Key Statutory Takeaways
- Deduction for sums payable to registered Micro and Small Enterprises (Manufacturers & Service Providers) is allowed on accrual basis only if paid within statutory MSMED Act timelines.
- Where no written agreement exists, payment must be completed within 15 days; where a written agreement exists, the credit period cannot exceed 45 days.
- Unpaid year-end balances settled after the statutory timeline are disallowed in that financial year and allowed in the subsequent year of actual payment.
Section 43B(h) of the Income-tax Act, 1961 aligns corporate payment discipline with Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Every enterprise subject to books maintenance or Tax Audit under Section 44AB must maintain verifiable vendor classification records prior to finalizing year-end financial statements.
1. Scope of Covered Suppliers
The provision applies strictly to suppliers holding a valid Udyam Registration as a Micro or Small enterprise engaged in manufacturing goods or rendering services. Medium enterprises and pure retail/wholesale traders (registered solely for priority-sector lending under Office Memorandum dated 02.07.2021) fall outside the disallowance ambit of Section 43B(h).
2. Computing the 15-Day vs 45-Day Statutory Window
- Without Written Agreement: Payment must be discharged within 15 days from the day of acceptance or deemed acceptance of goods/services.
- With Written Agreement: Payment must be made within the agreed credit period, subject to an absolute statutory cap of 45 days.
3. Year-End Audit Readiness Steps
Finance teams should obtain signed Udyam status declarations along with Udyam certificates from all active creditors, tag Micro/Small suppliers in the ERP master, reconcile invoice-wise ageing as on 31st March, and verify subsequent bank clearing dates before finalizing Clause 22 of Form 3CD.
Prepared by the Research Desk — Tipu & Company, Chartered Accountants
Disclaimer: This briefing is intended solely for general informational guidance and should not be construed as a formal tax or legal opinion on specific facts.
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