Section 43B(h): New MSME payment rule and disallowance
Section 43B(h) of the Income Tax Act, introduced by the Finance Act of 2023, is a new rule aimed at improving cash flow for micro, small and medium enterprises (MSMEs) in India. Here’s how it affects businesses and compliance.
The MSMED Act, 2006- The Related Provision
The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions for Delayed Payment to Micro and Small Enterprises (MSEs).
Time limits for payment to MSMEs (as per MSMED Act)
Section 15 of the MSMED Act specifies deadlines for payments to MSMEs. Ideally, payments should be made within 15 days of the invoice date if there’s no written agreement between buyer and seller. If there is a written agreement, the payment terms should be clearly defined, with a maximum delay of 45 days from the invoice date.
Therefore, the time allowed by section 15 of the MSMED Act for making payment to a supplier who is a micro or small enterprise can be summarized as follows:
- 15 days: This applies if there’s no written agreement between the buyer and the MSME supplier.
- Up to 45 days: This applies if there’s a written agreement, but the agreed-upon payment terms cannot exceed 45 days from the invoice date.
Impact of Section 43B(h) on Buyers:
Tax implications for late payments:
If any company fails to pay an MSME within the stipulated timeframe, the expense (purchase) cannot be claimed as a deduction in the current financial year. This can impact the company’s taxable income and potentially increase tax liabilities. Expenses will be allowed in the financial year in which payment is made.
for example;
- Invoice date: 02 March 2024
- Invoice amount: Rs 100,000
- Payment Terms: No agreement
- Date of Payment: 4th April 2024
As per the MSMED Act, in the above case, payment should be made on or before 17th March 2024 (within 15 days from the date of invoice in the absence of any agreement)
Tax Implication as per section 43B (h): New MSME payment rule effective from 1st April 2024. The payment was outstanding on 31st March 2024. The entire amount will be disallowed in the FY 2023-24 resulting in an increase in income by Rs 100,000.
Expense will be allowed only in FY 2024-24 as the payment was made on 4th April 2024.
New MSME Payment Rule in India (Key Notes)
(effective from April 1, 2024)
| Particulars | Description |
| Applicable Law | Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 (Sections 15, 16 & 2(b)) |
| Who Pays Whom | Buyer pays to MSME supplier for goods or services rendered |
| Agreement Between Parties | A written agreement between buyer and seller can specify a payment term, but it cannot exceed 45 days. |
| Payment Timeline | MSME suppliers can file an application with the Micro and Small Enterprises Facilitation Council (MSEFC) for non-payment or delayed payment. |
| Where No Written Agreement | Payment due within 15 days from the date of invoice |
| Penalty for Late Payment | – Considered income of buyer and taxed accordingly (as per section 43B(h) of the Income Tax Act – Interest at 3 times the bank rate notified by RBI |
| Dispute Resolution | MSME suppliers can file an application with the Micro and Small Enterprises Facilitation Council (MSEFC) for non-payment or delayed payment. |
