Section 43B(h) explained for manufacturers buying from Indian MSMEs

Why a US manufacturer should read this at all

If your business is entirely domestic, this does not apply to you and you can stop here. It applies where a US manufacturer has an India entity — an owned plant, a machining operation, an assembly or engineering office — that buys goods or services from Indian suppliers and files an Indian tax return.

A large share of Indian suppliers to manufacturers are registered as micro or small enterprises under the MSMED Act. Castings, forgings, machining subcontract, tooling, packaging, transport, and a great deal of professional services. If your India entity buys from them, the rule reaches your accounts.

It is worth being precise about what this is not. It is not a US obligation, it is not a customs or trade matter, and it does not apply because you import parts from India into the United States. It applies to an Indian taxpayer claiming a deduction on an Indian tax return.

What the provision actually does

Section 43B of India's Income Tax Act is a general rule that certain expenses are deductible only when actually paid, rather than when accrued. Clause (h), added by the Finance Act 2023 with effect from assessment year 2024-25, added payments to micro and small enterprises to that list — with an important carve-out.

The carve-out is that if the payment is made within the time limit specified in Section 15 of the MSMED Act, the normal accrual treatment applies. Pay inside the window and nothing changes. Pay outside it and the deduction moves to the year of actual payment.

So the mechanism is a timing shift, not a penalty and not a disallowance. An expense accrued in one financial year and paid late is deducted in the year it is paid instead. The cash cost of that shift depends on the rate and the gap, and on whether the payment crosses a year end at all.

The two clocks: 45 days and 15 days

Section 15 of the MSMED Act sets the payment window. Where there is a written agreement between buyer and supplier specifying a payment term, the limit is that term, capped at 45 days from the day of acceptance or deemed acceptance. Where there is no written agreement, the limit is 15 days.

That distinction catches manufacturers out more than anything else in the rule. A shop that buys castings on a handshake and pays at 30 days is outside the window, because with no written agreement the limit is 15. The same shop with a signed supply agreement specifying 45-day terms is inside it.

Acceptance is the other subtlety. The clock starts from the day of acceptance of the goods or services, or from the day of deemed acceptance where no objection is raised in writing within 15 days of delivery. For a manufacturer with an incoming inspection process that sometimes rejects a lot, the acceptance date and the delivery date are not the same day, and the difference matters.

Who counts as a micro or small enterprise

The classification comes from investment in plant and machinery and from turnover, and the supplier must be registered — the Udyam registration is the practical evidence. Micro and small are the two categories in scope. Medium enterprises are not covered by this provision, which is a distinction people routinely get wrong.

The registration is also the thing you can actually check. A supplier either has a Udyam registration number with a micro or small classification or they do not, and it is verifiable. A supplier's own assertion in an email is not a substitute, and neither is a line on their letterhead from three years ago — classifications change as businesses grow.

There is also a trading exception worth knowing: the provision is generally understood to apply to suppliers of goods and services rather than to traders registered only as such. If a meaningful share of your spend is with intermediaries rather than manufacturers, that is a question for your Indian tax adviser rather than for a software vendor, and we are not going to pretend otherwise.

A worked example of the exposure

Take an India entity of a US manufacturer with an annual spend of around 6 crore rupees with subcontract machining and casting suppliers, of which roughly 40 percent is with registered micro and small enterprises. That is about 2.4 crore of in-scope spend.

Suppose the entity habitually pays at 60 days against no written agreement. Every one of those payments is outside the 15-day window. At any given year end, the open payable to in-scope suppliers might be around 40 lakh. That 40 lakh of expense is not deductible in the year it accrued; it moves to the following year.

The cost is not 40 lakh. It is the tax on 40 lakh, brought forward by one year, plus whatever the cash consequence of a larger current-year tax payment is for a business that is already funding working capital. It is a real number and it is entirely avoidable by paying inside the window or by putting written terms in place — and the second one costs nothing but a signature.

What this looks like as a process, not a year-end panic

The failure mode is always the same. Nobody knows which suppliers are registered micro or small, nobody knows which invoices are past the window, and the whole thing becomes a scramble in the fortnight before the return is filed, reconstructed from a payables ledger that does not carry the registration status.

Three things fix it, and none of them are complicated. Capture the Udyam registration and classification on the supplier record at onboarding, not at year end. Put written agreements in place with your regular suppliers specifying terms within 45 days, which converts a 15-day clock into a 45-day one across most of your spend. And run a report every month showing in-scope payables against their acceptance dates.

That third item is the one that changes behaviour, because it turns a tax provision into an operational number a finance person can act on while there is still time to pay.

The interest liability nobody budgets for

Section 43B(h) is the tax consequence, and it gets the attention because it lands on a return. There is a second consequence that sits in the MSMED Act itself and is commercially larger for a manufacturer with a lot of small suppliers.

Section 16 of the MSMED Act makes a buyer who pays outside the window liable to pay compound interest to the supplier, at three times the Reserve Bank of India bank rate, compounded monthly, from the day after the window closed. That is not a rate anybody would agree to voluntarily, and it is not waived by a payment term in your own purchase order — a contractual term cannot override the statutory limit.

In practice most small suppliers do not invoice for it, because they would rather keep the business. That does not make the liability go away; it makes it a contingent item sitting quietly in your payables. It surfaces when a relationship ends badly, when a supplier is acquired, or during a due diligence exercise, which are exactly the three moments when a manufacturer least wants an unquantified historical liability.

There is also a disclosure dimension. Companies subject to Indian statutory audit are required to disclose amounts due to micro and small enterprises, including interest, in the notes to their accounts. A finance team that cannot identify in-scope suppliers cannot produce that disclosure accurately, which is a separate and quite visible problem.

Five mistakes manufacturers make with this rule

The first and most common is assuming a standard 30-day or 45-day payment term protects you. Without a written agreement the statutory limit is 15 days regardless of what your purchase order says, and a purchase order term the supplier never signed is generally not the written agreement contemplated here.

The second is treating medium enterprises as in scope. They are not. Applying the rule to every supplier with a Udyam registration overstates the exposure and produces a report nobody trusts, which is how a control quietly gets abandoned.

The third is running the clock from the invoice date. The statute runs it from acceptance or deemed acceptance, which for a manufacturer with incoming inspection can be days later — or, where a lot is rejected and replaced, considerably later. Recording an acceptance date is a small operational change with a direct effect on the numbers.

The fourth is checking registration once and never again. Classification depends on investment and turnover, and a growing supplier moves from micro to small to medium over a few years. An annual refresh of registration status across your active supplier base is enough. The fifth is leaving the whole exercise until the tax return, which converts a manageable monthly report into a fortnight of reconstruction with no time left to pay anybody.

Where a CRM fits, and where it does not

This is a payables and tax matter, and the definitive work belongs to your Indian accounting system and your tax adviser. We do not file returns, we do not compute a tax provision, and nothing in this article is tax advice.

What we hold is the commercial record around it: the supplier, their Udyam registration and classification, the purchase commitment, the acceptance date and the applicable clock on each payable. The MSMED 43B(h) tracker flags which suppliers are in scope and which payables are approaching or past the window, and it is included on every tier — Starter included — because gating a regulatory obligation behind an upgrade would be indefensible.

Enterprise adds an aggregated exposure calculator across entities, which matters if you run more than one Indian entity. The underlying tracker does not change between tiers, and neither does GST invoicing, GSTIN validation, HSN classification or e-Invoice IRN generation.

The short version

If your India entity buys from registered micro and small suppliers, pay them inside 45 days where you have written terms and inside 15 days where you do not, and the provision never touches you. If you pay late, the deduction moves to the year of payment, which is a cash timing cost rather than a lost expense.

The two changes with the best return are putting written agreements in place with your regular suppliers, which converts most of your spend from a 15-day clock to a 45-day one, and capturing registration status at supplier onboarding so the question can be answered in a report rather than reconstructed in March.

And take the actual advice from an Indian chartered accountant who can look at your specific facts. The provision has interpretive edges — trading suppliers, deemed acceptance, disputed invoices — where a general article is not a safe substitute for someone who is accountable for the answer.