The 45-Day MSME Payment Rule Under the New Income-tax Act: Section 37(2)(g) Replaces 43B(h) — What Buyers and Suppliers Must Know

For two financial years the most argued-over provision in Indian business accounting was section 43B(h) of the Income-tax Act, 1961: a buyer who did not pay a micro or small enterprise within the time allowed by the MSMED Act lost the deduction for that expense until the year it was actually paid. From 1 April 2026 the 1961 Act no longer applies, but the rule has not gone anywhere. It is now clause (g) of section 37(2) of the Income-tax Act, 2025, with the same trigger, the same consequence and one important difference from every other item in that section. Buyers who assumed the new Act quietly dropped the rule, and suppliers who stopped quoting it, should both read on.

What section 37 of the 2025 Act says

Section 37 restates the old section 43B: certain sums are deductible only in the tax year in which they are actually paid, whatever the method of accounting and whenever the liability arose. Sub-section (2) lists them: taxes, duties, cesses and fees; employer contributions to provident, superannuation and gratuity funds; bonus and commission to employees; interest to public financial institutions, state corporations, scheduled banks and NBFCs; leave encashment; railway charges; and, at clause (g), 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. For every item except clause (g), a payment made after the year end but before the return due date under section 263(1) still earns the deduction in the year of accrual. Clause (g) is expressly denied that grace. If the MSME was not paid within the section 15 period, the deduction moves to the year of actual payment, full stop.

The time limit comes from the MSMED Act, not the tax Act

Section 15 of the MSMED Act requires a buyer to pay a micro or small supplier on or before the date agreed in writing, which cannot exceed forty-five days from the day of acceptance or deemed acceptance of the goods or services; where there is no written agreement, payment is due within fifteen days. "Appointed day" counting starts from acceptance, so a purchase order that says "ninety days" is read down to forty-five. Medium enterprises are outside section 15 and outside clause (g); the rule protects micro and small suppliers only. Whether a supplier is micro or small depends on its Udyam classification under the investment and turnover limits, and a buyer is entitled to ask for the Udyam certificate, which is why the certificate now travels with every quotation.

How it works across a year end

• Invoice accepted 1 March 2027, written terms of 45 days, paid 10 April 2027: paid within the section 15 period, deductible in tax year 2026-27 even though paid after 31 March.
• Invoice accepted 1 March 2027, no written agreement, paid 10 April 2027: the fifteen-day limit ran out on 16 March; the expense is deductible only in tax year 2027-28, the year of payment.
• Invoice accepted 1 February 2027, written terms of 45 days, paid 31 March 2027: late against section 15 but paid within the same tax year, so deductible in 2026-27; the MSMED Act's compound interest at three times the bank rate is still owed to the supplier.
• Supplier is a medium enterprise or is not registered on Udyam: clause (g) does not apply and the ordinary accrual rule governs.

What the tax audit report will ask

The tax audit report for the year ended 31 March 2026, due on 30 September 2026, is the last under the 1961 Act, and clause 22 of Form 3CD already requires the auditor to report amounts inadmissible under section 43B(h) with the interest under the MSMED Act. The first return under the 2025 Act, for tax year 2026-27, will carry the same disclosure under the new section number. A buyer's accounts team therefore needs, for every trade creditor, the Udyam status, the date of acceptance, the written credit period if any, and the payment date. Companies also file the half-yearly MSME Form 1 with the Registrar for payments outstanding beyond forty-five days, so the same data feeds two filings.

What each side should do

1. Buyers: collect Udyam certificates from suppliers, put the credit period in writing at forty-five days or less, and run a creditor-ageing report against the acceptance date, not the invoice date.
2. Buyers: pay micro and small suppliers before 31 March even if others wait, since the cash cost of paying is usually smaller than the tax cost of the deferred deduction.
3. Suppliers: register on Udyam and quote the registration on every invoice, state the credit period in the purchase order or acceptance, and record the date of acceptance; a supplier who cannot show these cannot use the rule.
4. Suppliers: for chronic late payers, the Micro and Small Enterprises Facilitation Council under section 18 of the MSMED Act remains the route for recovering principal and interest.
5. Both: update contracts and templates that still cite "section 43B(h)" to section 37(2)(g) of the Income-tax Act, 2025 for supplies from 1 April 2026.

Frequently Asked Questions

Sources

Income-tax Act, 2025, section 37 (certain deductions to be allowed only on actual payment) and section 263 (return of income); Income-tax Act, 1961, section 43B(h) as inserted by the Finance Act, 2023; Micro, Small and Medium Enterprises Development Act, 2006, sections 15, 16, 18 and 23; Form 3CD, clause 22. Section numbers are as enacted; confirm against the Act before changing a filing position.

BookMyTM maintains Udyam registrations, prepares MSME Form 1 and tax audit schedules, and helps Kerala businesses on both sides of the rule keep the deduction and collect what they are owed.