/ MSE Payment Rules Impact Memo · Updated 2026-10-22
Section 43B(h), year 2 impact on Indian buyers.
Finance Act 2023 inserted Section 43B(h): expenses payable by an Indian buyer to Micro or Small Enterprise (MSE) supplier beyond 45 days from acceptance of goods / services are disallowed in the FY of accrual and allowed only on actual payment. FY 2024-25 was year 1 of impact (ITR filed by October 2025). FY 2025-26 is year 2 (ITR by October 2026). Here's what buyers are experiencing in year 2 and how to mitigate.
DC
Written by CA Durgesh Chavda
Chartered Accountant (ICAI) · Founder, Bharat Quantum Prospera · US incorporation, India-US DTAA, FEMA ODI, NRI taxation, cross-border structuring · LinkedIn
/ The core rule
Section 43B(h) + Section 15 MSMED.
- Section 43B(h) Income Tax Act: any sum payable by Indian buyer to Micro or Small Enterprise (not Medium) beyond the appointed day under Section 15 of MSMED Act 2006 - deduction allowed only in the FY in which payment is actually made.
- Section 15 MSMED Act: buyer must pay MSE supplier within:
- — 45 days from acceptance of goods / services, OR
- — If written agreement specifies longer period, that longer period (but not exceeding 45 days).
- — If no written agreement: 15 days from acceptance.
- Who qualifies as MSE: Micro (investment up to INR 2.5 crore / turnover up to INR 10 crore) + Small (investment up to INR 25 crore / turnover up to INR 100 crore) Udyam-registered enterprises. Medium Enterprises are OUT of Section 43B(h) scope.
/ What's actually happening in year 2 (FY 2025-26)
Observed impact.
- Buyers started paying MSE suppliers faster: cash flow accelerated; working capital impact on buyers has been real. For companies with large MSE supplier base, year 1 impact was 20-40% faster payment cycle.
- P&L impact: year 1 saw some buyers restate expenses when late-paid MSE invoices didn't qualify for deduction. Current-year expenses but deductible only on payment timing = P&L volatility.
- Udyam verification mechanism: buyers now routinely demand Udyam certificate from suppliers to confirm Micro/Small category. Form MSME Form I half-yearly return (dues > 45 days to MSE) also triggered.
- Procurement decisions shifted: some buyers consolidating purchases to larger (non-MSE) suppliers to avoid 43B(h) complexity. Not necessarily good policy outcome.
- Written agreements now specify <=45 day payment terms: standard contracts updated to comply with Section 15 MSMED default.
- Form 3CD disclosure: tax audit Form 3CD Clause 22 (now expanded) requires disclosure of 43B(h) impact. Transparency drives compliance.
/ Year 2 specific issues
What's changed since year 1.
- Interpretation of 'acceptance' date: when the 45-day clock starts. Industry practice settled around invoice-receipt / goods-receipt as 'acceptance' unless contract specifies otherwise.
- Credit notes / debit notes handling: payment reversal / adjustment timing complexities. Documentation improved in year 2.
- Case law emerging: multiple ITAT / High Court rulings on 43B(h) interpretation during 2025-26. Specific issues being litigated: 'written agreement' meaning, 'appointed day' calculation, retroactivity.
- Section 15 interest: separate from 43B(h), buyer owes compound interest at 3x RBI bank rate on delayed MSE payments. This is MSE's recovery lever + buyer's additional cost beyond disallowance.
- Form MSME Form I: half-yearly return of outstanding MSE dues beyond 45 days. ROC filing + compliance signal.
/ Buyer compliance checklist
The year 2 operating playbook.
- Collect Udyam certificate from every supplier before onboarding; refresh annually. Store centrally.
- Supplier master: flag Micro / Small / Medium / Not-registered. Different handling for each.
- Written contract with payment terms <=45 days for all MSE suppliers.
- Invoice date / acceptance date logging: ERP capture.
- Payment schedule: AP system flags any MSE invoice approaching 45 days.
- Form MSME Form I half-yearly: ROC filing by 31 October (for April-September period) and 30 April (for October-March period).
- Tax audit Form 3CD disclosure: Clause 22 - specific amount disallowed under 43B(h), amount paid in subsequent FY (reversed disallowance).
- Year-end accrual review: before 31 March, review outstanding MSE invoices; prioritise payment to preserve current-year deduction.
- Section 15 interest provision: if MSE payment delayed, provide for 3x RBI rate compound interest. Separate P&L cost.
Last updated: 2026-10-22.
/ Ready when you are
Buyer with large MSE supplier base?
43B(h) + Section 15 MSMED + Form MSME Form I + Form 3CD disclosure. BQP compliance stack for year 2. Standard annual engagement + priority support through year-end accrual review.
FAQ
Common questions, answered.
Is Section 43B(h) applicable in FY 2025-26 (year 2)?
Yes - Section 43B(h) is permanent. Finance Act 2023 inserted it; no sunset. Year 1 (FY 2024-25) and year 2 (FY 2025-26) and beyond are all in scope. ITR for FY 2025-26 (due October 2026) must apply 43B(h) treatment to any MSE expenses paid beyond 45 days.
Does Section 43B(h) apply to Medium Enterprises too?
No - only MICRO and SMALL Enterprises (MSE). Medium Enterprises (investment up to INR 125 crore / turnover up to INR 500 crore) are OUT of 43B(h) scope. Buyer verification should distinguish Micro / Small (in scope) from Medium (out of scope) using Udyam certificate.
What's the 'appointed day' under Section 15 MSMED?
The appointed day is the day immediately following the date of acceptance of goods / services. If there is a written agreement specifying payment period, the appointed day is as per agreement BUT cannot exceed 45 days from acceptance. If no written agreement, appointed day is 15 days from acceptance.
What if I pay MSE supplier after 45 days?
The expense is DISALLOWED in the FY of accrual under Section 43B(h) and ALLOWED only in the FY when payment is actually made. Separately, buyer owes compound interest at 3x RBI bank rate under Section 15 MSMED (recovery via Micro and Small Enterprises Facilitation Council - MSEFC). Both consequences apply.
How does Section 43B(h) interact with Form 3CD tax audit?
Form 3CD Clause 22 (expanded post Finance Act 2023) requires disclosure of: (a) specific amounts disallowed under 43B(h) during audit year, (b) amounts paid in subsequent FY where disallowance was reversed. Tax auditor's responsibility to verify 43B(h) compliance; buyer's finance team must maintain MSE invoice tracker.
Does BQP help buyers with Section 43B(h) compliance?
Yes - standard tax advisory. Udyam supplier verification process setup, AP system flagging rules, written contract updates for 45-day terms, year-end accrual review (prioritising MSE payment to preserve current-year deduction), Form MSME Form I half-yearly filing, Form 3CD disclosure during tax audit, Section 15 interest provision computation. For mid-size and large Indian buyers with significant MSE supplier base. WhatsApp +91 78018 87130.
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