Section 43B(h) of the Income-tax Act, 1961, introduced from the financial year 2023-24, allows a deduction for amounts owed to micro and small enterprises only when they are actually paid within the time allowed under the MSMED Act — generally 15 days without a written agreement and not more than 45 days with one. Amounts paid late are allowed in the year they are actually paid. Always check the current law and any changes with your tax adviser; the income-tax law is being replaced by a new Act and section references can change.
Who it affects
- Buyers who purchase goods or services from suppliers registered as micro or small enterprises (Udyam registration).
- It applies to both trading and service purchases. Medium enterprises and traders registered only for priority-sector lending have been treated differently — confirm each supplier's status.
What can go wrong
If ₹20 lakh owed to small suppliers on 31 March is older than the permitted period and is not paid before the year closes, that expense can be disallowed for the year, increasing taxable income. The cash impact is real even though the expense is eventually allowed.
A practical routine
- Collect Udyam registration details from every supplier and record the category in your supplier master.
- Record the agreed credit period (maximum 45 days) on the supplier.
- Run a weekly payables ageing filtered to micro and small suppliers.
- Before 31 March, review all MSME balances older than the permitted period and plan payments.
Cash planning
Shorter supplier credit means your cash conversion cycle can get longer. Re-check your working capital needs and talk to your bank early if you need a higher limit.
