Section 43B(h) of the Income Tax Act introduces a discipline that affects every business that buys from a registered Micro or Small Enterprise. The rule is straightforward in idea and unforgiving in application: any sum payable to a Micro or Small Enterprise that has not been paid within the time limit fixed by Section 15 of the MSMED Act is allowed as a deduction only in the year of actual payment.
Why this matters now
Section 43B(h) sits alongside the existing Section 43B disallowances for taxes, duties, employee contributions and similar items. It is, however, narrower in subject and broader in effect. Buyers who used to pay MSME suppliers on a flexible cycle suddenly have a tax cost attached to the same arrangement.
The tests in plain language
The provision applies if all of the following are true. The supplier is registered as a Micro or Small Enterprise on Udyam, the buyer is a person other than a Micro or Small Enterprise that buys from a Micro or Small supplier, and the buyer fails to pay within the time fixed by Section 15 of the MSMED Act, namely fifteen days where there is no written agreement and forty five days where there is.
What action does the buyer need to take
Three habits make this manageable. First, identify your Micro and Small suppliers using their Udyam Registration. Second, configure your accounting system to flag invoices subject to the forty five day or fifteen day window. Third, run a month end reconciliation that lists invoices approaching the cut off so payment can be released within time.
What about the supplier
The MSME supplier is unaffected by Section 43B(h) directly. It continues to follow accrual accounting and offers the income for tax in the year of accrual.
A practical FY 2026-27 checklist
Refresh your supplier master with current Udyam status before April. Lock in payment terms in writing where flexibility is needed up to forty five days. Flag invoices in your ERP at thirty days and at forty days. Reconcile at year end against accounting and tax computation. Document any disputes that suspend the time limit so the position can be defended in assessment.
Closing note
This is a discipline issue more than a planning one. Businesses that have already tightened their accounts payable cycle generally find Section 43B(h) a non event. Those that haven't will benefit from a one time clean up and a structural change in payment cadence.