Section 43B(h) two years on: the MSME-payment rule is finally being audited properly

Section 43B(h) was supposed to be the elegant fix. The rule: if you buy from a registered MSME and you do not pay them inside the statutory window — 15 days where there is no written agreement, or up to 45 days where there is — the unpaid amount is disallowed as a deduction in the year of accrual. Pay late, lose the deduction. Simple.

Two audit seasons in, the rule is doing its job. The audit work to get there, though, is heavier than anyone expected, and the picture this year shows the same three mistakes again and again.

Mistake one: treating “registered MSME” as an honour system

The disallowance only bites where the supplier is registered as a Micro or Small enterprise. (Medium enterprises do not trigger 43B(h).) Most buyers, for the first year, relied on either a self-declaration from the vendor or a Udyam Registration number printed somewhere on the invoice.

That is not enough now. Auditors are asking for:

• A current-year Udyam certificate — not the one from two years ago, the one that confirms the classification is still Micro or Small.
• A reconciliation of the vendor master against the Udyam portal at the start of every quarter. Registrations get cancelled; reclassifications happen.
• A documented process for what happens when a vendor changes status mid-year.

I have seen one client this season disallow ₹38 lakh of payments that turned out to be to vendors whose Udyam registration had lapsed and never been renewed. They paid late, assumed 43B(h) did not apply, and were technically right. They just could not prove it on the date of the audit. The disallowance was reversed, but only after a week of evidence-gathering that should have happened during the year.

Mistake two: the “no written agreement” default

The rule has two windows. Where there is a written agreement between buyer and supplier, the maximum window is 45 days. Where there is not, the window collapses to 15.

For a manufacturing buyer with 400 vendors, “is there a written agreement” is not a yes-or-no question. There is usually a purchase order, sometimes a master supply agreement, sometimes only an email confirming terms. The MSME Development Act’s definition of “agreement” is broader than most procurement teams realise — a recurring PO can qualify, even without a separate master.

The audit-friendly position is to document the agreement basis vendor by vendor, at the time of onboarding, and store the supporting document with the vendor master. The audit-hostile position is what most companies still do: argue it case by case after the year has closed.

Mistake three: paying inside the window but accounting outside it

This is the one that genuinely surprised me this year. A buyer pays the supplier inside the 45-day window. But the payment is accounted — cleared, posted, GL-stamped — only after the year-end cut-off. The auditor's tax disallowance run is keyed off the accounting date, not the bank-debit date.

Strictly speaking, 43B(h) talks about the date of actual payment, which is the bank-debit date, not the date of accounting entry. But if your books say March 28 was the bank date and the bank statement says April 3, you will spend audit-week proving it.

Practical tip: reconcile your supplier payment run against the bank statement weekly, not at year-end. The cost is a junior accountant for 30 minutes. The benefit is not having to defend a ₹15 lakh disallowance on a clearly-paid invoice.

The vendor side is also waking up

43B(h) has done something the original drafters perhaps intended and perhaps did not: it has given MSME vendors a real lever. Two years ago an MSME vendor calling a finance team to ask for a payment status was an annoyance. Today, the same call comes with the implicit reminder that the buyer’s deduction is at stake. The payment terms conversation has flipped.

I have spoken to three MSME owners this year who have used the rule to negotiate not just for faster payment, but for cleaner credit-period terms going forward. That is the rule working exactly as intended.

What to fix before the next audit

1. Run a vendor-master sweep against the Udyam portal. Today, not in October.
2. Document the “written agreement” status for every active MSME vendor.
3. Reconcile bank-debit dates against accounting dates on supplier payments at the end of every month.
4. Brief procurement on the rule. Most procurement teams I have met have never actually read 43B(h).

None of this is hard. It only feels hard the first time, in audit week, with a partner asking why a ₹2 crore payment is sitting in the disallowance schedule.