Delayed payments from large corporate buyers, mid-sized enterprises, and public sector undertakings represent the single biggest cause of sickness among Indian MSMEs. To address this chronic structural issue, the Government of India enacted Section 43B(h) in the Income Tax Act through the Finance Act 2023, creating a powerful economic deterrent against defaulting buyers. From 1 April 2026 (tax year 2026-27 onwards), the same rule continues as Section 37(2)(g) of the Income-tax Act, 2025. The 15/45-day limits under Section 15 of the MSMED Act are unchanged, and Section 43B(h) still applies for FY 2025-26 and earlier years.
In this guide
1. What Does Section 43B(h) Strictly Mandate?
Section 43B(h) stipulates that any sum payable by an assessee (buyer) to a Micro or Small enterprise for goods supplied or services rendered must be settled within the time limit prescribed under Section 15 of the MSMED Act, 2006: • In the absence of a written agreement: Payment must be made within 15 days of delivery / acceptance. • With a written agreement: Payment date can be agreed between parties, but CANNOT EXCEED 45 days. Crucially, any contract clause specifying a credit period exceeding 45 days is void ab initio under the MSMED Act.
- If payment is not released within the mandated timeframe within the financial year, the entire purchase amount is disallowed as an expenditure in the buyer's income tax computation.
- The unpaid amount is added back to the buyer's net taxable profit for that assessment year, attracting corporate/business tax rates plus applicable surcharges.
2. Who Qualifies for Protection under Section 43B(h)?
As clarified by the Central Board of Direct Taxes (CBDT) and the Ministry of MSME:
- Micro Enterprises: Investment in Plant & Machinery ≤ ₹2.5 Crores AND Annual Turnover ≤ ₹10 Crores (limits revised from 1 April 2025).
- Small Enterprises: Investment in Plant & Machinery ≤ ₹25 Crores AND Annual Turnover ≤ ₹100 Crores (limits revised from 1 April 2025).
- Medium Enterprises are EXCLUDED from Section 43B(h) benefits.
- Traders (Wholesale and Retail) registered on Udyam under NIC codes 45, 46, and 47 are also EXCLUDED from Section 43B(h) tax disallowance benefits (their Udyam status is restricted to priority sector lending).
3. Section 16 Penal Interest: 3 Times RBI Bank Rate
Under Section 16 of the MSMED Act, if a buyer defaults on timely payment, they are statutorily liable to pay compound interest with monthly rests to the supplier at three times the Bank Rate notified by the Reserve Bank of India. Furthermore, this penal interest cannot be deducted as an expense by the buyer under Section 23 of the MSMED Act for income tax calculations.
4. How to File a Delayed-Payment Claim on the MSME ODR Portal
If a buyer withholds your payment past 45 days, file a claim on the MSME ODR Portal (odr.msme.gov.in). It replaced MSME Samadhaan for new filings in 2025 and adds an online negotiation and conciliation stage before the case reaches the Facilitation Council:
- Ensure your Udyam Registration date was prior to or on the invoice issuance date.
- Upload copy of the Purchase Order (PO) or supply agreement.
- Upload tax invoices and corresponding Proof of Delivery (POD) / LR receipt / signed delivery challans.
- If the claim is not settled online, it moves to the State Micro and Small Enterprise Facilitation Council (MSEFC), which takes up the reference and conducts conciliation.
- If conciliation fails, the Council initiates formal arbitration awards that hold the legal standing of a Civil Court decree under the Arbitration and Conciliation Act, 1996.
Key takeaways
- Print your Udyam Registration number and the statutory 45-day payment clause conspicuously on all your tax invoices.
- Obtain signed and stamped delivery challans or digital receipt acknowledgements for every single consignment.
- Send an official reminder notice citing Section 43B(h) and Section 16 interest clauses on day 35 of unpaid invoices.
- File your claim promptly. Old dues can face limitation challenges, so take advice if an invoice is more than a couple of years overdue.
Frequently asked questions
If a buyer settles an overdue invoice after March 31 but before filing the tax return, is the deduction allowed?
No. Unlike other clauses under Section 43B (such as employer PF or bonus payments which can be paid before the return filing date), Section 43B(h) (now Section 37(2)(g) of the Income-tax Act, 2025) disallows payments made beyond the prescribed 15/45 days within the financial year. The deduction can only be claimed in the subsequent year when actual payment is made.
Can buyers force MSMEs to sign an agreement extending credit to 60 or 90 days?
No. Section 15 of the MSMED Act expressly states that the agreed period cannot exceed 45 days under any circumstances. A buyer cannot rely on a longer agreed period to delay payment beyond 45 days.
Official sources
General information only, not advice for your specific situation. Scheme rules and bank policies change; check the official source or talk to us before acting on it. Lending and subsidy decisions are made by banks, NBFCs and government agencies.