MSME 45-Day Payment Rule: Section 43B(h) Compliance or Face Expense Disallowance
The new provision disallowing business expense deduction if MSME payments delayed beyond 45 days, verification, documentation, and accounting system modifications
Written by
CA Ashama Rajawat
From FY 2023-24 onwards, if you delay MSME payments beyond 45 days, you CANNOT claim that expense in your tax return. Pay ₹10L to MSME vendor on day 50? ₹10L expense disallowed = ₹3L extra tax (if 30% slab)!
What is Section 43B(h)?
Introduced in Finance Act 2023, Section 43B(h) mandates that businesses must pay MSME vendors within 45 days of invoice date to claim the expense as a tax deduction.
- Effective: FY 2023-24 (AY 2024-25) onwards
- Timeline: 45 daysfrom invoice date (or agreed date if specified in writing)
- Penalty: Expense disallowed if not paid within 45 days
- Applies to: ALL businesses (corporates, partnerships, proprietorships)
- Only for: Payments to MSME-registered vendors
Who is an MSME?
| Category | Investment Limit | Turnover Limit |
|---|---|---|
Micro Enterprise | ≤ ₹1 crore | ≤ ₹5 crore |
Small Enterprise | ≤ ₹10 crore | ≤ ₹50 crore |
Medium Enterprise | ≤ ₹50 crore | ≤ ₹250 crore |
MSME status verified via Udyam Registration Portal (udyamregistration.gov.in)
How the Rule Works: Example
Scenario: Manufacturing Company
Transaction Details:
- • Invoice from MSME vendor: March 1, 2024 for ₹10,00,000
- • Payment due: April 15, 2024 (45 days)
- • Actual payment: May 5, 2024 (65 days - LATE!)
Tax Implication:
- • ₹10L expense claimed in FY 2023-24
- • But payment made after 45 days
- • Expense disallowed: ₹10,00,000
- • Extra tax @ 30%: ₹3,00,000
Solution:
- • Pay by April 15, 2024 → Expense allowed in FY 2023-24
- • OR pay in FY 2024-25 → Claim expense in FY 2024-25 ITR
How to Verify MSME Status
Ask for Udyam Registration Number (URN)
12-digit unique number starting with "UDYAM"
Verify on Udyam Portal
- Visit udyamregistration.gov.in
- Click "Verify Udyam Registration Number"
- Enter URN and captcha
- Download certificate (PDF)
Maintain Records
Store Udyam certificate with vendor master data. Update accounting system with MSME flag.
Documentation Requirements
- ✓
Udyam Registration Certificate
From each MSME vendor at onboarding
- ✓
Invoice with Clear Payment Terms
Invoice date, payment due date (if different from 45 days)
- ✓
Payment Proof
Bank statement, RTGS/NEFT confirmation, cheque details
- ✓
Aging Report
Monthly report showing days outstanding for each MSME invoice
Accounting System Modifications Needed
Vendor Master Update
Add "MSME" flag field. Enter Udyam number for each registered vendor.
Invoice Tracking
Auto-calculate payment due date (Invoice date + 45 days). Alert 7 days before deadline.
Payment Priority
Prioritize MSME payments in cash flow planning. Create separate approval queue.
Year-End Reporting
Generate report: MSME invoices paid beyond 45 days (disallowed expenses for ITR).
Special Cases & Exceptions
If you and MSME agree on 60 days (in writing), 60 days applies instead of 45.
Requirement: Written agreement signed by both parties BEFORE invoice date.
No clear guidance. Conservative approach: Pay within 45 days, raise dispute separately.
Section 43B(h) doesn't apply. Normal payment terms acceptable. But verify: if eligible, vendor should register.
Impact on Different Business Types
Positive if they're buyers (forced discipline). Negative if they're MSME vendors (still await payments).
Compliance Checklist
Obtained Udyam certificates from all vendors
Updated accounting system with MSME flags
Set up auto-alerts for 45-day deadline
Trained accounts payable team on new rule
Reviewed and renegotiated payment terms (if needed)
Created year-end report template for disallowed expenses
Communicated with CFO/Finance Head about tax implications
Conclusion
Section 43B(h) is a game-changer for cash flow management. Businesses must prioritize MSME payments or face tax disallowance penalties that far exceed any working capital benefit from delayed payments. Verify every vendor's MSME status, update your systems, and make 45-day payments the default. The Income Tax Department won't accept "cash flow issues" as an excuse for non-compliance. Pay on time, claim deductions. It's that simple.