made before filing the return) does not apply to this clause.
4. Examples for Practical Understanding
Here’s how the deduction works based on various scenarios:
| Date of Invoice Acceptance | MSMED Due Date | Payment Date | Deductible in PY 2023–24? | Reason |
| 01/05/2023 | 15/06/2023 | 14/06/2023 | Yes | Paid within MSMED limit |
| 15/10/2023 | 29/11/2023 | 10/03/2024 | Yes | Paid during same PY |
| 20/03/2024 | 04/05/2024 | 04/05/2024 | Yes | Paid within MSMED limit even after 31 March |
| 20/03/2024 | 04/05/2024 | 05/05/2024 | No | Paid after MSMED due date — deductible in PY 2024–25 |
Assumes a 45-day credit period as per agreement.
5. Applicability of the Provision
- Effective from Assessment Year 2024–25
- Applies to all businesses (even MSME-registered entities)
- Does not apply if:
- The vendor is a medium enterprise (only micro and small are covered)
- The vendor is not registered under the MSMED Act
- The vendor is engaged in trading, retail, or distribution
(since the MSMED Act covers only manufacturing and services)
6. Quick Points of Action
For Payers (Buyers):
- Get UDYAM registration or written declarations from vendors to verify if they fall under MSMED.
- Clear all payments to micro/small vendors on or before 31 March 2024 to claim deduction in PY 2023–24.
- Specify a due date in your purchase agreements to avoid being bound by the 15-day limit (default without agreement).
- If there are objections regarding delivery or service, raise them within 15 days of delivery. In such cases, the due date counts from the day the issue is resolved.
For Payees (Vendors):
- Mention MSME registration details in invoices for clear communication to the buyer.
- If applicable, obtain MSME registration to ensure your buyers comply and process payments on time.
7. Concluding Remarks
The introduction of Clause (h) under Section 43B is designed to promote faster payments to micro and small enterprises and support their cash flow and liquidity. However, it also places a compliance burden on buyers who now must monitor vendor registration status, due dates under the MSMED Act, and actual payment timelines.
As the end of PY 2023–24 approaches, businesses must revisit their payables, verify vendor classifications, and make sure payments are made within the statutory deadlines to avoid disallowance.
In addition, the new disclosure requirement in Part A – OI of ITR-6 (AY 2024–25) for such outstanding payments adds another layer of compliance. Both companies and tax professionals must keep this in check during audits and return filings.
