Section 43B of Income Tax Act MSME – The Complete Guide for Businesses in 2025
Deadlines | Case Studies | Compliance Checklist | Tax Impact
CA Rishabh Mehta 8 min read
In India's dynamic economic ecosystem, micro and small enterprises (MSMEs) play a pivotal role. They are the silent growth engines, contributing over 30% of the GDP and employing 110 million people as per the Ministry of MSME's 2023 report (Source: MSME Annual Report 2023).
Yet, a chronic challenge has plagued the sector — delayed payments from larger buyers. This issue impacts working capital, causes production slowdowns, and, in worst cases, forces MSMEs to shut shop.
The government's answer? Section 43b of income tax act msme — specifically the newly inserted clause (h) under the Finance Act, 2023. Effective from 1 April 2024 (AY 2024–25), it fundamentally changes when buyers can claim tax deductions for payments to MSMEs.
In this detailed guide, we'll cover:
What section 43b of income tax act msme actually says.
How it affects your tax planning and payment terms.
Real-world examples and statistics.
Best practices to stay compliant and avoid deduction delays.
Section 43B was introduced way back in 1983 to address a key issue — businesses claiming deductions for expenses they hadn't yet paid. Initially, it covered only taxes and statutory dues, but over the years it expanded to include:
Employer contributions to PF/ESI
Interest to banks and NBFCs
Leave encashment liabilities
Bonus and commission to employees
The idea was simple — you get a deduction only when you pay. This avoided a mismatch between accounting records and actual cash flow.
With the section 43b of income tax act msme amendment in 2023, the government extended this principle to protect micro and small enterprises. This change was the first time the section directly targeted business-to-business commercial transactions.
What Exactly Does Section 43B(h) Say for MSMEs?
Section 43b(h) states:
"Any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 shall be allowed as a deduction in computing the income of the previous year in which such sum is actually paid."
Breaking it Down:
Seller must be registered as a Micro or Small Enterprise under MSME classification.
Payment timelines are dictated by Section 15 of MSMED Act:
No written agreement → 15 days from acceptance/delivery.
Written agreement → up to 45 days (cannot be extended by contract).
Deduction timing:
Pay within the above limit → Deduction in the same FY.
Pay after limit → Deduction shifts to year of actual payment.
Why This Change Was Introduced
For years, surveys by FISME (Federation of Indian Micro and Small & Medium Enterprises) and SIDBI revealed that more than 50% of MSMEs faced payment delays beyond 45 days.
Large companies often booked the expense, claimed the deduction, but delayed payments for months — sometimes over 180 days. This created a cash-flow choke for smaller businesses.
By amending section 43b of income tax act msme, the government created a tax-linked incentive for timely payment — if you delay, you lose the immediate deduction.
Real-Life Case Studies
1. Our Client Story – How Taxiteazy Resolved a ₹58 Lakh Disallowance Risk
One of our clients, a leading FMCG distributor, came to us in September 2023 worried about a possible ₹58 lakh disallowance under section 43b of income tax act msme.
They had multiple micro suppliers, and payment cycles often extended to 60–70 days. Our audit revealed that nearly 40% of their vendor payments exceeded the MSME Act deadlines.
How we helped:
We created a vendor classification system tagging each supplier as MSME/non-MSME in their ERP.
Introduced a payment scheduling tool that auto-flags upcoming due dates.
Trained the accounts team on the 15/45-day rules.
Renegotiated payment terms with certain vendors to fit compliance windows.
Result:
In just one quarter, they brought 95% of payments within the deadline and saved themselves from a massive disallowance that could have impacted cash flow and investor confidence.
Real-Life Examples of Section 43B(h) in Action
Example 1 – Timely Payment Saves Deduction
Company A purchases raw materials worth ₹5,00,000 from XYZ Tools, a registered Small Enterprise.
Written agreement exists → 45-day payment limit.
Invoice date: 1 May 2024 → Payment made on 25 June 2024 (within 45 days).
✅ Result: Deduction of ₹5,00,000 allowed in FY 2024–25 itself.
Example 2 – Delay Shifts Deduction to Next Year
Company B avails services worth ₹3,00,000 from ABC Solutions, a Micro Enterprise.
No written agreement → 15-day payment limit.
Invoice date: 10 July 2024 → Payment made on 10 September 2024 (62 days later).
❌ Result: Deduction of ₹3,00,000 is disallowed in FY 2024–25 and shifted to FY 2025–26.
Example 3 – GST Component
Company C buys machinery worth ₹12,00,000 + ₹2,16,000 GST from PQR Manufacturing (Small Enterprise).
ITC claimed on GST.
Payment delayed beyond 45 days.
❌ Deduction for ₹12,00,000 shifts to next year.
GST amount is not affected since ITC already availed.
Example 4 – Manufacturing Sector
A large auto-parts manufacturer buys steel components from a micro supplier worth ₹8,00,000.
Written agreement with 45-day payment term.
Due to an internal cash-flow crunch, payment is made after 70 days.
Impact: Taxable income goes up by ₹8,00,000 for that FY, increasing tax outgo by roughly ₹2,08,000 (assuming 26% corporate tax). Payment is made next year, deduction is restored then — but cash flow suffers now.
Example 5 – IT Services
A software firm contracts a small IT services MSME for ₹4,00,000.
No written agreement → 15-day rule applies.
Firm assumes they can pay after project completion in 2 months.
Result: Entire ₹4,00,000 disallowed for current FY under section 43b of income tax act msme, impacting profit figures and tax.
Statistics Highlighting the Impact
According to the 2022 MSME Pulse Report by TransUnion CIBIL and SIDBI:
45% of MSMEs experience payment delays beyond 90 days.
Average delay period in B2B transactions: 61 days.
Payment delays cost MSMEs over ₹10,000 crore annually in interest burden.
The government estimates this amendment could improve MSME liquidity by 15–20% annually, as buyers will now prioritize faster payments to claim deductions.
Benefits of Section 43B(h) for MSMEs
Improved Cash Flow – Timely payments mean working capital is available for inventory and operations.
Stronger Bargaining Power – MSMEs can push for payments knowing buyers risk losing deductions.
Reduced Dependency on Costly Credit – Less need for high-interest working capital loans.
Compliance Push – Encourages buyers to streamline vendor payments.
Challenges for Buyers
Tightening cash-flow cycles to meet payment deadlines.
Upgrading accounting systems to track MSME vendor status and due dates.
Risk of reduced deductions if payments slip.
Potential disputes over "acceptance" date under MSMED Act.
Best Practices for Businesses to Comply
To avoid deduction loss under section 43b of income tax act msme, businesses should:
Maintain Updated MSME Vendor Records
Get the latest Udyam Registration Certificate from suppliers.
Automate Payment Reminders
Use ERP or accounting software to flag MSME invoices nearing due dates.
Negotiate Written Agreements
Where possible, secure 45-day terms (but never beyond — law prohibits longer).
Schedule Weekly Payment Runs
Avoid month-end bottlenecks that can cause delays.
Train Accounts Teams
Ensure they understand section 43b of income tax act msme compliance requirements.
Step-by-Step Compliance Checklist
Identify MSME Vendors – Verify Udyam Registration No. and classification.
Map Payment Due Dates – Based on invoice acceptance date and agreement terms.
Set Alerts – Configure system reminders at 10 days (no agreement) and 40 days (agreement).
Prioritize Payments – Process MSME invoices before others when close to due date.
Review Monthly – Run a compliance check to avoid missed deductions.
Document Evidence – Keep proof of payment dates and vendor classification for tax audits.
Frequently Asked Questions
No. Only Micro and Small enterprises under MSME classification are covered.
No. Unlike other Section 43B items, here deduction is allowed only in year of actual payment.
As per MSMED Act, acceptance is when buyer acknowledges delivery without objection.
No, traders are excluded even if registered.
If goods/services are under dispute, the payment timeline starts after resolution/acceptance.
Expert Opinion – Why This Clause is a Game-Changer
From a policy perspective, section 43b of income tax act msme is both a carrot and a stick:
The carrot: Buyers who pay on time keep their deductions and good vendor relations.
The stick: Delay payments and face immediate tax liability increases.
For MSMEs, this is a direct government-backed push for liquidity — something the sector has demanded for years. While it adds compliance pressure on buyers, it aligns with India's Ease of Doing Business and Make in India goals.
Conclusion – Pay on Time, Save on Taxes
The message is clear: with section 43b of income tax act msme, timely payments are no longer just about good business ethics — they are a tax necessity.
For buyers, it's time to overhaul payment systems, maintain accurate MSME records, and avoid last-minute cash-flow crunches. For MSMEs, it's an empowering move that ensures faster access to their own earnings.
If your business deals with MSMEs, review your payment policies today. The cost of delay is no longer just interest — it could be your tax deduction.
