For years, late payment to small suppliers was treated as an unfortunate fact of doing business. That assumption no longer holds. Two provisions — Section 43B(h) of the income-tax law and Form MSME-1 under company law — have converted a delayed payment into a direct cost and a compliance exposure for the buyer. This is one of the most consequential shifts for the SME ecosystem, and it cuts both ways.
The income-tax side: Section 43B(h)
Any amount you owe to a registered micro or small enterprise for goods or services is allowed as a deduction in the year of the expense only if you pay within the time limit set by the MSMED Act, 2006 — generally 45 days (or the period agreed in writing, capped at 45 days). Miss the window, and the deduction is deferred to the year you actually pay. In plain terms: pay your small suppliers late, and the unpaid amount is added back to your taxable income for that year.
The reporting around it has tightened too. Amendments to Form 3CD now require tax auditors to report interest disallowance under the MSMED Act and the total dues payable to micro and small enterprises. The number is no longer invisible — it is on the audit record.
The company-law side: Form MSME-1
Separately, companies must file Form MSME-1 disclosing amounts due to MSMEs that remain outstanding beyond 45 days. What was once treated as a routine, low-stakes filing is being enforced seriously: Registrars of Companies have begun passing adjudication orders, and delays of even a few months are attracting real monetary penalties. The "we will file it eventually" approach is now expensive.
If you are the buyer
- Identify which of your vendors are registered micro or small enterprises — the rule turns on their registration status, not on how small they look.
- Treat the 45-day clock as a payment deadline, not a guideline; build it into your accounts-payable workflow.
- Reconcile your MSME payables before year-end — an unpaid balance on 31 March can inflate your taxable income.
- File MSME-1 on time, every cycle, even when the numbers feel trivial.
If you are the supplier
The flip side is genuine leverage. If you are a registered micro or small enterprise, your buyers now have a tax and compliance incentive to pay you on time. Make sure your MSME registration (Udyam) is current and that it is stated clearly on your invoices and master data with your customers. A supplier who is visibly registered is a supplier who gets paid first.
The 45-day rule did something subtle but powerful: it made paying small suppliers on time the cheaper option for the buyer. Cash discipline is now also tax discipline.
Our take
This is one of the rare reforms that helps the smallest players in the chain without a subsidy — it simply re-prices delay. For our buyer-side clients, the advice is unglamorous but important: clean up your vendor master, tag your MSME suppliers, and run a payables review before March. For our supplier-side clients, get the registration in order and put it on the invoice. The businesses that adapt early will spend far less on penalties and disallowances than the ones that wait for a notice to explain the rule to them.
This article reflects the views of the Pixelex LLP Consultancy Desk on developments that were current at the time of writing. Tax and corporate law change frequently, and the application of any rule depends on the facts of your case. Nothing here is legal or financial advice — please speak to a qualified Chartered Accountant or Advocate before acting. Pixelex Consultants LLP, New Delhi.