Section 43B(h) of the Income Tax Act took effect from 1 April 2024, applicable from assessment year 2024-25, and it changed the economics of late payment in India. Where a buyer pays a micro or small enterprise beyond the statutory time limit, the deduction for that expense is allowed only in the year the payment is actually made — not the year the service was delivered. For a buyer with a March year end, paying an invoice late moves the deduction into the next financial year and increases this year's taxable profit.
The timelines are short. Fifteen days where there is no written agreement between buyer and supplier. Forty-five days where a written agreement specifies a longer period — and forty-five is the ceiling, so an agreement purporting to allow ninety days does not extend the protection. Interest also accrues on delayed payment under the MSMED Act at three times the RBI's notified bank rate, and that interest is not deductible for the buyer either.
Who is covered matters and is frequently misunderstood. Only micro and small enterprises registered under the MSMED Act qualify. Medium enterprises are outside the provision. Wholesale and retail traders hold Udyam registration only for priority sector lending purposes and are not covered. The buyer does not need to be registered — only the supplier — and while Udyam registration is not compulsory in itself, it is what triggers the protection, so an unregistered small supplier gets none of this.
For a small Indian software or services firm, the practical implication is worth acting on. If you are eligible and not registered on Udyam, registering is free and converts your payment terms from a request into a matter with a tax consequence for your customer. It also changes the conversation with a client's finance team: chasing an overdue invoice becomes a note that their deduction is affected, which reaches a different person than a reminder email does.
The other side of it applies to you as a buyer. Your own vendors — the small design studio, the freelance security tester, the boutique consultancy — may be registered micro or small enterprises, and paying them at ninety days now has a cost to you rather than a benefit. That means your accounts payable process needs to know each vendor's status, which in turn means capturing Udyam registration details at onboarding rather than discovering the position at year end.
For anyone building accounting or procurement software, this is a product requirement rather than a client's tax problem. The system needs a vendor-level MSME status field with the registration reference, a due date computed from the correct fifteen or forty-five day rule depending on whether a written agreement exists, and a visible ageing report of MSME payables approaching their limit. Most Indian accounting products bolted this on late; building it into the payables model properly is a genuine differentiator.
