A S BANKA ADVISORS

Most founders treat vendor payment timing as a cash-flow decision. For one category of supplier, it is now a tax decision. If your startup pays a registered micro or small enterprise beyond the statutory window, you do not just annoy the vendor. You lose the income-tax deduction for that expense in the year it belongs to, and unlike the rest of the law, there is no way to buy it back by paying before you file.

This is Section 43B(h) of the Income-tax Act 1961, inserted by the Finance Act 2023 and effective from 1 April 2024. As the 30 September 2026 tax-audit deadline approaches, it is the single sharpest exposure sitting in most companies’ Form 3CD. Here is what it actually does, and how it carries into the new Income-tax Act 2025.

The rule, in one line

Any sum payable to a micro or small enterprise beyond the time limit in Section 15 of the MSMED Act 2006 is deductible only in the year you actually pay it. If the dues sit unpaid past the deadline at year-end, the deduction is pushed forward, your FY 2025-26 taxable profit goes up, and you pay tax on cash you have not even released yet.

The 15 and 45 day clock

• With a written agreement: pay by the agreed date, which the law caps at 45 days.
• With no written agreement: pay within 15 days of accepting the goods or services.

This is a statutory clock, not your contractual terms. You cannot agree to 90-day credit and stay safe. Anything beyond 45 days is outside the protection, full stop.

Why this one has no escape hatch

Most items under Section 43B come with a saving grace: pay before your return due date and you keep the deduction. The MSME clause has no such proviso. Breach the MSMED timeline and the deduction moves to the year of actual payment even if you settle the bill the very next day. That asymmetry is exactly why audit teams flag it first.

Who is actually caught

The disallowance bites only on dues to suppliers registered under the MSMED Act (holding Udyam registration) as micro or small. Medium enterprises are outside it. Unregistered vendors are outside it. Traders are generally outside it too. So your first practical step is not legal, it is bookkeeping: segregate your trade payables by each supplier’s Udyam status. A payable to the wrong category does not create exposure, and a payable to the right one does.

What changes under the Income-tax Act 2025

The principle is period-based. Your FY 2025-26 audit and return (year ended 31 March 2026) are computed under the 1961 Act, so you apply Section 43B and 43B(h) exactly as before; the Section 536 saving clause of the 2025 Act preserves that. From Tax Year 2026-27 onward, the same test runs under Section 37 of the Income-tax Act 2025, with the MSME disallowance sitting at Section 37(2)(g). The section number changes. The threshold, the test, and the consequence do not.

What to do before 30 September 2026

1. Pull the creditors ledger as on 31 March 2026 and tag every payable: micro, small, medium, or unregistered.
2. For micro and small, test each balance against the 15 or 45-day clock.
3. Quantify the breaches and move those amounts to the year-of-payment column for the computation.
4. Reconcile the figure to Form 3CD clause 22 and document the basis.
5. Fix your accounts-payable process so FY 2026-27, now under Section 37(2)(g), runs clean from day one.

The lever here is operational, not clever. You cannot plan around the filing date on this one. You plan the payments.

Download the full carousel PDF for the section mapping, the 15/45-day table, and the pre-audit checklist in one place.

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