From TDS Reforms to the 45-Day Rule: A Complete Guide for MSME Buyers

The latest Tax Deducted at Source (TDS) regulations significantly change how micro, small and medium Enterprises (MSMEs) manage their tax obligations. The central government has introduced modifications to simplify the compliance landscape and improve liquidity for smaller vendors. Alongside these TDS reforms, strict payment timelines now govern how buyers can claim business expenditure deductions on purchases from MSME suppliers. A major focus of the latest budget involves reducing the administrative burden on deductors by rationalising existing tax provisions. The government proposed the omission of specific high-rate TDS sections that previously required extensive verification of the payee’s tax history.

Tax deduction adjustments for registered suppliers

The Finance Act has proposed the omission of Sections 206AB and 206CCA of the Income Tax Act. These sections previously mandated higher TDS rates for payees who had not filed their income tax returns. Deductors no longer need to check the non-filer status of their vendors through the department portal. The central tax authorities also updated the framework for Tax Collection at Source (TCS) to prevent overlapping liabilities. Specific payments now carry lower rates to ensure that working capital does not remain blocked with the tax department. Legislative changes also address the decriminalisation of technical defaults. Minor operational errors in reporting and documentation processes no longer attract criminal prosecution under the revised guidelines. The tax department, as always, focuses on monetary penalties for unintentional omissions instead of pursuing criminal cases.

Current turnover limits for enterprise classification

Understanding which enterprise category a business falls under is essential before applying the payment rules discussed below. The Section 43B(h) payment mandate applies only to micro and small enterprises (MSEs), with medium enterprises falling outside its scope. The updated classification, effective from 1st April, 2025, is as follows:

It is also important for businesses to maintain an updated Udyam registration. It helps them to claim the benefits associated with their enterprise category. The Income Tax Act limits Section 43B(h) benefits to MSEs. Medium enterprises cannot claim the same payment- related tax protections.

The 45-day payment mandate under Section 43B(h)

Section 43B(h) of the Income Tax Act links tax deductions to actual invoice settlement dates, enforcing a disciplined payment culture between buyers and their MSE suppliers. The provision references Section 15 of the MSMED Act to define allowable credit periods. The rules are as follows:

• If no written agreement exists between the buyer and the MSE supplier, payment must be made within 15 calendar days. If a written agreement exists, the payment period cannot exceed 45 calendar days.
• Any payment made beyond these specified calendar days causes a temporary tax disadvantage for the buyer. The tax department disallows the expense in the current financial year even if the firm follows the mercantile system of accounting.
• Delayed payments also attract a mandatory interest penalty under the MSMED Act. The buyer must pay compound interest at three times the bank rate notified by the Reserve Bank of India. The interest obligation is statutory and cannot be waived through private contracts.

Compliance actions for businesses

Businesses must establish strong internal verification procedures to remain compliant with these changes. The following steps apply:

• Verify the MSME status of every vendor through the official Udyam portal and update vendor master data to reflect the specific enterprise category (micro, small or medium) of each supplier.
• Flag invoices from MSEs to monitor the 45-day payment deadline from the date of acceptance of goods or services.
• Collect and archive Section 197 lower deduction certificates from eligible payees where applicable.
• Reconcile purchase ledgers with the Form 26AS statement on a monthly basis.
• Transition from manual bookkeeping to digital accounting systems to maintain accurate records of invoice acceptance dates and payment timelines.

Before You Apply These Rules: A Note on Effective Dates

The Section 43B(h) payment mandate is in effect from Assessment Year 2024-25, covering transactions from Financial Year 2023-24 onwards. The proposed omission of Sections 206AB and 206CCA is subject to the Finance Act receiving Presidential assent. Businesses should verify the current legislative status of each provision before adjusting their compliance procedures.

Conclusion

The latest tax reforms create a more favourable compliance environment for businesses dealing with MSME suppliers. The omission of Sections 206AB and 206CCA reduces the verification burden on deductors, while Section 43B(h) enforces real financial accountability on payment timelines. Businesses that build disciplined internal processes, verifying supplier

status, flagging deadlines and maintaining accurate records, will be better placed to avoid disallowances, interest penalties and audit exposure. Stay on top of your MSME payment deadlines and TDS obligations. TallyPrime gives you the visibility and automation to manage compliance without the manual effort.