The 45-Day Squeeze: How Section 43B(h) Quietly Pulls Cash Out of Your Working Capital

Most promoters first met the MSME payment rule as a tax problem: pay small suppliers late and lose the deduction. For many mid-market manufacturers, though, the bigger effect is on cash. Credit that small suppliers used to extend without complaint now has to be paid back into the business, and it rarely shows up in a monthly Tally report until the bank balance feels it.

What the rule actually says

Section 43B(h), introduced by the Finance Act 2023 and applicable from 1 April 2024, ties your tax deduction for purchases from micro and small enterprises to the payment deadlines in Section 15 of the MSMED Act, 2006. From 1 April 2026 the same requirement continues under Section 37 of the new Income-tax Act, 2025; the section number changed, the substance did not.

• Who it covers: suppliers registered as micro or small enterprises under the MSMED Act (Udyam registration). Medium enterprises are not covered. Suppliers registered only as traders are a grey area, and many advisers treat them conservatively.
• The deadline: 15 days from the day you accept the goods or services if there is no written agreement on payment terms, or the agreed period if there is one, but never more than 45 days. A purchase order that says 60 or 90 days does not extend the limit.
• The tax consequence: if an amount is past that deadline and still unpaid on 31 March, you cannot deduct it in that year. You get the deduction in the year you actually pay. Late payments cleared before 31 March are still deductible in the same year.
• The interest: separately, Section 16 of the MSMED Act makes the buyer liable for compound interest at three times the RBI bank rate, compounded monthly, from the day after the deadline. Section 23 makes that interest permanently non-deductible.

Why it is really a cash problem

For years, small suppliers have quietly financed Indian manufacturing. A 60- or 75-day payment cycle to a micro supplier was normal, and it cost the buyer nothing. Paying those suppliers within 45 days, or 15, means the business has to fund that gap itself, from cash or from its CC/OD limit.

The arithmetic is simple enough to do on the back of an envelope:

Cash absorbed = daily purchases × share bought from micro and small suppliers × (current supplier days − the limit)

Take an illustrative manufacturer with ₹60 crore of annual revenue, where raw material is 55% of sales. That is about ₹9 lakh of purchases a day. If 40% of those purchases come from micro and small suppliers and the business currently pays them in 55 days:

• With written 45-day terms, it must find about ₹36 lakh of extra working capital (₹9.04 lakh × 40% × 10 days).
• With no written terms, the limit is 15 days, and the figure rises to about ₹1.45 crore (₹9.04 lakh × 40% × 40 days).

Same business, same suppliers, and a four-fold difference in the cash hit, driven entirely by paperwork. That cash is not lost, but it is no longer available for stock, for festive-season build-up, or as a cushion when a big customer pays late.

If the business cannot fund the gap and some MSME dues are still overdue at 31 March, the tax effect stacks on top. At a 25% tax rate, every ₹50 lakh disallowed means roughly ₹12.5 lakh more tax in that year. It comes back when the dues are paid, but it leaves in the same quarter that cash is tightest.

Where the exposure hides in your books

Tally will tell you what you owe each supplier. It will not, on its own, tell you which of those payables fall under 43B(h), because that depends on details that are often missing:

• MSME status on the supplier ledger. TallyPrime lets you record a supplier's MSME registration details, but in many books those fields are blank or out of date, and the category (micro, small or medium; manufacturer or trader) is not captured.
• Acceptance date, not invoice date. The clock starts when you accept the goods. If goods receipt dates are not recorded, payables ageing by invoice date can make you look compliant when you are not.
• Payment terms. Whether a written agreement exists for each supplier usually lives in purchase orders or email, not in the ledger, and it decides whether your limit is 15 or 45 days.

Five things to do before 31 March

1. Classify every supplier. Check Udyam registration and category for each one, and record it on the party ledger. Medium enterprises fall outside the rule; micro and small do not.
2. Put payment terms in writing. Add explicit terms of up to 45 days to purchase orders or supply agreements. For many businesses this is the single largest cash lever.
3. Age payables from acceptance. Record goods receipt dates and track MSME dues against the actual deadline, not the invoice date.
4. Clear MSME dues first at year-end. Anything past the deadline but paid before 31 March keeps its deduction. Sequence payments accordingly, even if that means asking non-MSME suppliers for a little more time.
5. Talk to your banker early. If the rule absorbs working capital, raise limit headroom well before March, with the numbers in hand, rather than during the year-end rush.

Run it on your own numbers

The 45-Day Squeeze preshock in our Prebuilt Scenario Forecasts calculates this for you. Enter your revenue, material share, supplier days and MSME share, choose whether you have written terms (45 days) or not (15 days), and see how much liquidity the rule absorbs, whether it opens a cash gap, and at what share of purchases it would break you. It runs in your browser, and nothing you type is sent or stored.

Common questions

This article is general information, not tax or legal advice. Check how the rule applies to your business with your chartered accountant.