What is section 43B(h) (now section 37), and what happens if I pay an MSE supplier late?

The rule

Section 15 of the MSMED Act requires a buyer to pay a micro or small supplier:

• by the agreed date, which cannot exceed 45 days from acceptance of the goods or services; or
• within 15 days where there is no written agreement.

Section 43B(h) of the 1961 Act (now section 37 of the 2025 Act) links the income-tax deduction to this. If the payment is not made within that time, the expense is allowed only in the year it is actually paid.

Unlike other items in section 43B (now section 37), paying before the return due date does not save the deduction for clause (h). If the time limit falls after the year end and you pay within it, the deduction stays in the year of purchase.

Who is covered

Since 1 April 2025, a micro enterprise is one with investment in plant and machinery up to ₹2.5 crore and turnover up to ₹10 crore; a small enterprise, up to ₹25 crore and ₹100 crore.

Presumptive taxpayers under section 58 (formerly 44AD and 44ADA) claim no separate expenses, so the rule does not affect them.

Interest

A late payer also owes the supplier interest at three times the bank rate notified by the RBI, compounded monthly. That interest is not deductible for income tax.

What to do

1. Ask every supplier for their Udyam certificate and record the category and activity in your purchase master.
2. Put the credit period in writing, within 45 days.
3. At the year end, list unpaid MSE dues that are past the time limit; the tax audit report asks for this.
4. Companies must also file MSME-1 with the Registrar every half-year for dues beyond 45 days.