The MSME 45-day rule, explained for finance teams.

Author : purchase pro | Published On : 24 Aug 2026

For years, paying a small supplier a few weeks late was a working-capital decision. Section 43B(h) of the Income Tax Act changed that. From FY 2023-24, if you owe a registered micro or small supplier and you cross the legal payment deadline before your year closes, the tax department can disallow that expense for the year. The cost is not interest. It is tax on money you have already spent.

We built the MSME compliance tracking inside PurchasePro after watching finance teams discover this rule during their first audit under it. What follows is the part of the rule that changes how you run accounts payable, written for the controller or finance head who signs off the year-end numbers.

What Section 43B(h) actually says.

Section 43B of the Income Tax Act lists expenses you can deduct only in the year you pay them, not the year they accrue. The Finance Act 2023 added clause (h) to that list. It covers any amount you owe to a micro or small enterprise beyond the time limit set in Section 15 of the MSMED Act, 2006.

Read together, the two laws say one thing: pay your micro and small suppliers inside the legal window, or lose the deduction for that purchase until the year you clear it.

Three conditions have to be true for the clause to bite:

• The supplier holds a valid Udyam registration under the MSMED Act.

• The supplier falls in the micro or small category, not medium. Medium enterprises sit outside this clause.

• The payment crosses the Section 15 deadline and is still open at year-end.

Miss any one of these and the clause does not apply. Meet all three and the expense moves out of the current year.

The 15 and 45 day clock.

Section 15 of the MSMED Act sets the payment window, and it has two settings.

• No written agreement: you must pay within 15 days of accepting the goods or services.

• Written agreement: you and the supplier can agree a longer period, but it can never go past 45 days from the date of acceptance.

The clock starts on the day of acceptance, not the invoice date and not the delivery date. If you raise a written objection within 15 days of delivery, the clock starts when that objection is resolved. If you raise none, the day of delivery becomes the day of acceptance.

 

What a late payment actually costs.

Take a simple case. You buy ₹10,00,000 of packaging from a micro supplier in February. You have no written payment terms, so the window is 15 days. The invoice is still open on 31 March.

Under 43B(h), that ₹10,00,000 is added back to your taxable profit for the year. At a 25% effective rate, you pay ₹2,50,000 of extra tax on a purchase you have already incurred. You get the deduction back, but only in the year you pay the supplier. So the rule does not erase the expense. It pushes the tax benefit into a later year and charges you the time value in between.

Two costs stack here. The disallowance is the income-tax hit. On top of it, Section 16 of the MSMED Act entitles the supplier to interest at three times the RBI notified bank rate, compounded monthly, on the overdue amount. Section 23 then says you cannot deduct that interest either. A late payment to a small supplier is one of the few business costs the law makes a point of pricing high.

// COMPLIANCE TIP

Tag the supplier, not the invoice.

The 15 or 45 day window depends on the supplier’s MSME status, so capture the Udyam number and classification once at the vendor master level. Every invoice from that vendor then inherits the right clock. Teams that track this at the invoice level miss new suppliers and re-registrations.

Where AP teams slip.

The rule is short. The errors are predictable.

Treating the invoice date as the start date

The clock runs from acceptance, which is usually delivery, not from the invoice you booked later. A vendor who delivers on 1 March and invoices on 20 March has not reset your window. You are already 19 days into it.

Assuming it only applies to manufacturers

Both manufacturers and service providers can hold micro or small registration. A design studio, a logistics contractor, or a maintenance vendor can all fall inside the clause. Check the Udyam certificate, not the trade.

Forgetting the medium-enterprise line

The clause covers micro and small only. A medium supplier sits outside it. Many teams either over-apply the rule to every MSME-registered vendor or ignore it for all of them. Both are wrong. Read the classification on the certificate.

Relying on a year-end scramble

By the time the audit flags open MSME invoices in April, the year has closed and the disallowance is fixed. The control has to live in your daily AP run, not the year-end review.

Missing MSME Form 1

Companies carry a separate MCA duty to file MSME Form 1, a half-yearly return of amounts outstanding to micro and small suppliers beyond 45 days. The income-tax disallowance and the MCA return draw on the same set of facts. Capture the facts once and feed both.

The 43B(h) compliance checklist.

If you want your AP process to stay clear of the clause, build these into the workflow rather than the audit.

Want the year-end MSME exposure in one click?

The PurchasePro MSME Compliance report lists every open micro and small invoice against its 15 or 45 day deadline, live. See it on your own payables.

Closing thoughts.

Section 43B(h) is short, but it moves a familiar decision out of the treasury desk and into the tax return. Late payment to a small supplier is no longer a question of working capital. It is a question of whether you keep the deduction this year.

The teams that handle it well do one thing. They stop treating MSME status as an audit-season lookup and start treating it as a field on the vendor master that drives a daily ageing report. After that, the rule runs itself.

If you want to see how your current open payables look against the 15 and 45 day clock, we can map it on your data in a short session. The first conversation is with someone who knows the rule, not a sales rep.

This article is general information, not tax advice. Confirm your specific position with your chartered accountant before you file.