Section 43B(h) of the Income Tax Act requires companies to pay Micro and Small Enterprise vendors within 45 days of accepting goods or services (15 days if no written agreement exists). Any amount unpaid at 31 March cannot be deducted in that financial year; the expense shifts to the year of actual payment. The compliance risk sits inside the AP workflow, not the tax return.
Most finance teams heard about Section 43B(h) when it came into effect in April 2024 and handed it to their CA. That was the wrong call. The rule applies to any company in India buying from eligible MSME vendors, creates a direct link between invoice payment timing and tax deductibility, and the data it depends on lives entirely inside the AP function. By the time the tax auditor asks for a schedule of outstanding MSME dues at year-end, it is too late to fix the workflow that created them.
What the rule covers, and what it does not
Section 43B(h) applies when your company purchases goods or services from a vendor registered under the MSMED Act as a Micro or Small enterprise. The buyer’s own registration status is irrelevant. A large manufacturer buying from a Udyam-registered fabricator is fully in scope whether or not the manufacturer holds any MSME registration.
Two points narrow the scope in ways that matter for vendor classification. First, Medium enterprises are excluded; the rule applies only to Micro and Small. Second, traders are excluded. A vendor registered as a trader under Udyam does not qualify, even if the business is small. Only manufacturers and service providers registered as Micro or Small are covered under Section 43B(h) compliance requirements.
The payment timeline has two settings. Where no written agreement exists between buyer and vendor, payment is due within 15 days of accepting the goods or services. Where a written agreement does exist, payment must be made within the period specified in the agreement, subject to a hard cap of 45 days. The absence of a contract defaults you to the stricter 15-day window. This catches most informal vendor relationships by surprise.
Where the exposure lives in an AP workflow
If an eligible MSME invoice is unpaid at 31 March, the expense cannot be deducted in that financial year; it becomes deductible only in the year the payment is actually made. Accrual accounting provides no protection — an unpaid MSME liability at year-end is a deferred deduction, not a current-year expense.
Late payment also triggers interest under Section 16 of the MSMED Act. As typically interpreted, interest accrues at three times the RBI repo rate, compounded. At the current repo rate of 5.25%, that works out to 15.75% per annum on the overdue amount. This interest is not deductible as a business expense, making it a permanent cost, not a timing difference.
The practical exposure rarely comes from one large unpaid invoice. It accumulates across dozens of smaller vendor payments sitting in approval queues, waiting on GRN confirmation, or falling into the next payment run after the statutory deadline has passed. A 20-day internal approval cycle combined with a weekly payment run can breach the 15-day window on every invoice where no written agreement is in place.
MSME payment tracking follows the same logic as month-end close cut-offs. If your team already runs a hard cut-off on GST-related AP items before 31 March, MSME payments need the same treatment, with the added complexity that the statutory deadline is not a calendar date but a rolling count from invoice acceptance.
What AP teams need to change operationally
Four changes address the bulk of the exposure.
Classify the vendor master. The starting point is knowing which vendors are in scope. Collect Udyam Registration Certificates from all vendors and tag Micro and Small manufacturers and service providers in your ERP or AP system. Traders and Medium enterprises are out of scope. This is a one-time exercise with an ongoing maintenance requirement, since vendors can register, upgrade their category, or let registration lapse. The vendor compliance lifecycle needs to capture Udyam status as a required onboarding field, not an afterthought.
Set payment age alerts at day 30, not day 45. An alert at the statutory deadline leaves no buffer for approval delays, bank processing, or payment run timing. A day-30 alert on any open MSME invoice gives the AP team time to act. For vendors with no written agreement, the alert threshold should be day 10. Most AP systems can flag invoices by vendor tag; the classification step above is what makes this possible.
Audit your written agreements. For every tagged MSME vendor, confirm whether a written agreement specifying payment terms exists. Where it does not, the 15-day window applies. Vendors governed only by a purchase order may not have a qualifying agreement. This is worth verifying with your legal team before assuming the 45-day cap applies to your informal supply relationships.
Build the Form 3CD audit trail now. As reported by tax practitioners under revised Clause 22 of Form 3CD, applicable from AY 2025-26, AP teams must provide the tax auditor with a schedule covering: total amounts payable to MSEs during the year; the split between timely payments (within 15 or 45 days) and delayed payments; year-end outstanding dues classified by whether they remain disallowable; and interest accrued under Section 16. Prior-year disallowances paid in the current year are separately reported under Clause 26. This data has to come from the AP system. The CA cannot reconstruct it from the trial balance alone.
The compliance picture for AP has become more complex since GST was introduced. Section 43B(h) adds a layer that intersects directly with GST AP compliance requirements, since vendor registration status, invoice timing, and year-end cut-offs affect both.
AP automation that tags MSME vendors, tracks payment age by invoice, and generates the Clause 22 schedule on demand reduces the manual effort and audit exposure. See how IQInvoice handles MSME payment tracking alongside 3-way matching and ERP posting.
Key observations
- Section 43B(h) applies to purchases from Udyam-registered Micro and Small enterprises only, not Medium enterprises and not traders. The buyer’s own registration status has no bearing on applicability.
- The default payment window where no written agreement exists is 15 days, not 45. Informal vendor relationships with no contract are likely exposed to this tighter deadline.
- Late payment interest runs at 15.75% per annum (3x the current RBI repo rate of 5.25%), compounded, and is not tax-deductible, making it a permanent cost rather than a deferred one.
- Revised Clause 22 of Form 3CD, applicable from AY 2025-26, requires AP teams to disclose a detailed breakdown of MSE payments, outstanding dues at year-end, and interest accrued. The AP system is the only source for this data.
Frequently asked questions
Does Section 43B(h) apply if my company is not registered as an MSME?
What is the difference between the 15-day and 45-day payment windows?
Which vendors are covered — do MSME traders qualify?
What happens if an MSME invoice is unpaid on 31 March?
What does Form 3CD require AP teams to disclose about MSME payments?
Published by IQInvoice IQInvoice is an AI-powered accounts payable automation platform for Indian mid-market finance teams.