Pay Within 45 Days or Lose the Deduction: The Rule and the Argument Around It

The Legal and Parliamentary Framework

TaxGuru reported on 22 July 2026 a reply to Rajya Sabha Unstarred Question No. 242, answered on 21 July 2026, in which the Finance Ministry explained Section 43B(h) of the Income-tax Act, 1961.

The rule

Section 43B(h), added by the Finance Act, 2023, applies to amounts a business owes to a micro or small enterprise beyond the deadline set by the MSMED Act. The deduction for such an expense "shall be allowed as deduction only on actual payment basis and not when liability to pay such expense has incurred", according to the reply. Section 15 of the MSMED Act, 2006 provides that the payment period cannot exceed 45 days. The tax provision enforces this by deferring the buyer's deduction until the payment is made. The reply noted that the equivalent in the Income-tax Act, 2025 is Section 37(2)(g). The rule covers buyers paying enterprises classified as micro or small under the MSMED Act notification.

“Shall be allowed as deduction only on actual payment basis.”

The stated purpose

The government said the provision was designed after consulting stakeholders, including the MSME Ministry, to improve cash flow and working capital for small firms and cut their cost of arranging funds.

The question the reply did not answer

The reply did not directly respond to the question of whether buyers were cancelling orders with registered MSMEs, shifting to unregistered vendors or pressing suppliers to surrender their Udyam registration. It referred generally to MSME Ministry measures for credit flow and timely payment. We have no independent data on whether such behaviour is widespread; the question was raised in Parliament, which suggests it is being reported to members, but a question is not evidence of a pattern.

Practical meaning for buyers: our guidance

1. Know which suppliers are covered. Ask suppliers for their Udyam registration and classification, and record it. 2. Track due dates. The limit is measured from acceptance of goods or services, and written agreements may allow up to 45 days. Confirm the exact rule with your accountant. 3. Pay on time, or plan the tax cost. If you pay late, the deduction shifts to the year of payment. For a buyer with significant tax liability, this has a real cost. 4. Do not penalise registration. Switching to unregistered vendors can create other risks, such as weaker records, quality problems and compliance exposure. Discuss with an adviser.

Practical meaning for small suppliers: our guidance

1. Keep your Udyam details current and share them. The protection depends on your classification. 2. Put payment terms in writing. State the due date on each invoice and in contracts. 3. Follow up before the deadline. A reminder a week before the due date is normal business practice. 4. Use TReDS if payment is delayed. Our FI1 piece describes how invoice discounting and the guarantee can provide cash while the buyer's payment is awaited. 5. Know the remedy. The MSMED Act provides for interest on delayed payments and a facilitation process; see the Ministry's guidance for the procedure.

Balancing the evidence

The intention is clear and plausible: late payment is a long-standing burden on small suppliers. The concern raised in Parliament is also plausible because any rule that penalises buyers for dealing with registered MSMEs can create an incentive to avoid them. Only data on buyer behaviour can show which effect dominates. We recommend watching for official or academic studies.

For advisers

Document your clients' supplier classification and payment ageing every quarter. A simple report showing amounts overdue to micro and small suppliers, with days outstanding, will prevent surprises at year-end.

A worked example, with invented numbers

Suppose a buyer owes a small supplier Rs 10 lakh for goods accepted on 1 January, and the agreed credit period is 45 days, so payment is due by mid-February. If the buyer pays on 20 March, the expense is deductible only in the year of payment, which may be the next financial year. If the buyer's tax rate is 25%, the delay defers a tax saving of Rs 2.5 lakh. The deferral is not a penalty in the usual sense, but it has a cost to the buyer's cash position, and that cost is what the provision is meant to make visible. The numbers are invented to show the mechanism only.

What a finance team should put in place

Build an ageing report that flags micro and small suppliers separately. Set a payment run that clears these invoices before day 45. Reconcile supplier classifications once a year, since an enterprise can move between categories. Document the process so that auditors can see it.

Looking ahead

Policy debates on this rule will probably continue. The most useful contribution a business can make is accurate data: how many suppliers it pays within 45 days, how many beyond, and why. Such data allow a sensible discussion of whether the rule works. Editorial analysis based on TaxGuru, 22 Jul 2026, reporting a Rajya Sabha reply of 21 Jul 2026. General information, not tax advice.