The 45-day MSME payment rule just changed its section number — not its bite

Every August, tax-audit files land on a CA's desk with the same quiet trap buried in the ledger: a purchase bill from a small supplier, booked as an expense months ago, still unpaid. This year the trap has a twist most business owners haven't caught up with — the rule that disallows that expense just moved to a new section number, in a brand-new Income-tax Act, while the file being audited right now still runs under the old one.

The rule itself, in one line

If you buy goods or services from a supplier who is a Udyam-registered micro or small enterprise, and you don't pay within the time the MSMED Act, 2006 allows — 15 days if there's no written agreement, up to 45 days if there is one — that purchase cannot be claimed as a deduction in the year you booked it. It becomes deductible only in the year you actually pay it, however late that is. This has been the rule since Section 43B(h) of the Income-tax Act, 1961 was inserted by the Finance Act, 2023, effective from AY 2024-25 — and unlike every other clause of section 43B, there is no grace period for paying by the return-filing due date. Miss the MSMED clock, and the deduction is gone for that year, full stop.

Example: a Surat garment exporter books ₹5,00,000 of embroidery job-work from a Udyam-registered small dyeing-and-embroidery unit in November 2025, with a written 45-day payment term. The bill falls due in mid-January 2026. If the exporter actually pays only in April 2026, that ₹5,00,000 cannot be claimed as an expense for FY 2025-26 at all — even though the work was booked, billed and used in that year's production.

Two Acts, one supplier, right now

Here is the part almost nobody has caught up with yet. The Income-tax Act, 2025 came into force on 1 April 2026 and governs Tax Year 2026-27 onward — but the file being audited this September, for FY 2025-26, is still assessed entirely under the old 1961 Act, preserved by that Act's own saving clause. Section 43B(h) has been carried into the new Act as Section 37(2) — the MSME clause is most commonly numbered 37(2)(g) in the mapping tables circulating right now, though a few carry it as (h); the exact letter is worth confirming against your own software once the dust settles, since it doesn't change how the rule works. Either way, the mechanics are identical: no deduction until actual payment, no return-due-date grace period for this one clause.

Continuing the example above: the exporter's April 2026 payment falls inside Tax Year 2026-27 — after the new Act took effect. So when that ₹5,00,000 finally becomes deductible, it is claimed under Section 37(2) of the new Act, in the Tax Year 2026-27 return, even though the expense itself relates to FY 2025-26 business. Two Acts, one payment, one deduction that crosses from one law into the other.

Who actually counts as a "supplier" here

The rule only bites for suppliers who are Udyam-registered, and only as a micro or small enterprise — medium enterprises are outside it entirely. It also does not reach wholesale or retail traders: although traders have been allowed to register on Udyam since a July 2021 government office memorandum, that registration exists only for priority-sector-lending purposes, not because a trader meets the MSMED Act's definition of a "supplier" engaged in manufacturing or services. Buying cloth from a Ring Road wholesale trader on 90-day credit, however informal, carries no exposure under this rule. Buying dyeing or job-work from a Udyam-registered small processing unit on the same credit does.

Example: the same exporter also buys grey fabric on credit from a Ring Road trading firm and pays after 75 days — no disallowance, because the trading firm is not a "supplier" for this purpose, whatever its Udyam certificate says. The embroidery unit's bill above is a different story entirely.

One more thing worth rechecking this year: the government widened the classification limits from 1 April 2025 — small-enterprise turnover now runs up to ₹100 crore, up from ₹50 crore, and micro up to ₹10 crore, up from ₹5 crore. A supplier who quietly outgrew "small" status under the old limits may have slipped back into it under the new ones. Their Udyam certificate is the only reliable way to check, not last year's assumption.

The 45-day clock, and what breaking it costs

Section 15 of the MSMED Act sets the clock: payment is due within 15 days of accepting the goods or service if there's no written agreement, or on whatever date is agreed in writing — provided that date is not more than 45 days out. Miss it, and Section 16 makes the buyer liable for compound interest, with monthly rests, at three times the Reserve Bank of India's Bank Rate — currently 5.50%, so an effective 16.5% a year, compounding every month regardless of what any contract says. Section 23 then closes the loop: that interest, once it accrues, is itself not deductible either. Late payment to an MSME supplier is one of the few costs in the tax code that turns out expensive twice over.

What your tax auditor now checks

Tax audit isn't just a formality on this point any more. From 1 April 2025, clause 22 of Form 3CD was rewritten: the auditor must now report the full amount payable to micro and small enterprises under section 15 during the year, split between what was paid inside the 15/45-day limit and what wasn't — which is exactly the disallowed figure — alongside any interest inadmissible under section 23. That means the figure isn't something a business can quietly leave off a management representation letter; it has to be reconciled from the purchase ledger and Udyam certificates, invoice by invoice, before the report is signed.

Section 43B(h) never cared how good the reason for paying late was. Section 37(2) — whichever letter it ends up carrying — won't either.

Sources

This article is general information, not professional advice. Rules change; verify current provisions or contact the office for advice on your situation.