Wholesale traders and distributors run on credit. You buy on 30, 60 or 90-day terms and wait for your own customers to pay. But since FY 2023-24, the income tax law penalises late payment to small suppliers: if you pay a micro or small enterprise later than the MSMED Act allows, you cannot deduct that purchase as an expense until the year you actually pay.
This rule was Section 43B(h) of the Income-tax Act, 1961. From 1 April 2026 (tax year 2026-27) the Income-tax Act, 2025 has replaced the 1961 Act, and the same rule continues as Section 37(2)(g). Section 43B(h) still applies to FY 2025-26 and earlier years. Here is what it means for traders and distributors.
The 15-day and 45-day payment rule
The payment deadline comes from Section 15 of the MSMED Act, 2006:
- With a written agreement: pay on the agreed date, but the agreed credit period cannot be more than 45 days from the day you accept the goods or services.
- Without a written agreement: pay within 15 days of acceptance. A verbal "60 days" or the usual trade practice does not count.
If you pay a covered supplier later than this deadline, the expense is allowed only in the year of payment. So a bill that is overdue and still unpaid on 31 March is added back to that year's income. A bill whose deadline falls after 31 March stays deductible in the year of purchase, as long as you pay it within the deadline. Unlike other Section 43B items, paying before the due date of your income tax return does not save the deduction.
Which suppliers are covered
The rule protects only micro and small enterprises registered on Udyam. It does not apply to medium enterprises, to suppliers that are not registered on Udyam, or to wholesale and retail traders. Traders may register on Udyam only for priority-sector lending, and the delayed-payment protection of the MSMED Act does not apply to them, so buying from another distributor or wholesaler does not trigger the rule.
| Supplier | Covered? | What happens to overdue dues |
|---|---|---|
| Micro or small manufacturer or service provider (Udyam) | Yes | Added back to income until paid |
| Medium enterprise | No | No disallowance under this rule |
| Wholesale or retail trader (Udyam) | No | No disallowance under this rule |
| Supplier not registered on Udyam | No | No disallowance under this rule |
Interest on late payment
The tax add-back is not the only cost. Under Section 16 of the MSMED Act, a buyer who pays a micro or small supplier late must pay compound interest, with monthly rests, at three times the bank rate notified by the RBI, from the date the payment was due. Section 23 of the same Act says this interest cannot be deducted for income tax.
Example: a distributor buys goods worth ₹10,00,000 from a micro manufacturer on a written 45-day term, and the bill is still unpaid on 31 March after the 45 days have run out. The ₹10,00,000 is added back to that year's taxable income, and the distributor also owes the supplier interest that it cannot deduct. The ₹10,00,000 becomes deductible in the year it is finally paid.
Classify your suppliers correctly
From 1 April 2025 (notification S.O. 1364(E)), enterprises are classified on both their investment in plant and machinery or equipment and their annual turnover:
| Category | Investment up to | Turnover up to |
|---|---|---|
| Micro | ₹2.5 crore | ₹10 crore |
| Small | ₹25 crore | ₹100 crore |
| Medium | ₹125 crore | ₹500 crore |
When you add a supplier, check its category and its major activity (manufacturing, services or trading) on its Udyam certificate, and ask for an updated copy every year, because a supplier's category can change.
How to track payables so you never miss a deadline
- Put credit terms in writing. Purchase orders or agreements that state the credit period (up to 45 days) give you more time than the 15-day default.
- Tag supplier ledgers. Mark which suppliers are micro or small manufacturers or service providers, so their bills can be tracked separately.
- Watch bill-wise dues. ValueSoft accounting and billing software keeps your payables and receivables with party-wise outstanding reports, so you can see which supplier bills are coming due.
- Pay before the deadline, and review before 31 March. Clear covered bills within 15 or 45 days, and check all open MSME bills before the year closes.
If your credit terms are complicated or a supplier disputes the dues, take your CA's advice. Delayed-payment complaints by MSE suppliers are filed on the government's MSME Samadhaan portal.
Stay ahead of payment deadlines
The MSME payment rule turns late payments to small suppliers into extra income tax. Checking each supplier's Udyam category and paying within 15 or 45 days keeps your deductions safe and avoids interest you cannot claim. Book a free demo on kalasoftech.com to see how ValueSoft helps you keep track of payables.
Frequently asked questions
If I pay after 45 days but before filing my income tax return, do I get the deduction for that year?
No. Other Section 43B items can be paid until the return due date, but this rule is different: a payment made after the MSMED Act deadline is allowed as a deduction only in the year you actually pay.
Does the rule apply to purchases from medium enterprises?
No. It covers only micro and small enterprises. Late payments to medium enterprises do not lead to a disallowance under this rule.
Does it apply to payments to traders registered on Udyam?
No. Wholesale and retail traders may register on Udyam only for priority-sector lending, and the delayed-payment protection of the MSMED Act does not apply to them, so dues to trader suppliers do not trigger the rule.
What is the rule called under the new Income-tax Act?
From tax year 2026-27 it is Section 37(2)(g) of the Income-tax Act, 2025, which replaced the Income-tax Act, 1961 on 1 April 2026. Section 43B(h) still applies to FY 2025-26 and earlier years. The 15 and 45-day limits are unchanged.
Sources
This article is for general information. GST rules change from time to time: check the GST portal or ask your CA before acting on it.
