Understanding Section 43B(h) and New Regulations for MSEs in India

Introduction

The Government of India has enhanced protections for Micro and Small Enterprises (MSEs) through the MSMED Act and recent amendments to the Income Tax Act. The MSME Samadhaan scheme, along with new payment regulations, aims to guarantee timely payments and bolster liquidity for MSEs. Significant changes introduced in the Union Budgets of 2023 and 2025, particularly with the introduction of Section 43B(h), present both opportunities and challenges for these businesses.

Key Amendments Affecting Micro and Small Enterprises

Section 43B(h) of the Income Tax Act (Effective April 1, 2024)

Timely Payments Required: Payments to MSEs must adhere to the timelines outlined in the MSMED Act—15 days without an agreement or up to 45 days with a written agreement.
Tax Deduction Conditions: Tax deductions for delays beyond the stipulated MSMED timeline can only be claimed in the fiscal year when payment is made, rather than when the obligation occurs.
Scope of Applicability: This provision specifically applies to micro and small enterprises, exempting medium enterprises.
Udyam Portal Registration: Suppliers must register on the Udyam portal for buyers to avail of deduction benefits.
Interest Penalties: Delayed payments incur compounded monthly interest at three times the RBI bank rate.

Recent and Upcoming Changes: MSME Classification and Budget 2025

Revised MSME Classification (Effective April 1, 2025)

Enterprise Category	Investment Limit	Turnover Limit
Micro	₹2.5 crore	₹10 crore
Small	₹25 crore	₹100 crore
Medium	₹125 crore	₹500 crore

These updated thresholds allow a greater number of businesses to qualify as MSMEs, thereby enhancing access to various government schemes and incentives.

Budget 2025 Initiatives

Increased Credit Guarantee: Expanded coverage for MSEs, from ₹5 crore to ₹10 crore.
Micro-Enterprise Credit Cards: Introduction of credit cards tailored for micro-enterprises and a new Fund of Funds to support their growth.
Support for Underrepresented Groups: Special schemes designed for women and SC/ST entrepreneurs.

Challenges and Industry Impact

For Medium and Large Enterprises

Increased Administrative Requirements: Companies must verify their suppliers’ MSME status through Udyam registration and adhere to payment timelines.
Risk of Disallowance in Tax Claims: Business expenses paid to MSEs may face disallowance for tax purposes if payments do not meet the prescribed timelines, leading to heightened tax liabilities.
Supplier Selection Dynamics: Large enterprises might prefer non-MSME suppliers to streamline compliance, which could negatively impact MSEs.

For Micro and Small Enterprises

Liquidity Issues: The 45-day payment rule has led to liquidity challenges for some MSEs, particularly in industries with extended working capital cycles such as textiles and chemicals.
Market Share Risks: MSEs risk losing orders as buyers may prefer suppliers offering more flexible payment arrangements.

Legal and Compliance Tips

Verify MSME Status: Always confirm your supplier's Udyam registration to ensure compliance and eligibility for tax deductions.
Maintain Accurate Financial Records: Keep thorough records of all payments to monitor deadlines and avoid potential penalties.
Advocate for Industry-Specific Regulations: Consider lobbying for payment terms tailored to your sector if it experiences longer working capital cycles.

MSME Samadhaan Portal and Dispute Resolution

Businesses can file complaints regarding delayed payments via the MSME Samadhaan portal. Disputes will be addressed by the Micro and Small Enterprises Facilitation Council (MSEFC), with the possibility of arbitration should conciliation efforts be unsuccessful.

FAQs: MSME Payment Rules and Section 43B(h)

Who is covered under Section 43B(h)?
Only micro and small enterprises registered under the MSMED Act and Udyam portal (medium enterprises are excluded).
What is the payment deadline?
Payments are due in 15 days if no written agreement exists, or up to 45 days if a written agreement is in place.
What are the consequences of delayed payment?
Tax deductions can only be claimed in the year when actual payment is made, and interest is calculated at three times the RBI bank rate.
How has MSME classification been altered?
As of April 1, 2025, investment and turnover limits have been revised, allowing more businesses to qualify as MSMEs.
How can I file a complaint for delayed payment?
Complaints for delayed payments can be filed and tracked online through the MSME Samadhaan portal.