Section 43B(h) Income-Tax – Government Clarifies Its Position on MSME Payment Compliance
The Government of India has reaffirmed the purpose and scope of Section 43B(h) of the Income-tax Act while responding to an Unstarred Question in the Rajya Sabha on 21 July 2026. The clarification addresses concerns raised by industry regarding the impact of the provision on Micro and Small Enterprises (MSEs) and their buyers.
What is Section 43B(h)?
Introduced through the Finance Act, 2023 (now reflected as Section 37(2)(g) of the Income-tax Act, 2025), the provision aims to ensure that Micro and Small Enterprises receive timely payments for goods and services supplied.
Under this provision:
- A buyer can claim a tax deduction for purchases from a Micro or Small Enterprise (MSE) only if payment is made within the timeline prescribed under Section 15 of the MSMED Act, 2006.
- If payment is delayed beyond the prescribed period, the expenditure is allowed as a tax deduction only in the year in which the actual payment is made.
- The maximum payment period under the MSMED Act is 45 days, even if both parties mutually agree to a longer credit period.
The objective is to improve the cash flow of small businesses and discourage delayed payments.
Rajya Sabha Member Shri Rajeev Kumar sought clarification on several issues:
- Whether Section 43B(h) effectively disallows tax deductions until buyers make actual payments to MSEs.
- Whether large and medium enterprises have begun cancelling orders placed with registered MSMEs due to the provision.
- Whether buyers are shifting to unregistered vendors or encouraging suppliers to surrender their Udyam registration.
- Whether the provision applies only to Udyam-registered suppliers and whether the Government plans any corrective measures.
Government’s Response
1. Tax deduction linked to actual payment
The Government confirmed that Section 43B(h) links the tax deduction to actual payment if dues remain unpaid beyond the payment period specified under the MSMED Act.
This means businesses cannot claim the expenditure merely on an accrual basis when payment to a Micro or Small Enterprise is delayed beyond the statutory limit.
2. No acknowledgement of order cancellations or vendor shifting
In response to concerns that buyers are cancelling orders from registered MSMEs, moving to unregistered suppliers, or pressuring vendors to surrender their Udyam registration, the Government did not confirm the existence of such practices.
Instead, it reiterated that the Ministry of MSME has undertaken several measures to strengthen credit flow and ensure timely payments to Micro and Small Enterprises.
3. Applicability of the provision
The Government clarified that Section 43B(h) applies only to amounts payable to Micro and Small Enterprises as classified under the MSMED Act.
The provision does not extend to Medium Enterprises.
Therefore, its applicability depends on the supplier’s classification as a Micro Enterprise or Small Enterprise under the MSMED framework.
4. Purpose behind the provision
According to the Ministry of Finance, the provision was introduced after detailed and wide consultations with stakeholders, including the Ministry of Micro, Small and Medium Enterprises.
The stated objective is to:
- Improve cash flow for Micro and Small Enterprises.
- Reduce working capital stress.
- Minimize the need for costly external borrowing.
- Encourage prompt payment discipline among buyers.
Key Takeaways
- Section 43B(h) remains unchanged and continues to be an important compliance requirement for buyers dealing with Micro and Small Enterprises.
- Delayed payments beyond the MSMED Act timelines result in deferred tax deductions, although the deduction becomes available once payment is actually made.
- The Government has not acknowledged that the provision has caused widespread order cancellations or migration to unregistered suppliers.
- The provision applies only to Micro and Small Enterprises, not Medium Enterprises.
- The Government continues to emphasize that the law is intended to protect the liquidity and financial health of India’s smallest businesses.
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