MSME 45-Day Payment Rule (Section 43B(h)): Rules, Extension Status & Tax Disallowance
Priya Sharma
· Corporate Legal & Compliance Counsel· 7 min read
The Finance Act introduced Section 43B(h) to the Income Tax Act with a single clear goal: compel medium and large enterprises to pay Micro and Small Enterprises on time. For Indian SMB suppliers, it is the strongest statutory lever in years to eliminate 90-day and 120-day payment cycles.
The core rule: 15 days without agreement, 45 days with agreement
Under Section 15 of the MSMED Act, 2006, payment must be made to a registered micro or small enterprise within 15 days from the date of acceptance of goods or services, unless there is a written agreement specifying a different timeline.
Even with a written contract, the credit period cannot exceed 45 days under any circumstances. Any contractual clause stipulating 60, 90, or 120 days is void under Indian law. Section 43B(h) of the Income Tax Act ties this directly to tax deductibility.
Was the MSME 45-day payment rule date extended?
A frequent question among Indian businesses is whether the government or CBDT postponed or extended the MSME 45-day rule. The answer is NO. Despite representations from various trader associations, the Finance Ministry and Supreme Court declined to defer Section 43B(h).
The rule remains in full statutory force for FY 2024-25, FY 2025-26, and subsequent assessment years. If payment to an eligible micro or small vendor is not cleared within 45 days (or 15 days without written agreement) by the end of the financial year, the deduction is disallowed.
Who is covered under Section 43B(h)? (Micro & Small vs Medium & Traders)
Section 43B(h) strictly protects Micro Enterprises (turnover up to ₹5 Crore and investment up to ₹1 Crore) and Small Enterprises (turnover up to ₹50 Crore and investment up to ₹10 Crore) holding a valid Udyam Registration Certificate.
Medium enterprises (turnover up to ₹250 Crore) are NOT covered under Section 43B(h). Additionally, wholesale and retail traders registered under Udyam (NIC codes 45, 46, and 47) are eligible for priority sector lending but are EXEMPT from Section 43B(h) payment disallowance.
The severe tax penalty and non-deductible penal interest
If a buyer fails to pay within statutory timelines, the unpaid purchase invoice is added back to taxable income, attracting 25% or 30% corporate income tax. Unlike other clauses of Section 43B, paying before the ITR filing date does not save the deduction if payment was overdue past March 31.
Furthermore, Section 16 of the MSMED Act mandates penal interest at 3 times the RBI bank rate, compounded monthly. Crucially, Section 23 of the MSMED Act prohibits claiming this penal interest as a business deduction.
Automating MSME compliance with Dyopact
Dyopact stamps your 19-digit Udyam Registration Number on every GST invoice, calculates statutory 15-day and 45-day deadlines, and sends automated WhatsApp payment reminders before dues cross the threshold. You can also calculate exact penal interest and tax disallowances using our free interactive Section 43B(h) MSME Calculator.
Frequently Asked Questions
Is the MSME 45-day payment rule date extended?
No. The Ministry of Finance and CBDT confirmed that Section 43B(h) is not extended. It remains fully applicable for FY 2024-25 and subsequent assessment years.
Does Section 43B(h) apply if there is no written agreement?
If there is no written contract or agreement specifying payment terms, payment must be completed within 15 days from the delivery of goods or completion of services under Section 15 of the MSMED Act.
Are wholesale and retail traders covered under the MSME 45-day rule?
No. Office Memorandum No. 5/2(2)/2021-E/P & G/Policy clarified that wholesale and retail traders registered under Udyam are excluded from Chapter V (delayed payments) of the MSMED Act and Section 43B(h).
What is the penal interest rate for delayed MSME payment?
Section 16 of the MSMED Act mandates compound interest with monthly rests at 3 times the RBI Bank Rate (currently 20.25% p.a. when RBI rate is 6.75%). This interest cannot be claimed as a tax deduction.
Priya Sharma
Corporate Legal & Compliance CounselSpecializing in commercial contract litigation, Section 138 NI Act recovery, commercial property leases, and MSMED Act compliance.