By Vaibhav Rane, Founder, Cresolv One
This is part of our GST & TDS Reconciliation Automation Guide.
Section 43B(h) of the Income Tax Act, inserted by the Finance Act 2023 and effective from FY 2023-24, changed a compliance detail that used to sit quietly in MSME policy into something that directly hits your tax computation. If you pay a micro or small enterprise late, the expense isn't just a strained vendor relationship — it can be disallowed as a deduction until the year you actually pay.
If you buy goods or services from an enterprise registered as micro or small under the MSMED Act (not medium — that distinction matters and gets missed often), the payment has to be made within the time limit under Section 15 of the MSMED Act: 45 days if there's a written agreement specifying a longer period, or 15 days if there isn't one. Miss that window, and the expense is disallowed as a deduction for that year under Section 43B(h) — allowed only in the year the payment is actually made. This is on top of whatever the vendor is already entitled to separately under MSMED Act interest provisions for late payment.
None of this applies unless you correctly know a vendor is classified micro or small under Udyam registration. Medium enterprises are explicitly excluded from this specific provision, which means a vendor's Udyam certificate needs to be checked, not assumed, and re-checked periodically since classification can change as a business grows. Getting this step wrong in either direction creates a problem: treating a medium enterprise as covered adds unnecessary payment pressure, and missing that a vendor is genuinely micro or small means an exposure nobody's tracking.
The 45 (or 15) day window runs from the date of acceptance of goods or services — not from invoice date, not from GRN date, and not from when the invoice happens to get processed. If your AP workflow doesn't capture acceptance date as a distinct field per transaction, you're tracking against the wrong starting point without realizing it, which means the "days outstanding" figure most AP dashboards show is measuring the wrong clock entirely for MSME vendors.
Three patterns show up repeatedly. First, vendor classification is captured once at onboarding and never revisited, so a vendor's Udyam status drifts out of date. Second, the payment clock is tracked at the invoice-processing level using invoice date, not the actual acceptance date, so real exposure hides behind an AP dashboard that looks fine. Third, and most common: nobody is tracking this at all, because "45-day MSME payment" is treated as a payables-hygiene best practice rather than a distinct tax compliance requirement with its own disallowance consequence.
Three things, done consistently: MSME/Udyam status captured and periodically re-verified at vendor onboarding, not assumed from a self-declaration; the acceptance date recorded as its own field, separate from invoice date, so the clock starts from the right moment; and a payment-due view that's specific to MSME-classified vendors, not buried inside general ageing reports where it looks like every other payable.
Cresolv One's Vendor Portal captures MSME and Udyam registration status at onboarding as part of vendor master data setup, and the payment-visibility module tracks where each invoice sits against its due date — giving finance a vendor-classification-aware view instead of a generic ageing report that treats every payable the same way.
Getting this wrong isn't a rounding error — it's a disallowed deduction, and it compounds across every micro or small vendor you're paying late. See our Vendor Portal.