All you need to know about payment to MSME

Have you ever found yourself in a situation where your actions, meant to benefit someone, inadvertently work against their interests? You might have said, “I did this with all good intentions to help you, I never thought it would backfire like this!” This is precisely what occurred with an amendment to the Income Tax Act in the last budget concerning payments to Micro and Small Enterprises (MSMEs)!

In Finance Act, 2023, which is applicable from financial year starting 1st April 2023 a new clause 43B(h) was introduced making it mandatory to pay any sum due to registered Micro or Small enterprise within the due date specified in MSME Act, 2006 to encourage timely payments.  

What does this mean in simple words?

Suppose, you are buying goods or services from Micro or Small manufacturing or service entity, you must pay the dues within 45 days, if you have an agreement, or 15 days if you have no agreement.  

What happens if you don’t pay the dues within 45 days to Micro or Small enterprises?

The expenses to which the payments are not paid with within 45 days, then such expenditure will be disallowed while computing the taxable income.

What if I have not paid within 45 days but paid before the end of the financial year?

This can be explained through an example – Suppose, M/s ABC Pvt Limited has purchased goods worth Rs.5,00,000 from M/s XYZ, a Micro enterprise on 1st January 2024. The payment for this should have been made before 15th Feb 2024. However, the actual payments are done on 19th March 2024.

Since the payment is done before the end of the financial year, there is no disallowance of expenses, as the expenses can be claimed in the year of actual payment. 

By the way, who are Micro or Small enterprises?

Micro Enterprises: Enterprises with an investment in plant and machinery or equipment not exceeding INR 1 crore and turnover not exceeding INR 5 crore

Small Enterprises: Enterprises with an investment in plant and machinery or equipment not exceeding INR 10 crore and turnover not exceeding INR 50 crore

Note # 1 - The above Section 43B(h) is not applicable to Medium Enterprises.

Note # 2 – The value of investment is the depreciated value; not the original cost.

Suppose your turnover is Rs.6 Crores, but you haven’t registered under MSME Act. In this case, whether the above Section 43B(h) is applicable?

No. Registration under MSME is mandatory to take the benefits of the Act and therefore, the above provision is not applicable to unregistered enterprises.

What if you have purchased goods worth Rs.10,00,000 from a trader registered under MSME Act, say on 15th Feb 2024. Should I also pay the dues to him before 31st March 2024 to avoid disallowance of expenditure?

In this case, you needn’t worry!  Trader / Retailer / Distributor etc., are not covered under the definition of Micro or Small enterprise for the purpose of Section 43B(h) disallowance. So, even if you pay after the due date, your expenditure won’t be disallowed.

Here is another scenario. M/s ABC purchased goods worth Rs.2,00,000 from M/s XYZ on 20th March 2024, with 45 days credit period; which falls on 5th May 2024. Suppose, the payment is done before 5th May 2024, will the expenditure be allowed in Financial Year 2023-24?

Yes. If the payments are done within 45 days from the date of purchase, even if it falls in the subsequent year, such expenditure will not be disallowed u/s 43B(h). In the above case, suppose the payment was done on 7th May 2024, which is beyond 45 days, then the expenditure will be disallowed in FY 2023-24 and allowed in 2024-25

I am a businessman; I will enter into an agreement with the supplier with 60 days credit period. Is it not my prerogative to choose the credit period? If the supplier also has no problem in accepting 60 days, will I be punished with the new disallowance clause?

Exactly. This is what I mentioned at the beginning of the article. Even though the intention of the amendment is good, it is backfiring on the Micro and Small enterprises in terms of getting business. They are denied to have their own terms of payment and if the payment terms exceed 45 days, such expenditure will be allowed only in the year in which the actual payment is done.  

What can you do?

If you run an enterprise, please check the outstanding payable (sundry creditors) list of Micro and Small suppliers; pay their dues before 31st March 2024 and save taxes.  The disallowance of expenses means you are going to pay higher taxes! 

Hope this helps. You can write to This email address is being protected from spambots. You need JavaScript enabled to view it.

Those reading this note may consider it as the final opportunity to rectify the errors or disclose the missing income or information in the Income Tax Return (ITR) for the Financial Year 2022-23 (i.e., financial year ending 31st March 2023). Try to put your house in order if messed up in the past, as the last date to file belated returns for said year is 31st December 2023.

One significant omission by resident individual taxpayers is the disclosure of foreign income and assets.

Note: Should Resident but Not Ordinarily Resident (RNOR), Non-Resident Indians (NRI) or OCI declare their foreign income and assets in Indian Income Tax Return? No. The disclosure is to be done by Resident Taxpayers only.

Where to disclose the income and assets?

The foreign assets are to be disclosed under Schedule FA of the Income Tax Return (ITR) and income is to be offered to tax and pay applicable taxes, after taking DTAA benefits, if any.

The foreign assets include Shares, Debentures, Life Insurance policies, 401K pension funds, balance in bank accounts, immovable properties, etc. Likewise, the foreign income includes dividends, capital gain from the sale of shares, interest, rent, etc.

Now the last but the most crucial part of the story! Why is disclosure so important?

Under Black Money (Undisclosed Foreign Income and Assets),2015, if the residents with assets or income from foreign sources fail to declare and disclose in the Income Tax Return, they can be punished with a penalty of Rs.10 Lakhs! Not just that, such persons can be imprisoned for up to 7 years!

To illustrate the importance of disclosure, let me provide an example I recently handled: –

Mr. Muttanna, employed in an MNC in Bangalore, received USD 20,000 (equivalent of Rs. 14,00,000 considering 70 INR per USD) dividends from his US Stock holdings during the financial year 2019; on dividends, 25% is the tax in the US; post taxes USD 15,000 was credited to his US Bank account.

Being a Resident taxpayer, Mr. Muttanna was obliged to declare that income in India and take the tax paid in the USA as a tax credit. Effectively, he would not have paid any additional taxes in India, had he declared that income in the Indian ITR for 2019.

However, since he had not declared the income, the tax department sent a notice to Mr. Muttanna asking him to pay the taxes.  

As this aspect is covered under the Black Money Act, he has to pay special tax rates – Tax at 30% (Rs.4,20,000) plus a penalty of 3 times the tax amount (Rs.12,60,000) plus Rs.10,00,000 for non-disclosure!

Does this illustration seem like fiction to you? Trust me, this is the current state of many such cases in the tax department.

Conclusion – Please remember this – FOREIGN ASSETS AND INCOME to be declared and disclosed in Income Tax Return by Resident Taxpayers WITHOUT FAIL, to avoid 120% tax on undisclosed income plus Rs.10,00,000 as a penalty.

Your plea that you are an honest salaried taxpayer or ignorant of the black money rules won’t cut the ice among the tax authorities.

For further information on these topics such as exceptions, appeals, etc., please write to This email address is being protected from spambots. You need JavaScript enabled to view it..




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