Paying Suppliers: the MSME Payment Rule and What It Costs
Most tax disallowances can be cured by paying before the return is filed. This one cannot. A payment to a micro or small supplier made outside the statutory window is deductible only in the year it is actually paid, and the usual rescue provision is expressly switched off. For a business with a large payables book and a habit of stretching suppliers, it is the most expensive single line in the tax computation.
- The rule, and why the usual relief does not apply
- The revised classification thresholds and who is actually covered
- The half-yearly return and what it now asks for
- How to build accounts payable so this does not happen
A disallowance with no way back
Under the Income-tax Act 1961, section 43B(h), inserted with effect from assessment year 2024-25, any sum payable to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act 2006 is deductible only in the year of actual payment. The first proviso to section 43B, which normally allows a deduction if the amount is paid before the return due date, does not apply to clause (h). That is the whole point of the provision and it is what makes it different from every other item in section 43B.
Under the Income-tax Act 2025 the provision maps to section 37, with the micro and small enterprise limb at section 37(2)(g), and section 37(3) carrying the actual-payment relief but expressly excluding clause (g). Section 37 applies from tax year 2026-27. FY 2025-26, which is assessment year 2026-27, stays under section 43B(h) of the 1961 Act, preserved by the repeal and savings provision in section 536. There is no gap and no overlap.
The window is the one fixed by section 15 of the MSMED Act, and it is not a flat forty-five days. Where there is no written payment agreement, payment falls due within fifteen days of acceptance or deemed acceptance. Where there is one, it falls due on the agreed date, and forty-five days is the ceiling that agreement cannot exceed, so an agreement for thirty days means thirty. Note which way round the default runs: having no written agreement gives you less time, not more.
The scope limits that actually matter
The disallowance covers micro and small enterprises only, not medium. The supplier must be registered. Traders are generally outside the delayed payment protection. None of these is a reason to relax: the practical difficulty is that most buyers do not hold reliable registration data for their own supplier master, which means they cannot tell which invoices are in scope until the year end, which is far too late.
The classification changed on 1 April 2025
Classification thresholds were revised with effect from 1 April 2025 and remain current.
| Category | Investment in plant and machinery or equipment | Turnover |
|---|---|---|
| Micro | Up to ₹2.5 crore | Up to ₹10 crore |
| Small | Up to ₹25 crore | Up to ₹100 crore |
| Medium | Up to ₹125 crore | Up to ₹500 crore |
Both limits must be satisfied. Breaching either moves the enterprise up a category.
The revision cuts both ways. Some suppliers that were small are now still small on much larger numbers, widening the population caught by the disallowance. Others moved to medium and dropped out of it. Either way, a supplier master that has not been reclassified since March 2025 is producing the wrong answer.
Half-yearly, and it asks more than it used to
Specified companies file a half-yearly return of payments to micro and small suppliers under section 405 of the Companies Act 2013, read with an order of 2019. The April to September return is due 31 October and the October to March return is due 30 April.
The order was materially widened in July 2024. The return now requires amounts paid within forty-five days, amounts paid after forty-five days, amounts outstanding for forty-five days or less, amounts outstanding beyond forty-five days, and reasons for delay.
Note that this forty-five days is not the payment deadline above. It is the reporting threshold in the order, and the two are set by different instruments. The filing obligation arises where payments to a micro or small supplier remain pending for more than forty-five days from acceptance or deemed acceptance.
Build payables so the rule cannot bite
1. Get the supplier master right
Registration status and category for every supplier, captured at onboarding and refreshed, not reconstructed at the year end. Reclassify against the April 2025 thresholds if you have not.
2. Put written agreements in place
Fifteen days without an agreement, against the agreed date with one, up to a ceiling of forty-five. This is the cheapest possible intervention and it is frequently not done.
3. Flag in-scope invoices at capture
The payment run should know, at the point of approval, which invoices carry a disallowance risk. Discovering it in the tax computation is discovering it too late.
4. Report ageing against the statutory window, not a commercial one
A standard thirty, sixty, ninety day ageing shows you neither line. You need two: fifteen days for suppliers with no written agreement, and the agreed date for the rest. A single forty-five day column will not do it.
5. Reconcile to the half-yearly return
The return and the tax computation should be built from the same data. Where they are not, one of them is wrong and it is usually discovered by somebody else.
Where to go next
Accounts Outsourcing
Back to the main page: what we run, how a handover works, and how to reach us.
What an Outsourced Finance Function Actually Covers
Where the boundary sits between bookkeeping, controllership and finance leadership, what a handover looks like in practice, and the three failure modes that make outsourced finance go wrong.
Books of Account, the Audit Trail Rule and Where Your Data Must Live
What the Companies Act requires you to keep and for how long, the audit trail obligation and how your auditor reports on it, and the requirement that electronic books be backed up daily on servers physically in India.
The Compliance Calendar: Withholding, Goods and Services Tax, and What Changed
The monthly, quarterly and annual filing rhythm an outsourced finance function actually runs, with the 2025 and 2026 changes that break an older calendar: new section numbers, new form numbers, a rebuilt rate structure, and corrections that now have to be made upstream of the summary return.
Choosing a Reporting Framework: Ind AS, AS, and the New Rules for LLPs and Firms
Which framework applies to your entity and why it is rarely a choice, the road map thresholds, and the change that gives limited liability partnerships and other non-corporate entities a prescribed format for the first time.
Send an enquiry
If you have not reclassified your supplier master since March 2025, that is the single most valuable thing we can do for you this year. It is a contained piece of work with a directly quantifiable answer.
Position as at 16 September 2026. Reviewed every six months.
This page is general information, not professional advice. Indian financial reporting and tax compliance moved substantially between September 2025 and June 2026. The Income-tax Act 2025 replaced the 1961 Act on 1 April 2026 and renumbered every section and every form; the goods and services tax rate structure was rebuilt on 22 September 2025; the small company definition changed on 1 December 2025; and prescribed financial statement formats began to apply to limited liability partnerships and other non-corporate entities. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.