All you need to know about payment to MSME

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.

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