Payment to MSME Vendors in 45 Days

The foundation of the Indian economy is Micro, Small, and Medium-Sized Enterprises (MSMEs). They contribute significantly to employment generation, exports, innovation, and inclusive growth. However, one of the biggest challenges faced by MSME Vendors is delayed payments from buyers, especially larger enterprises. This issue hampers their working capital cycle, creates liquidity crunches, and limits their potential to grow.

To address this concern, the Indian government introduced Section 43B(h) through the Finance Act, 2023, bringing significant changes to the Income Tax Act, 1961. This provision mandates timely Payments to MSME vendors in 45 days, failing which buyers will lose their deduction eligibility for the expense in that financial year.
In this blog, we will decode the implications of this provision, its scope, compliance requirements, and how businesses and MSME Vendors must realign their processes to stay compliant and benefit from this regulation.

 

Understanding Section 43B(h): The Core Provision

Regardless of the taxpayer’s accounting method, Section 43B of the Income Tax Act lists some deductions that are only permitted upon actual payment. The newly introduced section (h) under Section 43B focuses on payment delays to micro and small firms registered under the MSME Development Act of 2006.

Key Highlights:

Deduction for expenses payable to MSMEs will only be allowed on actual payment.


Payment must be made within:
15 days if there is no agreement.
45 days if there is a written agreement.
Only the year of actual payment may be used to claim the deduction if payment is delayed past this point.

 

Applicability of the Payment to MSME Vendors in 45 Days

The amendment is applicable from Assessment Year (AY) 2024–25 (i.e., for Financial Year 2023–24 onwards).

Who does it affect?
Buyers of goods or services from micro and small enterprises, including corporates, LLPs, firms, and individuals, are subject to tax audit.
MSME sellers must be registered on the Udyam portal to be covered under this provision.
Note: Medium enterprises are not covered under Section 43B(h) as per the current legal framework.

 

Impact on Businesses: Compliance and Deductions

1. Accounting and Payment Discipline

Businesses can no longer delay vendor payments without tax implications. If payment is delayed beyond the permissible timeline, the expense, whether related to raw materials, services, or any other supply, cannot be claimed in the current financial year.

2. Cash Flow Planning

Companies must align their cash flows and payment schedules to avoid deferred deductions. Timely payments will also reduce disputes and build better vendor relationships.

3. MSME Vendors Classification

It becomes crucial for buyers to classify their vendors accurately into:
Registered Micro enterprises
Registered Small enterprises
Medium/others (not covered)

Maintaining updated MSME registration certificates and Udyam Verification becomes essential.

Computation Example

Suppose a company purchases machinery worth ₹10 lakhs from a registered microenterprise on February 1, 2024, and has a written agreement stipulating a payment term of 45 days.
The due date would be March 17, 2024.
If payment is made after March 31, 2024, say on April 10, 2024:
The company cannot claim the deduction in FY 2023–24.
When the actual payment year occurs in FY 2024–2025, deductions will be allowed.

Legal Backing and MSME Act Linkage

The MSME Development Act, 2006 mandates that buyers must make payments to micro and small enterprises within the specified time frame, failing which they are liable to pay compound interest at 3 times the bank rate. However, enforcement was weak, and many vendors hesitated to take legal action, fearing business losses.
Now, with Section 43B(h) in place, the onus shifts to the buyer, since tax deductions are linked to timely payments. This not only strengthens the MSME Act but also encourages systemic reform in vendor payment practices.

Challenges and Recommendations

Challenges:

Lack of knowledge among tax professionals and small enterprises.
Complex vendor classification and inadequate documentation.
Cash flow stress for buyers due to compressed payment cycles.

Recommendations:

Maintain MSME Vendors records with updated Udyam Registration Numbers.
Use ERP systems or accounting tools to set payment alerts.
Include specific MSME clauses in contracts for payment timelines.
To make sure that suppliers are paying on time to do internal audits.

Benefits of Section 43B(h)

Improved liquidity for MSMEs, especially in supply-chain heavy sectors like manufacturing, logistics, and trading.
Reduction in disputes over delayed payments.
Formalization of the economy by encouraging MSME registration.
Better credit profiles for MSMEs, aiding in obtaining loans and government incentives.

 

How Cretum Advisory Can Help?

At Cretum Advisory, we provide end-to-end compliance solutions for businesses dealing with MSME vendors. Our services include: Vendor due diligence and classification under the MSME Act. Drafting vendor agreements aligned with Section 43B(h). Establishing internal SOPs for timely payment and audit trails. Tax planning and accounting support to minimize disallowances. Advisory for MSMEs to register on the Udyam Portal and claim benefits.
Our GST, Direct Tax, and Compliance experts help streamline your payment cycles, mitigate risks, and ensure you stay compliant with the latest provisions. Whether you’re a startup, SME, or a listed company, our regulatory guidance ensures peace of mind and optimized tax savings.

📩 Reach out to us at: info@cretumadvisory.com for personalized assistance.

 

The Final Thought

The implementation of Section 43B(h) marks an important phase in the financial stability of the MSME sector and try to do the timely Payment to MSME Vendors in 45 Days. By linking tax deductions to timely payments, the government has effectively nudged businesses to prioritize their vendor obligations. This shift promotes not only fair trade practices but also empowers micro and small enterprises to thrive in a competitive ecosystem. Businesses must now recalibrate their internal controls and accounting practices to embrace this change, ensuring growth, compliance, and goodwill in equal measure.

 

Frequently Asked Questions (FAQs) on Payment to MSME Vendors in 45 Days

1. What is Section 43B(h) of the Income Tax Act?

Payments to registered Micro and Small Enterprises vendors (MSME Vendors) must be made within 15 or 45 days, according to Section 43B(h). If the payment is not paid on time, the deduction is only valid in the year of the payment.

2. When did Section 43B(h) become effective?

This clause becomes effective on April 1, 2024, and it will be used starting in Assessment Year 2024–2025. It affects every spending from the 2023–2024 fiscal year.

3. Which MSME Vendors are protected by this clause?

The only MSME Vendors covered are those listed on the Udyam portal and registered as Micro or Small Enterprises under the MSME Development Act, 2006. This regulation does not apply to medium-sized businesses.

4. What is the 15-day vs. 45-day rule?

Payment must be made within 15 days if there isn’t a formal agreement. To be eligible for the tax deduction, payment must be made within 45 days of the written agreement.

5. What happens if I delay the payment beyond the due date?

If the payment is made beyond the permissible period, you cannot claim the expense as a deduction in the same financial year. The deduction will only apply in the year that the payment is actually made.

6. Does this rule apply to all types of buyers?

Yes, it applies to all buyers who are subject to income tax audit, including companies, LLPs, and proprietorships with turnover above the audit limits. It makes sure that MSME payment responsibilities are more widely followed.