Section 43B(h) of the Income Tax Act — inserted by the Finance Act 2023, effective AY 2024-25 (1 April 2024) — disallows the tax deduction on any amount payable to a registered micro or small supplier until it is paid within the MSMED Act limit: 15 days with no written agreement, 45 days with one. Pay late and the expense shifts to the year of payment, inflating taxable profit. It covers micro and small Udyam suppliers only — traders excluded.
In one line: You can deduct a purchase from a registered micro or small supplier only in the year you actually pay it — and only if you pay within 15 days (no written agreement) or 45 days (with one). Pay later and the deduction slips to the year of payment.
That single clause turned the supplier-payment calendar into a tax problem, and the tax problem into a treasury one. Late payment to a small supplier is no longer just a relationship risk — it is a year-end tax cost on the buyer’s own books. This guide sets out exactly what 43B(h) does, who it catches, and the payables strategy that keeps you compliant without surrendering your cash terms.
For a CFO or treasury head managing a large vendor base, 43B(h) is the demand-side forcing function now driving anchor interest in supply chain finance. Reading the rule precisely is the first step to a payables structure that satisfies it.
What Section 43B(h) actually says
Section 43B of the Income Tax Act lists expenses that are deductible only in the year they are actually paid, regardless of the accrual-accounting year. Clause (h) added a new entry to that list: any sum payable by a buyer to a micro or small enterprise beyond the time limit set in Section 15 of the MSMED Act, 2006.
The mechanics are blunt. If you buy from a registered micro or small supplier and pay within the limit, you deduct the expense in the normal accrual year. If you pay even one day late, the deduction is disallowed in the accrual year and allowed only in the year you finally pay. For a buyer with a 31 March year-end, an invoice that crosses the 15/45-day line into April means the deduction slips a full year — and this year’s taxable income rises by the unpaid amount.
There is no proviso letting you square it up by simply paying before you file your return (the relief that applies to some other 43B items does not apply to clause (h)). The only thing that preserves the current-year deduction is actually paying inside the statutory window.
The rule in one table
The scope conditions are where most buyers get caught out. Get these exactly right.
| Element | The rule under Section 43B(h) |
|---|---|
| Effective from | Finance Act 2023; AY 2024-25 / 1 April 2024 onwards |
| Who it protects | Registered micro & small suppliers only — medium enterprises excluded |
| Supplier status needed | Must be Udyam-registered as micro or small at the time of supply |
| Traders | Excluded — wholesale/retail traders’ Udyam registration does not trigger 43B(h) protection |
| Payment window | 15 days if no written agreement; 45 days hard cap even with an agreement |
| Consequence of delay | Deduction disallowed until the year of actual payment |
| Linked interest | MSMED Act Sec 16 — compound interest at 3× the RBI bank rate, itself not tax-deductible (Sec 23) |
| Whose registration matters | The supplier’s — the buyer’s own MSME status is irrelevant |
The buyer carries the entire burden here. Your supplier’s Udyam classification — which you may not even hold on file — decides whether your deduction is safe. That is why the first operational task under 43B(h) is collecting and validating Udyam status across your vendor master.
Why it bites: the two-layer cost
Late payment to a small supplier now costs a buyer twice over. First, MSMED Act Section 16 imposes compound interest at three times the RBI bank rate on the overdue amount — and Section 23 makes that interest non-deductible. Second, Section 43B(h) pushes the deduction on the principal into a later year, raising current-year taxable profit.
Stack those together and a stretched payable to a micro supplier becomes a real, quantifiable hit: penal interest you cannot deduct, plus tax paid now on income you would otherwise have sheltered. For a buyer running thousands of small-vendor invoices through a 31 March cut-off, the aggregate exposure is material enough to warrant a structural fix, not a manual scramble each March.
The strategic payables response
The instinctive reaction — “just pay everyone in 45 days” — collides with the buyer’s own interest in holding cash as long as possible. The two goals look irreconcilable: pay the MSME early to protect the deduction, and keep your payable terms long to protect your cycle.
This is exactly the gap reverse factoring (approved-payables finance) is built to close. A financier pays the registered micro or small supplier early — comfortably inside the 15/45-day window, so your 43B(h) deduction is preserved and no penal interest accrues — while you settle with the financier later, on your own preferred terms. The supplier gets cash on the buyer’s strength; you get compliance without shortening your cycle. We unpack the mechanism for CFOs in payables finance and reverse factoring, and the instrument itself in what reverse factoring is.
A few discipline points make this work cleanly:
- Segment the vendor master. Flag which suppliers are Udyam-registered micro/small (the ones 43B(h) actually covers) versus medium, traders, or unregistered — your obligation differs by segment.
- Route the at-risk segment through approved-payables finance. Reverse factoring across banks, NBFCs or a TReDS programme pays those suppliers early on your anchor credit.
- Mind the accounting classification. Reverse factoring is not automatically off-balance-sheet. Whether the financed amount stays a trade payable or is reclassified as borrowing is an Ind AS 109 judgement that turns on tenor extension and financier substitution — confirm it with your auditor before assuming off-balance-sheet treatment.
Because the financing is priced off the anchor buyer’s credit, not the small supplier’s, the all-in cost is typically modest — indicative bands run roughly 6.5%–9% on auction-discovered TReDS, 7.5%–9.5% bank-led, and 9%–12% via NBFCs, always per case. The logic is hard to beat: institutional liquidity on your rating, settling your MSME payables on time, and — where the accounting allows — sitting off your balance sheet.
How 43B(h) fits the bigger MSME picture
Section 43B(h) does not exist in isolation. It is the demand-side half of a deliberate policy push to fix the MSME credit gap — estimated at around ₹20–25 lakh crore by the RBI’s U.K. Sinha Expert Committee on MSMEs (2019). The supply-side half is the TReDS onboarding mandate: under MSME Ministry notification S.O. 4845(E) dated 7 November 2024, companies with turnover above ₹250 crore plus all CPSEs had to onboard a TReDS platform by 31 March 2025 (lowered from the earlier ₹500 crore threshold).
Read together, the message to large buyers is consistent: pay your small suppliers on time, and use the institutional plumbing — bank programmes, NBFC-Factors, or one of the four RBI-licensed TReDS platforms — to do it without straining your own cash. A buyer who treats 43B(h) purely as a compliance chore misses the point; treated as a treasury-design prompt, it is the trigger to build a vendor-finance programme that turns a tax liability into a structural advantage.
FAQ
What is Section 43B(h) in simple terms? Section 43B(h) of the Income Tax Act, effective from AY 2024-25, says a buyer can deduct a purchase from a registered micro or small supplier only in the year it is actually paid, if payment runs beyond the MSMED Act limit of 15 days (no agreement) or 45 days (with one). Pay late and the deduction shifts to a later year, raising current-year taxable profit.
Does Section 43B(h) apply to medium enterprises and traders? No. It applies only to suppliers registered on Udyam as micro or small enterprises. Medium enterprises are excluded entirely, and wholesale or retail traders are excluded even if Udyam-registered, because traders’ registration is for priority-sector lending rather than the buyer’s 43B(h) protection. The supplier’s status at the time of supply is what matters, not the buyer’s.
What is the time limit for payment under Section 43B(h)? The limit comes from Section 15 of the MSMED Act: 15 days where there is no written agreement, and a hard cap of 45 days even where an agreement specifies a longer term. Beyond that window the deduction is disallowed until the amount is actually paid, and Section 16 adds non-deductible compound interest at three times the RBI bank rate.
How does reverse factoring help with Section 43B(h)? Reverse factoring lets a financier pay your registered micro or small supplier early — inside the 15/45-day window — so your deduction is preserved and no penal interest accrues, while you settle with the financier on your own longer terms. It satisfies the rule without shortening your working-capital cycle. Whether it stays off-balance-sheet depends on the Ind AS 109 classification, so confirm with your auditor.
Can I claim the deduction if I pay before filing my income tax return? No. The relief that lets some other Section 43B items be deducted if paid before the return-filing due date does not extend to clause (h). For purchases from micro and small suppliers, only payment within the statutory 15/45-day window preserves the current-year deduction; pay after that and the deduction moves to the year of actual payment.
Designing a payables programme that satisfies Section 43B(h) without straining your cash? Our supply chain finance practice is ex-banker and CA-led, and channel-agnostic across banks, NBFCs and TReDS. Part of Finnova’s ₹4,250 Cr+ mobilised across 100+ corporate-finance mandates since 2011.
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