Section 43B(h) Of Income Tax Act: Applicability, Date, Limit, Example

Section 43B(h) Of Income Tax Act: Applicability, Date, Limit, Example.  
Section 43B(h) of the Income Tax Act is one of the recent amendments made through the Finance Act, 2023, which came into effect from April 1, 2024. This provision has introduced a significant reform in the payment cycle between businesses and Micro and Small and Medium Enterprises (MSMEs). The key objective behind this new provision is to ensure that timely payments are made to MSMEs and that such payments are claimed as deductions in the financial year only if they are made within the prescribed timeframe.
What is a Section 43B(h) of the Income Tax Act?
Section 43B(h) mandates that any amount payable by a business to a Micro or Small Enterprise (MSE) for goods or services will be allowed as a deduction under the Income Tax Act only if the payment is made within the time limits specified under Section 15 of the MSMED Act, 2006. If the payment is delayed, the deduction will be allowed only in the financial year in which the actual payment is made. This provision is aimed at ensuring prompt payments to MSEs and reducing the instances of long outstanding dues, which negatively impact the working capital and cash flow of smaller businesses.
Applicability of Section 43B(h) Of Income Tax Act
The applicability of Section 43B(h) arises when a buyer procures goods or services from a seller who is registered as a Micro or Small Enterprise under the MSMED Act, 2006. It is important to note that the buyer does not need to be registered under the MSMED Act for the provision to apply. The only requirement is that the seller should be registered as a Micro or Small Enterprise.
For example, if Mr. A, who is not registered under MSMED, purchases goods from Mr. B, who is registered as an MSME, Section 43B(h) will still be applicable.
Effective Date of Section 43B(h) Of Income Tax Act
This provision came into effect from April 1, 2024. That means it applies to transactions taking place on or after this date. For assessment purposes, it will be applicable from Assessment Year (AY) 2024-25, corresponding to Financial Year (FY) 2023-24. Any purchases or transactions conducted before March 31, 2024, will not come under the purview of Section 43B(h). For instance, if Mr. A made a purchase from an MSME on March 31, 2023, Section 43B(h) will not apply, and regular provisions of income tax law will govern such payment.
MSME Payment Timeline Under Section 43B(h)
As per the MSMED Act, Section 15 outlines the timeline within which payments must be made to MSMEs. If there is no written agreement between the buyer and the seller, payment should be made within 15 days from the date of acceptance or delivery of goods or services. However, if a written agreement exists, the payment period shall not exceed 45 days from the date of acceptance. In case payments are delayed beyond these limits, the expenses related to the payment will be disallowed as a deduction in that financial year and can only be claimed in the year in which the actual payment is made.
Examples to Understand Section 43B(h) Of Income Tax Act
Let us understand how this provision works through a few examples:

If goods are accepted on March 29, 2024, and the credit period agreed is 60 days, the due date as per MSMED Act becomes May 13, 2024. If payment is made on May 25, 2024, the deduction will be allowed in FY 2024-25.

If goods are accepted on April 1, 2024, and the credit period is 45 days, the due date becomes May 16, 2024. If payment is made on May 21, 2024, deduction is allowed in FY 2024-25.

If goods are accepted on January 31, 2024, and the credit period is 15 days, due date becomes February 15, 2024. Payment made on February 20, 2024, will allow deduction in FY 2023-24.

MSME Turnover Limit for Classification
As per the MSMED Act, the classification of MSMEs is as follows:

Micro Enterprises are those with investment in plant and machinery not exceeding INR 1 crore and turnover not exceeding INR 5 crores.

Small Enterprises have investment in plant and machinery not exceeding INR 10 crores and turnover not exceeding INR 50 crores.

Only enterprises falling within this classification and registered under the MSMED Act are eligible for protection and benefit under Section 43B(h).
Non-Applicability of Section 43B(h) on Traders
It is essential to highlight that traders (both wholesale and retail) are not eligible for benefits under Section 43B(h). According to the Office Memorandum dated July 2, 2021, traders can get Udyam Registration only for the purpose of availing Priority Sector Lending benefits. Therefore, if a buyer purchases goods from a trader, Section 43B(h) will not apply.
For example, if Mr. A buys goods from Mr. B, who is a registered trader, Section 43B(h) will not be applicable, even if Mr. B is registered under Udyam.
Penalty and Interest for Delay in MSME Payments
In cases where payment is not made within the stipulated period, interest is applicable on the delayed amount. This interest is compounded and calculated at three times the bank rate notified by the Reserve Bank of India. Importantly, this interest paid on delayed MSME payments is not allowed as an expense under the Income Tax Act. This further discourages late payments and encourages businesses to comply with the provisions of the MSMED Act.
Impact of GST on Disallowed MSME Payments
The treatment of GST under Section 43B(h) depends on whether the GST component has been claimed as Input Tax Credit (ITC).

If GST is claimed as ITC: Only the base amount (excluding GST) is disallowed under Section 43B(h). The GST portion is treated separately and continues to be claimed as ITC.

If GST is not claimed as ITC: The entire amount including GST will be disallowed as an expense under Section 43B(h) until the payment is made.

Example: If the total invoice is INR 1,20,000 including INR 20,000 GST, and the GST is claimed as ITC, only INR 1,00,000 is disallowed. But if GST is not claimed as ITC, the entire INR 1,20,000 will be disallowed.
Application of Section 43B(h) on Capital Expenditure
Section 43B(h) is not restricted to only revenue expenditures. It also applies to capital expenditures where deductions are allowed under specific provisions like Section 35AD or Sections 30 to 36 of the Income Tax Act. This means, even payments made to MSEs for acquiring capital assets (where deductions are allowed under law) must be paid within the prescribed timelines to be eligible for deduction. If delayed, the deduction can be claimed only in the year in which the payment is made.
Benefits of Section 43B(h) Of Income Tax Act for MSMEs
This provision has been enacted to support the MSME sector, and its benefits are substantial:
Smooth Payment Cycle
When payments to MSMEs are made within the timelines prescribed under the MSMED Act, it helps them maintain a healthy cash flow. This reduces their dependency on external credit and avoids working capital shortages, allowing smoother business operations.
Better Bargaining Power
With legal backing under Section 43B(h) and the MSMED Act, MSMEs are empowered to set and enforce clear payment timelines. This enhances their confidence in negotiations and promotes timely payment agreements with buyers.
Reduction in Legal Disputes
Ensuring payments are made on time leads to fewer instances of delayed or defaulted invoices. As a result, MSMEs face fewer legal battles or arbitration over unpaid dues, saving time and costs associated with recovery proceedings.
Benefits of Section 43B(h) of Income Tax Act for Larger Enterprises
The following are the benefits of Section 43B(h) of Income Tax Act for larger enterprises:
Tax Planning
Under Section 43B(h), businesses can claim deductions for payments to MSMEs only if paid within the prescribed timeline. This encourages timely payments and enables better tax planning by aligning expenses with allowable deductions.
Compliance and Transparency
The provision fosters financial discipline by mandating timely payments, which enhances transparency in accounting and promotes adherence to regulatory norms, reducing the risk of penalties or disallowances.
Stronger MSME Ecosystem
Timely payments strengthen MSMEs' financial health, allowing them to operate sustainably. This stability supports long-term supplier relationships and contributes to a resilient and dependable supply chain ecosystem.
Five Important Takeaways on Section 43B(h) of Income Tax Act
The following are 7 important takeaways on Section 43B(h) of Income Tax:
Payment Deadline
To claim a deduction in the same financial year, payments to MSMEs must be made within 15 days if there's no written contract, or within 45 days if there is one, as per Section 43B(h).
Effective from April 1, 2024
This provision is applicable to all eligible transactions carried out on or after April 1, 2024, and is relevant for Assessment Year 2024-25 onwards.
Applicability
Section 43B(h) specifically applies to payments made to manufacturers and service providers registered as MSMEs. It excludes traders, even if they are registered under UDYAM.
Interest Penalty
If payment is delayed beyond the allowed timeline, interest at three times the RBI’s bank rate is levied. Importantly, this interest cannot be claimed as a tax-deductible expense.
GST Treatment
If the GST component of an invoice is claimed as Input Tax Credit (ITC), it's unaffected. However, if ITC is not claimed, the entire invoice amount—including GST—is disallowed for tax deduction under Section 43B(h) until the payment is made.
Conclusion
Section 43B(h) Of Income Tax Act is an important step in addressing the payment woes of the MSME sector. By linking tax deductions to actual payments and enforcing strict payment timelines, the law promotes a financially disciplined ecosystem. Larger enterprises are encouraged to re-structure their payment cycles and maintain better compliance. MSMEs can now expect more timely inflows, improved cash flows, and better prospects for growth and stability. To ensure full compliance and reap benefits, it is advisable to register your MSME through trusted service providers such as Compliance Calendar LLP and confirm all invoices are settled within the specified duration.
To book a consultation with the experts, connect us through email at info@ccoffice.in or Call/Whatsapp at +91 9988424211.
FAQs
Q1. What is Section 43B(h) of the Income Tax Act?
 Ans. Section 43B(h) was introduced by the Finance Act, 2023, and is applicable from April 1, 2024. It mandates that payments to Micro and Small Enterprises (MSEs) for goods or services will be allowed as a deduction only if the payment is made within the time limit specified under Section 15 of the MSMED Act, 2006. If payment is delayed, the expense is allowed as a deduction only in the financial year when the actual payment is made.
Q2. To whom does Section 43B(h) apply?
Ans. Section 43B(h) applies to all business enterprises purchasing goods or services from Micro and Small Enterprises registered under the MSMED Act, 2006. It is not necessary for the buyer to be registered under the MSMED Act. The provision applies if the supplier is an MSME.
Q3. What is the payment deadline under Section 43B(h)?
Ans. If there is no written agreement between the buyer and the MSME supplier, payment must be made within 15 days of acceptance of goods or services. If a written agreement exists, payment should be made within the agreed timeline, but not exceeding 45 days. Payments made beyond this period will not be deductible in the same financial year.
Q4. Does Section 43B(h) apply to traders?
Ans. No, Section 43B(h) does not apply to wholesale and retail traders. As per a government memorandum, traders are allowed Udyam Registration only for availing Priority Sector Lending benefits. They are not considered eligible MSMEs for the purpose of Section 43B(h).
Q5. What is the penalty for delayed payments to MSMEs?
Ans. If payments are not made to MSMEs within the prescribed period, the buyer is liable to pay compound interest at three times the bank rate notified by the Reserve Bank of India. Moreover, this interest is not allowed as a deduction under the Income Tax Act.
Q6. How does GST affect disallowance under Section 43B(h)?
Ans. If GST is claimed as Input Tax Credit (ITC), then only the principal amount (excluding GST) is disallowed. However, if GST is not claimed as ITC and is treated as an expense, then the entire amount including GST will be disallowed under Section 43B(h) until it is paid.
Q7. From which financial year is Section 43B(h) applicable?
Ans. Section 43B(h) is applicable from Financial Year 2023–24 (Assessment Year 2024–25). It applies to payments made on or after April 1, 2024, for purchases made from MSMEs. Any purchases or dues before March 31, 2024, are not covered under this provision.

Section 43B(h) of the Income Tax Act is one of the recent amendments made through the Finance Act, 2023, which came into effect from April 1, 2024. This provision has introduced a significant reform in the payment cycle between businesses and Micro and Small and Medium Enterprises (MSMEs). The key objective behind this new provision is to ensure that timely payments are made to MSMEs and that such payments are claimed as deductions in the financial year only if they are made within the prescribed timeframe.

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

Section 43B(h) mandates that any amount payable by a business to a Micro or Small Enterprise (MSE) for goods or services will be allowed as a deduction under the Income Tax Act only if the payment is made within the time limits specified under Section 15 of the MSMED Act, 2006. If the payment is delayed, the deduction will be allowed only in the financial year in which the actual payment is made. This provision is aimed at ensuring prompt payments to MSEs and reducing the instances of long outstanding dues, which negatively impact the working capital and cash flow of smaller businesses.

Applicability of Section 43B(h) Of Income Tax Act

The applicability of Section 43B(h) arises when a buyer procures goods or services from a seller who is registered as a Micro or Small Enterprise under the MSMED Act, 2006. It is important to note that the buyer does not need to be registered under the MSMED Act for the provision to apply. The only requirement is that the seller should be registered as a Micro or Small Enterprise.

For example, if Mr. A, who is not registered under MSMED, purchases goods from Mr. B, who is registered as an MSME, Section 43B(h) will still be applicable.

Effective Date of Section 43B(h) Of Income Tax Act

This provision came into effect from April 1, 2024. That means it applies to transactions taking place on or after this date. For assessment purposes, it will be applicable from Assessment Year (AY) 2024-25, corresponding to Financial Year (FY) 2023-24. Any purchases or transactions conducted before March 31, 2024, will not come under the purview of Section 43B(h). For instance, if Mr. A made a purchase from an MSME on March 31, 2023, Section 43B(h) will not apply, and regular provisions of income tax law will govern such payment.

MSME Payment Timeline Under Section 43B(h)

As per the MSMED Act, Section 15 outlines the timeline within which payments must be made to MSMEs. If there is no written agreement between the buyer and the seller, payment should be made within 15 days from the date of acceptance or delivery of goods or services. However, if a written agreement exists, the payment period shall not exceed 45 days from the date of acceptance. In case payments are delayed beyond these limits, the expenses related to the payment will be disallowed as a deduction in that financial year and can only be claimed in the year in which the actual payment is made.

Examples to Understand Section 43B(h) Of Income Tax Act

Let us understand how this provision works through a few examples:

If goods are accepted on March 29, 2024, and the credit period agreed is 60 days, the due date as per MSMED Act becomes May 13, 2024. If payment is made on May 25, 2024, the deduction will be allowed in FY 2024-25.
If goods are accepted on April 1, 2024, and the credit period is 45 days, the due date becomes May 16, 2024. If payment is made on May 21, 2024, deduction is allowed in FY 2024-25.
If goods are accepted on January 31, 2024, and the credit period is 15 days, due date becomes February 15, 2024. Payment made on February 20, 2024, will allow deduction in FY 2023-24.

MSME Turnover Limit for Classification

As per the MSMED Act, the classification of MSMEs is as follows:

Micro Enterprises are those with investment in plant and machinery not exceeding INR 1 crore and turnover not exceeding INR 5 crores.
Small Enterprises have investment in plant and machinery not exceeding INR 10 crores and turnover not exceeding INR 50 crores.

Only enterprises falling within this classification and registered under the MSMED Act are eligible for protection and benefit under Section 43B(h).

Non-Applicability of Section 43B(h) on Traders

It is essential to highlight that traders (both wholesale and retail) are not eligible for benefits under Section 43B(h). According to the Office Memorandum dated July 2, 2021, traders can get Udyam Registration only for the purpose of availing Priority Sector Lending benefits. Therefore, if a buyer purchases goods from a trader, Section 43B(h) will not apply.

For example, if Mr. A buys goods from Mr. B, who is a registered trader, Section 43B(h) will not be applicable, even if Mr. B is registered under Udyam.

Penalty and Interest for Delay in MSME Payments

In cases where payment is not made within the stipulated period, interest is applicable on the delayed amount. This interest is compounded and calculated at three times the bank rate notified by the Reserve Bank of India. Importantly, this interest paid on delayed MSME payments is not allowed as an expense under the Income Tax Act. This further discourages late payments and encourages businesses to comply with the provisions of the MSMED Act.

Impact of GST on Disallowed MSME Payments

The treatment of GST under Section 43B(h) depends on whether the GST component has been claimed as Input Tax Credit (ITC).

If GST is claimed as ITC: Only the base amount (excluding GST) is disallowed under Section 43B(h). The GST portion is treated separately and continues to be claimed as ITC.
If GST is not claimed as ITC: The entire amount including GST will be disallowed as an expense under Section 43B(h) until the payment is made.

Application of Section 43B(h) on Capital Expenditure

Section 43B(h) is not restricted to only revenue expenditures. It also applies to capital expenditures where deductions are allowed under specific provisions like Section 35AD or Sections 30 to 36 of the Income Tax Act. This means, even payments made to MSEs for acquiring capital assets (where deductions are allowed under law) must be paid within the prescribed timelines to be eligible for deduction. If delayed, the deduction can be claimed only in the year in which the payment is made.

Benefits of Section 43B(h) Of Income Tax Act for MSMEs

This provision has been enacted to support the MSME sector, and its benefits are substantial:

Smooth Payment Cycle

When payments to MSMEs are made within the timelines prescribed under the MSMED Act, it helps them maintain a healthy cash flow. This reduces their dependency on external credit and avoids working capital shortages, allowing smoother business operations.

Better Bargaining Power

With legal backing under Section 43B(h) and the MSMED Act, MSMEs are empowered to set and enforce clear payment timelines. This enhances their confidence in negotiations and promotes timely payment agreements with buyers.

Reduction in Legal Disputes

Ensuring payments are made on time leads to fewer instances of delayed or defaulted invoices. As a result, MSMEs face fewer legal battles or arbitration over unpaid dues, saving time and costs associated with recovery proceedings.

Benefits of Section 43B(h) of Income Tax Act for Larger Enterprises

The following are the benefits of Section 43B(h) of Income Tax Act for larger enterprises:

Tax Planning

Under Section 43B(h), businesses can claim deductions for payments to MSMEs only if paid within the prescribed timeline. This encourages timely payments and enables better tax planning by aligning expenses with allowable deductions.

Compliance and Transparency

The provision fosters financial discipline by mandating timely payments, which enhances transparency in accounting and promotes adherence to regulatory norms, reducing the risk of penalties or disallowances.

Stronger MSME Ecosystem

Timely payments strengthen MSMEs' financial health, allowing them to operate sustainably. This stability supports long-term supplier relationships and contributes to a resilient and dependable supply chain ecosystem.

Five Important Takeaways on Section 43B(h) of Income Tax Act

The following are 7 important takeaways on Section 43B(h) of Income Tax:

Payment Deadline

To claim a deduction in the same financial year, payments to MSMEs must be made within 15 days if there's no written contract, or within 45 days if there is one, as per Section 43B(h).

Effective from April 1, 2024

This provision is applicable to all eligible transactions carried out on or after April 1, 2024, and is relevant for Assessment Year 2024-25 onwards.

Applicability

Section 43B(h) specifically applies to payments made to manufacturers and service providers registered as MSMEs. It excludes traders, even if they are registered under UDYAM.

Interest Penalty

If payment is delayed beyond the allowed timeline, interest at three times the RBI’s bank rate is levied. Importantly, this interest cannot be claimed as a tax-deductible expense.

GST Treatment

If the GST component of an invoice is claimed as Input Tax Credit (ITC), it's unaffected. However, if ITC is not claimed, the entire invoice amount—including GST—is disallowed for tax deduction under Section 43B(h) until the payment is made.

Conclusion

Section 43B(h) Of Income Tax Act is an important step in addressing the payment woes of the MSME sector. By linking tax deductions to actual payments and enforcing strict payment timelines, the law promotes a financially disciplined ecosystem. Larger enterprises are encouraged to re-structure their payment cycles and maintain better compliance. MSMEs can now expect more timely inflows, improved cash flows, and better prospects for growth and stability. To ensure full compliance and reap benefits, it is advisable to register your MSME through trusted service providers such as Compliance Calendar LLP and confirm all invoices are settled within the specified duration.

To book a consultation with the experts, connect us through email at info@ccoffice.in or Call/Whatsapp at +91 9988424211.

FAQs

Q1. What is Section 43B(h) of the Income Tax Act?

Ans. Section 43B(h) was introduced by the Finance Act, 2023, and is applicable from April 1, 2024. It mandates that payments to Micro and Small Enterprises (MSEs) for goods or services will be allowed as a deduction only if the payment is made within the time limit specified under Section 15 of the MSMED Act, 2006. If payment is delayed, the expense is allowed as a deduction only in the financial year when the actual payment is made.

Q2. To whom does Section 43B(h) apply?

Ans. Section 43B(h) applies to all business enterprises purchasing goods or services from Micro and Small Enterprises registered under the MSMED Act, 2006. It is not necessary for the buyer to be registered under the MSMED Act. The provision applies if the supplier is an MSME.

Q3. What is the payment deadline under Section 43B(h)?

Ans. If there is no written agreement between the buyer and the MSME supplier, payment must be made within 15 days of acceptance of goods or services. If a written agreement exists, payment should be made within the agreed timeline, but not exceeding 45 days. Payments made beyond this period will not be deductible in the same financial year.

Q4. Does Section 43B(h) apply to traders?

Ans. No, Section 43B(h) does not apply to wholesale and retail traders. As per a government memorandum, traders are allowed Udyam Registration only for availing Priority Sector Lending benefits. They are not considered eligible MSMEs for the purpose of Section 43B(h).

Q5. What is the penalty for delayed payments to MSMEs?

Ans. If payments are not made to MSMEs within the prescribed period, the buyer is liable to pay compound interest at three times the bank rate notified by the Reserve Bank of India. Moreover, this interest is not allowed as a deduction under the Income Tax Act.

Q6. How does GST affect disallowance under Section 43B(h)?

Ans. If GST is claimed as Input Tax Credit (ITC), then only the principal amount (excluding GST) is disallowed. However, if GST is not claimed as ITC and is treated as an expense, then the entire amount including GST will be disallowed under Section 43B(h) until it is paid.

Q7. From which financial year is Section 43B(h) applicable?

Ans. Section 43B(h) is applicable from Financial Year 2023–24 (Assessment Year 2024–25). It applies to payments made on or after April 1, 2024, for purchases made from MSMEs. Any purchases or dues before March 31, 2024, are not covered under this provision.