For business owners in India, the end of the financial year is often a hectic period, with multiple deadlines to manage. Effective from 1st April 2024, Section 43B(h) of the Income Tax Act introduces clear rules on how and when payments to Micro and Small Enterprises (MSEs) must be made.
Non-compliance doesn’t just risk your relationship with suppliers; it can also result in disallowed tax deductions, directly affecting your bottom line.
If the distinctions between the 15-day and 45-day timelines seem confusing, or if you are concerned about which expenses may be disallowed, this guide explains everything you need to know to stay compliant and safeguard your profits.
What is Section 43B(h)?
Introduced under the Finance Act 2023, Section 43B(h) brings stricter accountability for payments made to micro and small enterprises. It makes timely payment a condition for claiming tax deductions – amounts payable for goods or services supplied by a Micro or Small Enterprise can be deducted only if they are paid within the timelines prescribed under Section 15 of the MSMED Act, 2006.
If a payment remains unpaid by the end of the financial year (31st March), that expense cannot be claimed as a deduction for that year. The tax liability for the unpaid amount is added to your current-year income, and the deduction becomes available only in the year the payment is actually made.
The critical timelines (Section 15 of MSMED Act)
To comply with Section 43B(h), you must adhere to these payment deadlines:
- No written agreement: Payment must be made within 15 days of acceptance of goods/services.
- Written agreement exists: Payment must be made by the agreed date, but this period cannot exceed 45 days.
Note: This rule applies specifically to purchases from Micro and Small enterprises. It does not apply to Medium enterprises.
The impact on your business
Failing to comply with Section 43B(h) can have serious financial consequences for your business.
1. Increased tax liability
For example, if you purchase ₹50 lakhs worth of raw materials from a small enterprise in February but fail to pay by 31st March, that amount is added back to your taxable income. This means you end up paying tax on money you intended to spend, directly affecting your bottom line.
2. Compound interest penalties
Apart from the loss of tax deduction, delayed payments also attract penalties under the MSMED Act. Any delay triggers compound interest at three times the RBI’s notified bank rate. Since this interest is not allowed as a tax deduction, the cost of delay can add up quickly and significantly increase the overall financial impact.
3. Liquidity strain
The new timelines require businesses to manage their payables far more closely. Payments can no longer be pushed without consequences, which makes accurate cash flow planning essential. Regularly reviewing liquidity – using tools such as a Business Liquidity Calculator – can help ensure you have sufficient funds to meet obligations on time without affecting day-to-day operations.
Steps to ensure compliance
To avoid disallowances and last-minute issues, it helps to put a few practical controls in place.
- Identify MSME suppliers: Collect the Udyam Registration Certificate from your vendors, so you know who falls under MSME regulations.
- Confirm their classification: Verify whether each supplier is registered as a Micro or Small enterprise, based on turnover limits and investment.
- Review payment terms: Look closely at your agreements. Where no written contract exists, the 15-day payment rule applies by default.
- Monitor invoice-level deadlines: Instead of relying on standard credit periods, track due dates for each invoice to ensure payments are released on time.
How TallyPrime Simplifies Section 43B(h) Compliance
Managing these deadlines manually for hundreds of suppliers is impossible. This is where robust accounting software like TallyPrime becomes your biggest asset. TallyPrime has been designed specifically to handle these MSME compliance requirements effortlessly.
1. Update MSME status in ledgers
TallyPrime lets you record a supplier’s Udyam registration details directly in the party ledger. Once this information is in place, suppliers can be marked as Micro, Small, or Medium, allowing the system to automatically apply the relevant compliance rules.
2. Track "Bills Payable" by MSME status
You no longer need to sift through Excel sheets. TallyPrime provides a dedicated "MSME Form 1" view or filtered Bills Payable reports. This instantly shows you:
- Which bills are due to Micro/Small enterprises?
- Which bills are approaching the 15/45 day limit?
- Which bills are overdue and at risk of disallowance?
3. Ageing analysis for prioritisation
TallyPrime’s powerful ageing analysis helps you prioritise payments. You can generate a report showing bills overdue by days (e.g., 0-15 days, 15-45 days), allowing you to release payments to critical MSME vendors first to save on taxes.
Conclusion
Section 43B(h) is a move towards financial discipline, ensuring that small businesses in India are paid on time. While it may seem like a compliance burden initially, it encourages better cash flow habits that ultimately benefit the entire ecosystem.
Do not wait for the audit season to fix your payables. Leverage the power of TallyPrime to identify your MSME vendors, track due dates in real-time, and ensure that your hard-earned revenue isn't lost to avoidable tax penalties.
