Section 43B(h): A Practitioner's Operating & Reconciliation Guide to the MSME 45-Day Rule

Published: July 12, 2026

By CA Kiren Kumar K, FCA

1. What this guide is (and is not)

Section 43B(h) of the Income-tax Act, 1961 has quietly become one of the sharpest year-end items on a finance team's desk. It links a company's tax deduction to whether it paid its micro and small suppliers on time — and unlike every other item in section 43B, it offers no last-minute cure.

Most explainers stop at "pay MSMEs within 45 days." This guide goes to the part practitioners actually struggle with at year-end: how the clock is computed, who really counts as a covered supplier, how the disallowance is worked out, and how the number ties out to the tax audit report. It closes with a step-by-step reconciliation method you can run by hand or on top of whatever system holds your data.

It is written as statutory education for CFOs, finance teams, and tax auditors — not as a software pitch. How a finance system's architecture fits this reconciliation is addressed in Section 9.

Every statutory statement below is sourced to the bare Act, Rules, or the enacting Gazette.

2. The statutory architecture — three instruments interlocking

Section 43B(h) is short, but it borrows its machinery from two other places. Reading it in isolation is where errors start.

Which law governs which year — a 2026 note. The Income-tax Act, 1961 has been replaced by the Income-tax Act, 2025 (Act No. 30 of 2025), in force from 1 April 2026. The two regimes sit side by side across the current audit cycle:

• PY 2025-26 (FY 2025-26 / AY 2026-27) — the year most teams are auditing and filing now — is governed by the 1961 Act, so the rule set out below is section 43B(h) exactly as drafted.
• From tax year 2026-27 onwards, the same rule lives in the 2025 Act at section 37(2)(g), and the "no cure by paying before the return-filing due date" carve-out is preserved at section 37(3) (which excepts "the sum referred to in clause (g)"). The substance is identical — only the section numbers and the drafting style change (the 2025 Act replaces provisos with direct sub-clauses).

Crucially, both Acts point to the same MSMED Act, 2006: section 15's 45-day limit, the section 2(b) acceptance clock, the section 2(n) "supplier" definition, and the section 16/23 interest treatment are unchanged — the MSMED Act is a separate statute that the income-tax reform does not touch. Everything in this guide about the MSME machinery therefore reads identically under either regime; only the income-tax section citation moves. The mechanics below are written against section 43B(h) because that is the law for the cycle being audited now, with the 2025-Act equivalents flagged where they bear on the worked example (Section 8).

The trigger — Income-tax Act, section 43B(h). Inserted by the Finance Act, 2023 with effect from 1 April 2024 (i.e. Assessment Year 2024-25 / Financial Year 2023-24), clause (h) disallows:

"any sum payable by the assessee to a micro or small enterprise beyond the time-limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006".

Like the rest of section 43B, such a sum is then allowed as a deduction only in the previous year in which it is actually paid.

The "who" — micro and small only. Explanation 4 to section 43B (as substituted by the Finance Act, 2023) fixes the meanings:

"'micro enterprise' shall have the meaning assigned to it in clause (h) of section 2 of the [MSMED Act], 2006" and "'small enterprise' shall have the meaning assigned to it in clause (m) of section 2 of the [MSMED Act], 2006".

There is no clause pulling in medium enterprises. A medium enterprise is outside 43B(h) entirely. This is the first filter of any reconciliation.

The "how long" — MSMED Act, section 15. The time limit that clause (h) refers to is set here:

"the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance."

Two limbs, one hard cap: 15 days where there is no written agreement, the agreed period where there is one, but never more than 45 days — even if the contract says 60 or 90.

Why 43B(h) is harsher than the rest of section 43B. Ordinarily, section 43B's first proviso rescues an accrued liability if it is paid before the income-tax return due date under section 139(1). The Finance Act, 2023 deliberately shut that door for clause (h). It amended the first proviso by inserting, after the words "nothing contained in this section", the words "except the provisions of clause (h)". The proviso now reads (with the inserted words shown):

"Provided that nothing contained in this section except the provisions of clause (h) shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139..."

The consequence is the single most important thing to understand about 43B(h): paying an overdue micro/small supplier before your return-filing due date does not restore the deduction. If the sum was not paid within the section 15 time limit and remains unpaid at year-end, it is disallowed for that year and shifts to the year of actual payment — full stop.

3. The 45-day clock — the mechanics that trip people up

3.1 It runs from acceptance, not the invoice date

The clock starts on the day of acceptance or deemed acceptance, defined in section 2(b) of the MSMED Act:

"'the day of acceptance' means — (a) the day of the actual delivery of goods or the rendering of services; or (b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery... the day on which such objection is removed by the supplier; ... 'the day of deemed acceptance' means, where no objection is made in writing by the buyer... within fifteen days from the day of the delivery..., the day of the actual delivery of goods or the rendering of services".

So the default clock-start is the date of delivery / completion of service, not the invoice date and not the accounting date. Two practical consequences:

• A written objection raised within 15 days of delivery resets the acceptance date to the day the objection is resolved — legitimately extending the clock, but only if the objection was genuine and in writing and within the window.
• If no written objection is raised within 15 days, acceptance is deemed to be the original delivery date. You cannot manufacture delay after the fact.

3.2 The two limbs and the 45-day ceiling

• No written agreement: payment is due before the "appointed day", which section 2(b) defines as the day after 15 days from acceptance — i.e. 15 days.
• Written agreement: the agreed period governs, capped at 45 days from acceptance. A 60-day or 90-day contractual term is legally overridden to 45 for this purpose.

3.3 The point most blogs miss — 43B(h) only bites deductible expenditure

Section 43B disallows sums "otherwise allowable" as a deduction. A payment to a micro/small vendor that is capitalised — for example, plant or equipment purchased and carried to the fixed-asset register — is not claimed as a revenue deduction, so 43B(h) has nothing to disallow on it. The provision reaches your revenue/deductible spend with covered suppliers, not your capital purchases. (Depreciation on such a capitalised asset is governed by its own provisions, not 43B(h).)

4. Who actually counts as the "supplier"

43B(h) covers a micro or small enterprise — but the MSMED Act attaches a registration condition and a scope limit that decide whether a given vendor is really in the net.

4.1 The registration condition

"Supplier" is defined in section 2(n) of the MSMED Act as:

"a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8".

The "memorandum" today is the Udyam Registration (the online self-declaration mechanism notified under the MSMED Act). The practical first step of any 43B(h) reconciliation is therefore to obtain and record the vendor's Udyam Registration Number and confirm its micro/small status — a field existing in your master is not the same as the registration being verified. Classification itself (micro < small < medium) runs on combined investment and turnover criteria notified under section 7 of the MSMED Act; the thresholds were most recently revised with effect from 1 April 2025 (confirm the vintage applicable to the year you are reconciling).

4.2 The trader question — a genuine judgement point

Manufacturers and service providers registered as micro/small are squarely within section 15. Traders (wholesale and retail) are a nuance that most year-end checklists assert without sourcing. The Ministry of MSME's Office Memorandum dated 2 July 2021 brought retail and wholesale trade within Udyam registration — but a companion Ministry clarification restricts that recognition to priority-sector-lending purposes and does not admit traders to the MSMED Act's delayed-payment machinery (sections 15/16 and the Facilitation Councils). The Kerala High Court, in a 2025 decision, has endorsed the general principle that a trader's Udyam recognition is confined to priority-sector lending and does not unlock the other benefits of the MSMED Act — though the exemption actually at issue there was a separate regulatory one, so the point is affirmed as principle rather than as a direct delayed-payment ruling. Treat a trader-supplier's 43B(h) status as a case-specific judgement, not a settled rule.

Net for the reconciliation: filter in micro/small manufacturers and service providers with a verified Udyam number; filter out medium enterprises; and treat trader-suppliers as a flagged judgement item rather than an automatic inclusion.

5. The disallowance mechanic and the reversal

Once a covered supplier's invoice is past its section 15 due date and remains unpaid at the balance-sheet date, the mechanic is:

1. Add-back in the year of default. The unpaid principal is added to the taxable income of the previous year in which the liability was incurred.
2. Allowed in the year of actual payment. The same amount becomes deductible in the previous year in which it is actually paid — not the year it accrued.
3. No pre-return-filing cure (the proviso carve-out). As set out in Section 2, paying before the section 139(1) due date does not help for clause (h). This is the difference from every other 43B item.

A useful boundary: if a covered invoice is accrued and actually paid within the same financial year — even a few days late against section 15 — it is "actually paid" in that year and so remains deductible that year. The tax cost arises when payment slips past the year-end (or the invoice is simply outstanding at year-end beyond its due date).

Sidebar — interest under the MSMED Act (settled law, cited for completeness). Where a buyer fails to pay within section 15, section 16 makes the buyer liable to compound interest with monthly rests at three times the bank rate notified by the RBI, from the appointed day. That interest is not deductible: section 23 provides that interest payable or paid under the MSMED Act "shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction." The interest exposure is separate from — and on top of — the 43B(h) disallowance of the principal.

6. Form 3CD — the tax-audit tie-out

The 43B(h) number does not stay inside the computation; it surfaces in the tax audit report. The CBDT amended Form 3CD in March 2024 to capture it, and the amendment trail is a two-step one that is widely mis-cited:

• CBDT Notification No. 27/2024 (G.S.R. 155(E), dated 5 March 2024) first extended the section 43B reporting clause — Clause 26 — to add clause "(h)" alongside "(f)" and "(g)".
• A corrigendum, CBDT Notification No. 34/2024 (G.S.R. 223(E), dated 19 March 2024), then superseded that step and relocated the 43B(h) reporting into Clause 22 of Form 3CD (the clause that already covered interest inadmissible under section 23 of the MSMED Act), so that Clause 22 now also reports amounts not allowable under section 43B(h).

The net current position for tax audits from AY 2024-25 onwards: the tax auditor reports the amount inadmissible under section 43B(h) in Clause 22 of Form 3CD. The reconciliation you run through this guide is what feeds that figure, and the auditor's reporting responsibility on it is addressed in the ICAI Guidance Note on Tax Audit under Section 44AB (current edition). Confirm the exact live Clause 22 wording against your current Form 3CD utility.

7. The reconciliation — a step-by-step operating method

Run this on the ledger of year-end payables. It is a hand-runnable method: a system can pre-populate the dated inputs, but each step below still resolves to a human check.

Step 1 — Supplier classification (an explicit manual step). For every creditor with a year-end balance: obtain and record the vendor's Udyam Registration Number and confirm its micro/small status — from the vendor's registration certificate or the Udyam portal, not merely a flag someone once typed into the master. Exclude medium enterprises; flag trader-suppliers for judgement (Section 4.2). Anything not confirmed micro/small drops out of the pool. This confirmation is a deliberate manual verification: no upstream system can attest a vendor's live MSME status on your behalf.

Step 2 — Per-invoice clock computation. For each invoice from an in-pool supplier: record the acceptance date (delivery/service-completion date, adjusted only for a valid written objection); set the due date = agreed term if a written agreement exists, else 15 days, capped at 45; compute days outstanding at 31 March.

Step 3 — Year-end cut-off treatment. Bucket each invoice:

• Within limit at year-end (due date on/after 31 March, or paid on time) → allowed; no add-back.
• Beyond limit and unpaid at year-end → disallowed for the year; carried to the year of actual payment. (Payment after year-end but before the return due date does not rescue it.)
• Beyond limit but actually paid within the same financial year → allowed this year (paid in-year), but note it for interest exposure under section 16.

Step 4 — Clause 22 tie-out. Sum the disallowed principal across all in-pool suppliers. That total is the 43B(h) add-back in the computation and the figure reported in Clause 22 of Form 3CD. Reconcile the two so the return and the tax audit report agree. Separately, assess section 16 interest exposure (compound, three times the bank rate) on the late-paid covered invoices — it is non-deductible under section 23 and sits on top of the 43B(h) disallowance.

8. Worked exposure example

Assume a company with year-end 31 March 2026 (FY 2025-26 / AY 2026-27 — the cycle most teams are auditing and filing now, governed by the 1961 Act's section 43B(h)) and the following covered-supplier invoices:

Reading the example:

• Invoice C is the disallowance. It is a covered supplier, past its 15-day limit, unpaid at year-end. Note it was paid on 28 April 2026 — before the return due date — yet the proviso carve-out means no relief: the ₹5,00,000 is added back in FY25-26 and becomes deductible only in FY26-27.
• Invoice B is unpaid at year-end but its 45-day clock runs to 6 April 2026 — still within limit at the balance-sheet date — so there is no disallowance.
• Invoice D shows the 45-day cap overriding a 60-day agreed term; the due date is 19 February, not 6 March. It was paid late but within FY25-26, so it stays deductible this year (watch it for section 16 interest, and it would have disallowed had it crossed the year-end unpaid).
• Invoice E falls away entirely — a medium enterprise is outside 43B(h).

FY25-26 Clause 22 figure = ₹5,00,000 (invoice C only). That is the number that must appear both as the 43B(h) add-back in the computation and in Clause 22 of the tax audit report.

A dual-regime footnote on invoice C. The add-back happens in FY 2025-26, under the 1961 Act's section 43B(h). But invoice C is actually paid on 28 April 2026, so its reversing deduction falls in FY 2026-27 — a year governed by the Income-tax Act, 2025, where the identical rule lives at section 37(2)(g). The same liability is disallowed under one Act and allowed back under its successor, with no change in outcome: the reform renumbers the provision, it does not alter the arithmetic. Straddling entries like this are the practical reason to carry both section citations in your working papers through the FY 2025-26 → FY 2026-27 transition.

9. Where this fits in a finance system's architecture

A reconciliation this date-sensitive is a natural fit for tooling — but it helps to see where each part of the answer lives, because that is what tells you the right shape for a system, not whether to use one at all.

Two different kinds of fact drive the 43B(h) number, and they sit in two different places by design:

• The risk signal lives upstream, in the procurement/asset record. The vendor master (with a verified Udyam number and micro/small flag) and the acceptance/delivery date per invoice are captured where the goods or services are received. From those two inputs a system can compute each covered invoice's section 15 due date and age every unpaid invoice against it, surfacing the ones approaching or past the limit as a running year-end risk list. This is real, useful work, and it is available continuously through the year — not just at March.
• The settlement truth lives in the books. Whether a bill has actually been paid, and on what date, is recorded in the accounting ledger — your books, or the Tally/ERP where cash is posted. That is not a gap in the upstream system; it is the correct system of record for a payment. The final 43B(h) figure is the intersection of the two: covered invoices past their limit (the risk record) that remain unpaid at year-end (the settlement record).

So the architecture that fits 43B(h) is one where the aged, classified risk list from the procurement/asset side is reconciled against actual settlement data from the books — which is precisely why Tally-integrated tooling is the natural shape for this problem: it lets the risk signal and the payment truth meet without re-keying either. A tool that surfaces the risk list is doing most of the work; the number becomes filing-ready when that list is squared against the ledger. This guide's method is written to be run either by hand or on top of whatever system holds your data.

10. Closing note

Section 43B(h) rewards teams that treat the 45-day clock as an operating discipline through the year, not a March scramble — because once an invoice crosses year-end unpaid and past its limit, there is no cure left in the statute.

This guide is published for educational purposes. If your organisation would like a professional engagement to review its MSME payment-compliance position, our engagement approach is described on our advisory page.