When Section 43B(h) of the Income Tax Act was introduced in the Union Budget 2023, the intent was clear — to ensure that Micro, Small, and Medium Enterprises (MSMEs) receive timely payments from buyers. However, two years down the line, the very provision that was expected to empower MSMEs is now being blamed for strangling their financial health and compliance stability.

Under Section 43B(h) of the Income Tax Act, any sum payable by an assessee to an MSME supplier is allowed as a deduction only when actually paid — not merely accrued — if the payment is delayed beyond the time limit prescribed under Section 15 of the MSMED Act (usually 45 days). The idea was to discourage delayed payments by large corporates.

But the ground reality paints a different picture.

Disallowance Disaster for MSMEs

Tax experts and MSME associations have raised alarms that the disallowance mechanism under Section 43B(h) is now working against the smaller players it was meant to protect. For many MSMEs, delayed payments are not due to choice but because of systemic cash flow challenges or dependence on delayed client remittances. The provision, instead of penalizing large corporations for payment delays, has created cascading financial distress among small suppliers.

“Large corporates with disallowances running into ₹20–30 crore conveniently disclose only ₹4–5 crore under Section 43B(h) and escape scrutiny. But MSMEs, which survive on narrow margins, face the brunt of the provision both as vendors and buyers,” said a senior tax consultant.

Dual Impact: Compliance Burden and Business Loss

For MSMEs, the situation is twofold — they lose business opportunities as large entities hesitate to engage with them due to the 43B(h) compliance risk, and they face their own disallowances if they are unable to make payments within the stipulated 45 days. This has resulted in inflated taxable incomes and reduced working capital at a time when liquidity is already a concern.

Many industry bodies argue that the compliance framework fails to consider commercial realities — such as disputes over quality, supply chain delays, or partial deliveries — which are common in MSME transactions.

Call for Policy Recalibration

Experts are now urging the Central Board of Direct Taxes (CBDT) and the Ministry of Finance to review Section 43B(h). Suggestions include:

• Exempting MSMEs from disallowance for transactions within the MSME sector.
• Introducing a turnover-based threshold for applicability.
• Allowing deductions where payments are delayed for valid commercial reasons.
• Providing clarity through detailed FAQs or a circular on interpretation.

“Section 43B(h) has noble intentions but poor execution. Instead of protecting MSMEs, it’s pushing them into compliance traps,” observed a tax analyst.

The Bottom Line

The provision that was envisioned as a lifeline for India’s small businesses has, ironically, turned into a financial and compliance chokehold. Without urgent policy correction, Section 43B(h) could do more harm than good to the sector it set out to protect.

Read More: Income Tax Dept. Launches Crackdown on Non-Compliance in Reporting High Value Transactions