The Finance Act 2023 inserted Section 43B(h), which specifies that any sum owed to Micro, Small & Enterprises (MSME), for goods supplied or services given, may be deducted in the same year if the actual payment is made within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
Section 43B(h) will not apply to Medium enterprises.
The applicability of clause (h) of Section 43B is from April 1, 2024. This amendment is made applicable from assessment year Assessment Year 2024-25, that is, Financial Year 2023-24.
Section 43B(h) states that any sum payable by the assessee to a Micro & Small Enterprises (MSE) beyond the time limit set in Section 15 of the MSMED Act, 2006, is not eligible for deduction.
Section 43B(h) Applicability
This section is applicable when an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006. The applicability is not only dependent on the registration of supplier under MSMED Act, but also be applied if the enterprise falls within the threshold limits of MSE.
So, registration under MSMED Act is not mandatory to avail the benefits of 43B(h).
Note:- If the enterprise not registered, the eligibility to recover the interest on late payment will lapse.
Types of Micro and Small Enterprises (covered under section 43B(h)
The Government of India has classified an MSME Enterprise in two categories for the purpose of Section 43B(h) i.e., Micro and Small Enterprises. The criteria for the same is listed below:
| Type | Investment* | Turnover** |
| Micro | ≤ 1 Crore | ≤ 5 Crore |
| Small | ≤ 10 Crore | ≤ 50 Crore |
*Investment in Plant & Machinery: WDV Value should be considered and it includes all tangible Assets other than Land and Building & furniture and fittings and hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.
**Turnover: While calculating turnover Export turnover should be excluded.
Note: Both the limits of Investment and Turnover should be fulfilled.
Section 43B (h) Time Limit
Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In the absence of a written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.
Note:- Days Calculation on the provisions made should be from the day of the rendering of services not from the day of the provision made.
Transactions not included in 43B(h)
- Opening outstanding balances
- Capital expenditure
Penalties for Failure to Pay MSMEs Within the Time Frame
In the case of late payment to an MSME, interest is applicable.
Rate of interest: Monthly compound interest, three times of the bank rate notified by the Reserve Bank of India (RBI).
Date from which interest is payable: Date of payment due or the date as per the agreement, as the case may be.
Deduction of this interest is not allowed as an expense, as per the Income-Tax Act, 1961.
Note:- Provision for interest payable should be made at the end of the Financial Year.
Examples of Section 43B(h):-
| S. No. | Date of purchase | Agreement available or not | Appointed date of payment | Actual date of payment | Deduction allowed in which FY |
| 1 | 01/05/2023 | No | 16/05/2023 | 30/05/2023 | FY 2023-24 |
| 2 | 01/05/2023 | Yes | 15/06/2023 | 30/05/2023 | FY 2023-24 |
| 3 | 01/05/2023 | Yes | 15/06/2023 | 30/08/2023 | FY 2023-24 |
| 4 | 19/02/2024 | No | 04/03/2024 | 30/03/2024 | FY 2023-24 |
| 5 | 19/02/2024 | Yes | 04/04/2024 | 01/04/2024 | FY 2023-24 |
| 6 | 19/02/2024 | Yes | 04/04/2024 | 19/04/2024 | FY 2024-25 |
