The Government of India offers various schemes and incentives—like UDYAM registrations—to support micro, small, and medium enterprises (MSMEs). These help MSMEs access credit easily and keep operations running smoothly.
One important benefit under the MSME Act is the 45-day and 15-day payment rule, designed to ensure timely payments from buyers to MSMEs. Recent amendments change how these expenses are treated under the Income Tax Act from 1st April 2024.
In this guide, we'll explain:
- The new payment timelines
- Tax implications under Sections 15, 16, and 2(b) of the MSME Act, 2006
- What suppliers need to know to stay compliant
Overview of 45-Day and 15-Day Payment Cycle
Before knowing about the tax structure of expenses for supplies received from MSMEs, it is good to know about the new payment terms granted to them. Here are the three most important points to know in this matter:
- If the buyer and supplier (MSME) have not mutually agreed upon the payment date, buyers have to pay the MSMEs within 45 days from the date of receiving the goods/services.
- If the buyer and supplier have agreed on a credit period of more than 45 days, the MSME Act of 2006 states that the payment still needs to be made within 45 days of receiving the goods/services.
- If the buyer and supplier have not agreed on any credit period, then the MSME regulation states that the payment has to be made to the suppliers within 15 days of receiving the goods/services.
Changes that come into effect from 1st April 2024
From 1st April 2024 (Assessment Year 2024–2025 onwards):
- Businesses must prepare a list of all MSME vendors and track pending payments as of 31st March 2024.
- Payments delayed beyond permitted timelines may face disallowance as expenses under the Income Tax Act.
This makes it essential to track payable dates carefully to avoid tax complications.
How Tax Deductions Work Under the New Rules
- Situation 1:
Payment made within the permitted period in the same financial year → Expense is deductible in the year of accrual.
- Situation 2:
Payment made after the permitted period and in the next financial year → Deduction allowed only in the year the payment is actually made.
- Situation 3:
Expense accrued in one year, payment made next year but within the permitted credit period → Deduction allowed in the year of accrual.
- Situation 4:
Expense accrued in one year; payment made next year beyond the credit period → Deduction allowed only in the actual year of payment.
Section 43B(h): Disallowance of Overdue Payments
Under Section 43B(h) of the Income Tax Act (newly introduced):
- If payment isn’t made to MSMEs within 15 or 45 days (as applicable), expense cannot be claimed on an accrual basis.
- Deduction will be allowed only in the year the payment is actually made.
Points to Keep in Mind About These Recent Amendments
All the above-mentioned amendments regarding allowance/disallowance of pending payments to MSMEs will come into effect only on 1st April 2024. These changes are applicable for the Assessment Year of 2024-2025. Hence, they do not apply for amounts outstanding to MSMEs as of 31 March 2023.
Discussed below are some of the important points of the new Section 438 (h) of the Income Tax Act of 1961 for MSME payments
- All the above-mentioned changes apply to small and micro enterprises, not medium enterprises.
- When suppliers make delayed payments made before filing of Income Tax returns for that year, then deductions can be claimed only in the year of actual expenses, and not in the year in which they were accrued.
- If the supplier has not informed the MSMEs about his registration to the UDYAM scheme, then he cannot claim for disallowance under Section 438 (h) of the Income Tax Act of 1961.
Bottom Line
From 1st April 2024, delayed payments to MSMEs can impact your tax deductions—even if you’re not registered under the MSME Act. Businesses must review contracts, update vendor records, and monitor payment timelines carefully.
By understanding these amendments and aligning business practices with the MSME Act and Income Tax Act, businesses can reduce risk, stay compliant, and protect profitability.
FAQs
What are the new MSME payment rules from 1st April 2024?
From 1st April 2024, buyers must pay micro and small enterprises (registered under MSME) within the timelines specified under the MSME Act:
- Within 15 days if no credit period is agreed.
- Within 45 days if a credit period (up to 45 days) is agreed.
Payments beyond these timelines may lead to disallowance of the expense under Section 43B(h) of the Income Tax Act.
Which businesses do these new rules apply to?
These changes apply to payments made to micro and small enterprises (as per MSME Act definitions). They do not apply to payments to medium enterprises.
What is Section 43B(h) and why is it important?
Section 43B(h) (introduced in the Income Tax Act) states that if a buyer does not pay MSMEs within the mandated period, the business cannot claim the expense on an accrual basis. Instead, deduction is allowed only in the year when payment is actually made.
Do these rules apply even if the supplier isn’t MSME-registered?
No. The disallowance under Section 43B(h) applies only when the supplier is registered as an MSME (micro or small enterprise) under the UDYAM registration portal.
What should businesses do to stay compliant?
- Identify and list all MSME-registered vendors.
- Track payment timelines carefully.
- Update agreements to ensure credit periods don’t exceed 45 days.
- Maintain proper documentation of vendor registration under MSME.
From which financial year are these changes applicable?
These changes apply from 1st April 2024, impacting Assessment Year 2025–26. They do not apply to outstanding amounts as of 31st March 2023.
What happens if payment is made before filing the ITR but after the credit period?
If payment is delayed beyond the permitted period (15/45 days), deduction can be claimed only in the year the payment is actually made, even if it is paid before filing the ITR.
