The rule
The Finance Act 2023 inserted clause (h) into Section 43B of the Income-tax Act, effective from the financial year 2023-24. An amount you owe to a micro or small enterprise is deductible as an expense only in the year you actually pay it, unless you pay within the time limit in Section 15 of the MSMED Act.
Section 15 of the MSMED Act sets that limit at:
- 15 days from the day of acceptance (or deemed acceptance) of the goods or services, where there is no written agreement on payment terms; or
- the agreed date, which can be no more than 45 days from acceptance, where there is a written agreement.
If an invoice from a small supplier dated 20 March 2026 is paid on 10 May 2026 under 45-day terms, the expense moves out of 2025-26 and into 2026-27, raising the 2025-26 taxable profit.
Which suppliers it covers
- Micro and small enterprises registered on the Udyam portal. Medium enterprises are not covered.
- Manufacturers and service providers. Traders were allowed to register on Udyam in 2021 for priority-sector lending, and are generally treated as outside the delayed-payment provisions. Check each case with your CA.
- The classification that matters is the supplier's, so ask suppliers for their Udyam certificate and keep it on file.
How this interacts with GST
Finance teams often hold payment to suppliers whose invoices are missing in GSTR-2B. For an MSME supplier, holding the whole payment past 45 days can cost the income-tax deduction, and the MSMED Act also charges compound interest at three times the bank rate on late payments. A common middle path is to pay the value of the supply on time and hold back only the GST until the invoice reaches GSTR-2B.
How to track it
- Flag MSME suppliers in your vendor master.
- Age their unpaid invoices separately with a 45-day limit (or 15 days where there is no written agreement).
- Before the year closes, list MSME dues outstanding past the limit; they need to be added back in the tax computation.
- Report outstanding MSME dues in the half-yearly MSME Form I where it applies to you.
The ITC deadline calculator shows the 45-day date next to the GST deadlines for any invoice. Parakh counts from the invoice date, which is usually the same as or earlier than acceptance, so its date is the cautious one.
Frequently asked questions
Does Section 43B(h) apply to medium enterprises?
No. It applies only to micro and small enterprises as defined under the MSMED Act.
Is the 45 days counted from the invoice date?
Section 15 of the MSMED Act counts from the day of acceptance or deemed acceptance of the goods or services, which is usually the delivery date. Counting from the invoice date is the cautious approach.
Is the deduction lost forever if I pay late?
No. It is allowed in the year you actually pay.