Budget 2023 introduced Section 43B(h) to the Income Tax Act, disallowing deductions for payments to Micro and Small Enterprises (MSEs) if not made within the time limits prescribed under the MSMED Act. This seemingly simple provision has significant implications for businesses.
What Does Section 43B(h) Say?
Section 43B(h) provides that any sum payable to a Micro or Small Enterprise as a buyer shall be allowed as a deduction only in the year of actual payment — if the payment is not made within the time limit prescribed under Section 15 of the MSMED Act. Section 15 prescribes: 15 days (if no agreement) or 45 days maximum (if written agreement exists).
Who is Affected?
Any taxpayer — individual, firm, company, LLP — that purchases goods or services from a Micro or Small Enterprise (registered under Udyam) and has outstanding dues beyond 45 days. Medium Enterprises are NOT covered — the provision applies only to Micro and Small. This requires you to know which of your vendors are registered MSEs.
Impact on Tax Liability
If you owe ₹50 lakh to an MSE vendor and haven't paid within 45 days by March 31, you cannot claim that ₹50 lakh as a deduction this year. It will only be deductible in the year you actually pay. This can significantly increase your taxable income and advance tax liability.
Practical Challenges
Many businesses don't track whether their vendors are MSE-registered. Vendors may not proactively disclose their Udyam registration status. Payment terms in existing contracts may exceed 45 days. ERP systems may not flag MSE vendors for priority payment.
Steps to Comply
Audit your vendor master — identify all Udyam-registered Micro and Small vendors. Update your vendor onboarding process to capture Udyam registration details. Review payment terms in all vendor agreements. Prioritise payment to MSE vendors before March 31. Update your ERP/accounting software to flag MSE dues crossing 45 days.
Our Advisory
We recommend conducting a one-time vendor MSE audit before your year-end. For large businesses with hundreds of vendors, we can help implement a systematic process. For companies facing disallowance, we can help quantify the impact and plan advance tax accordingly. Contact us for a 43B(h) compliance review.
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Our Accounting & MIS practice at Shahi & Co. assists businesses across New Delhi and Pan-India.