Pay a micro or small enterprise vendor even one day beyond the legal deadline, and the entire expense can disappear from this year's tax deduction — regardless of what your own contract says the payment terms are. This provision has been law since 2024, but it's still catching businesses by surprise in ways that suggest most companies haven't actually internalised how unforgiving it is.
Section 43B(h) of the erstwhile Income-tax Act, 1961 — now continued as Section 37(2)(g) under the Income-tax Act, 2025 — was introduced through the Finance Act, 2023 to force timely payment to micro and small enterprises. The mechanism is blunt by design: if a payment owed to an MSE supplier isn't made within the statutory deadline and remains unpaid at year-end on 31 March, the entire underlying expense is disallowed as a deduction for that financial year, added back to taxable income, and can only be claimed in the year the payment is actually made.
The Deadline Businesses Consistently Get Wrong
The statutory payment period is 15 days if there's no written agreement, or whatever period is agreed in writing — but capped absolutely at 45 days. That cap is the specific detail that trips up a genuinely large number of businesses: a written agreement specifying 60-day, 75-day, or 90-day credit terms with an MSE vendor is not simply a commercially generous arrangement — under Section 15 of the MSMED Act, 2006, any agreed period beyond 45 days is void for this purpose, and the deadline reverts to the statutory 45-day cap regardless of what both parties signed. A business that negotiates and genuinely believes it has 60 days to pay, and pays on day 58, has not paid late by 60-day standards — it has paid 13 days beyond a deadline the law never actually recognised as extendable.
Why This Isn't Just a Deferred Deduction — There's a Second Cost
The tax disallowance under Section 37(2)(g) is only half of the exposure. Separately, Section 16 of the MSMED Act imposes compound interest on any amount unpaid beyond the statutory deadline, at three times the RBI-notified bank rate — with the current bank rate around 6.75%, that works out to roughly 20.25% per annum, compounding monthly, which is a genuinely severe rate by any commercial lending standard. And Section 23 of the same Act specifically bars that interest from being claimed as a tax deduction at all — meaning the buyer absorbs the full economic cost of a punitive interest rate with zero tax relief attached, making the real cost of a delayed payment considerably higher than either provision looks at in isolation.
The Genuinely Easy Mistake Worth Naming Specifically
This provision applies only to enterprises classified as "micro" or "small" under the MSMED Act — based on investment in plant, machinery or equipment and annual turnover, with medium enterprises and most wholesale or retail traders falling outside its scope for this specific purpose. That distinction matters practically: a business tracking "MSME vendors" as a single undifferentiated category, without separating out which specific suppliers actually qualify as micro or small under the Act's precise thresholds, risks either applying unnecessary payment discipline to vendors the law doesn't actually cover, or — the more costly direction — missing genuine exposure on vendors it assumed were medium-sized or non-MSME without ever formally verifying their Udyam registration category.
What We'd Actually Recommend
Three concrete habits materially reduce this risk. First, verify each vendor's actual Udyam registration category rather than assuming — a supplier that describes itself informally as "MSME" may be medium-sized and outside this provision's scope, or genuinely micro or small and squarely within it, and the difference changes your obligations considerably. Second, treat 45 days as an absolute ceiling in every written agreement with a verified micro or small enterprise vendor, regardless of what commercial terms you'd otherwise prefer to negotiate — a longer written term offers no legal protection and creates a false sense of compliance margin. Third, run a genuine payables review before every 31 March, specifically flagging any MSE-vendor payable that has already crossed its statutory deadline and remains unpaid — because once that date passes with the payment still outstanding, the disallowance is fixed for that year regardless of how quickly you pay afterward.