In this guide · 9 sections
- Section 15 of the MSMED Act: a buyer must pay a micro or small supplier by the date agreed in writing — never more than 45 days from acceptance — or, with no agreement, within 15 days. Late payment carries compound interest at three times the RBI bank rate (section 16), and that interest is never deductible for income tax (section 23).
- Schedule III (Division I) asks for three things: the micro and small split of trade payables, the five MSMED disclosures (principal and interest unpaid, interest paid, interest due, interest accrued, further interest), and the ageing schedule with MSME and disputed MSME rows.
- Section 43B(h) of the Income-tax Act, 1961 (from AY 2024-25): a sum payable to a micro or small enterprise beyond the section 15 time limit is deductible only in the year it is actually paid. The "pay before the return due date" proviso does not apply.
- Medium enterprises are outside both the face split and section 43B(h). Retail and wholesale traders on Udyam were brought in for priority sector lending only; the delayed payment provisions do not extend to them.
- The evidence is the supplier's Udyam certificate and the payment terms — not a "Yes" in the vendor master. Disclosures based on "information available with the company" still need that information on file.
Try SignReady: A Payables step for MSME status, 45-day dues and section 43B(h) on every file.
Start freeMSME dues used to be a one-line note: "Based on information available with the Company, there are no dues to micro and small enterprises." Since section 43B(h) arrived, that line also drives a tax disallowance and a clause in the tax audit report — and a wrong answer now costs the client money. In small-company files the MSME note is often copied from last year, the split on the face is left at nil, and nobody has looked at a single Udyam certificate. Here is what the MSMED Act, Schedule III and the Income-tax Act actually require, where the traps are, and a checklist for the payables file.
What the MSMED Act requires of the buyer
Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006 deals with delayed payments. Four sections matter to the auditor:
| Section | What it says (in short) |
|---|---|
| 15 — time to pay | The buyer must pay on or before the date agreed in writing with the supplier or, where there is no agreement, before the "appointed day" — the day following the expiry of 15 days from acceptance or deemed acceptance. An agreed period can never exceed 45 days from the day of acceptance or deemed acceptance. |
| 16 — interest | If the buyer does not pay as section 15 requires, it owes compound interest with monthly rests at three times the bank rate notified by the RBI, from the appointed day or the day after the agreed date — whatever the contract says. |
| 22 — disclosure | A buyer whose accounts must be audited under any law discloses in its annual accounts the unpaid principal and interest, interest paid and late payments made, interest due for delay, interest accrued and unpaid, and further interest remaining due. |
| 23 — tax | Interest payable or paid under the Act is not deductible in computing income under the Income-tax Act, 1961. |
Two definitions decide the scope. A "supplier" (section 2(n)) is a micro or small enterprise that has filed its memorandum — today, the Udyam registration — so a medium enterprise is not a supplier for these sections. And the day of acceptance is the day of delivery or of rendering the service; if the buyer objects in writing within 15 days, it is the day the supplier removes the objection. With no written objection within 15 days, the day of delivery is the day of deemed acceptance.
Section 22 is not limited to companies. A partnership firm or proprietor whose accounts are audited under any law — a tax audit included — is also a buyer that has to give this information.
What Schedule III Division I asks for
For a company following Division I, the MSME requirements sit in three places:
- On the face of the balance sheet, trade payables are split into (A) total outstanding dues of micro enterprises and small enterprises and (B) dues of other creditors. ICAI's Guidance Note on Division I says the same principle applies to trade payables shown under other long-term liabilities.
- In the notes (Part I, para FA), the five MSMED items: (a) principal and interest unpaid at the year end, shown separately; (b) interest paid under section 16 with the payments made beyond the appointed day; (c) interest due and payable for the delay on amounts paid late; (d) interest accrued and unpaid at the year end; and (e) further interest remaining due in succeeding years, for the section 23 disallowance. The terms carry their MSMED Act meanings.
- In the ageing schedule (para FB) for trade payables due for payment, with rows for (i) MSME, (ii) others, (iii) disputed dues – MSME and (iv) disputed dues – others, aged from the due date of payment (from the transaction date where no due date is specified), with unbilled dues shown separately.
The Guidance Note adds detail that is easy to miss: add "Unbilled" and "Not due" columns so that the total agrees with the note; the MSME and Others rows hold undisputed dues only; and a dispute needs some positive evidence of disagreement — an unpaid invoice is not disputed merely because the client says so.
The common slips in small-company drafts: the face split left at nil while the ageing table shows MSME dues (or the reverse); the five items printed as "Nil" with interest never worked out; and the MSME row in the ageing table disagreeing with the micro and small total on the face. The three must tell the same story.
SignReady's work programme carries a standard Payables step — MSME status of suppliers obtained, dues beyond 45 days identified for disclosure and section 43B(h) — with status, remarks and done by.
Section 43B(h): deduction only on payment
The Finance Act, 2023 inserted clause (h) in section 43B of the Income-tax Act, 1961, with effect from assessment year 2024-25 (financial year 2023-24 onwards). A sum payable by the assessee to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act is allowed as a deduction only in the year in which it is actually paid. The Memorandum to the Finance Bill made two points that decide most cases:
- The proviso to section 43B — which allows a deduction on accrual if the sum is paid by the due date of the return — does not apply to clause (h).
- Accrual is allowed only if the payment is made within the time mandated by section 15.
So the test is not "was it outstanding on 31 March?" but "was it paid within the section 15 time?" An illustration for FY 2025-26:
| Goods from a registered small enterprise delivered and accepted on 10 March 2026 (45 days agreed in writing unless stated) | Deduction |
|---|---|
| Paid on 20 April 2026 — within 45 days (they end on 24 April) | Allowed in FY 2025-26 on accrual |
| Paid on 15 May 2026 — after 45 days | Not in FY 2025-26; allowed in the year of payment |
| No written agreement, paid on 5 April 2026 (15 days ended on 25 March) | Late — not in FY 2025-26; allowed in tax year 2026-27, the year of payment |
| Still unpaid when the tax audit is signed | Not in FY 2025-26 |
This means the year-end work cannot stop at the balance sheet date: payments to micro and small suppliers after the year end have to be traced to see whether they were made in time. The interest under section 16 is a separate matter — it is never deductible (section 23), whether provided or paid.
Points to keep in view:
- Medium enterprises are outside section 43B(h) — it speaks only of micro or small enterprises.
- Traders. Retail and wholesale traders were allowed to register on Udyam from 2 July 2021, but the Ministry of MSME restricted their benefits to priority sector lending only, and an Office Memorandum of 1 September 2021 clarified that the delayed payment provisions of the MSMED Act are excluded. A trading supplier is therefore generally treated as outside sections 15 and 16, and so outside section 43B(h). Check the activity on the supplier's Udyam certificate and record the conclusion.
- Which Act. FY 2025-26 accounts are assessed under the Income-tax Act, 1961. The Income-tax Act, 2025 applies from tax year 2026-27, so a sum disallowed for FY 2025-26 and paid in 2026-27 should be followed through under section 37(2)(g) of the new Act, which carries over section 43B(h); like the old proviso, section 37(3) does not give clause (g) the relief for payment by the return due date.
Reporting in the tax audit (Form 3CD)
Clause 22 of Form 3CD has long asked for the interest inadmissible under section 23 of the MSMED Act. For AY 2024-25, following the corrigendum to CBDT Notification No. 27/2024, tax auditors were asked to report the section 43B(h) details in clause 22. From 1 April 2025, CBDT Notification No. 23/2025 (28 March 2025) substituted clause 22 itself: it now asks for (i) the interest inadmissible under section 23 of the MSMED Act; (ii) the total amount required to be paid to micro or small enterprises, as referred to in section 15, during the previous year; and (iii) of that amount, what was paid within the section 15 time and what was not paid within that time and is inadmissible for the year. The same notification widened clause 26 to every sum referred to in section 43B, so clause (h) amounts are reported there too. Use the current utility and its instructions for the year being reported. Whatever the form, the figures should agree with the MSMED disclosures in the audited accounts — a nil note in the accounts and a disallowance in Form 3CD (or the reverse) is an inconsistency anyone can see.
How to verify MSME status
The disclosure in the accounts is usually worded "based on information available with the Company". That wording is acceptable only if the information exists. In practice:
- Udyam certificate, not a tick-box. Obtain the certificate (or the Udyam number, checked on the portal) for each supplier claimed to be micro or small — and for material suppliers the client has marked "not MSME". Note the classification shown for the relevant year; an enterprise can move between micro, small and medium as its figures change, and the investment and turnover limits were revised from 1 April 2025 (micro: investment up to ₹2.5 crore and turnover up to ₹10 crore; small: ₹25 crore and ₹100 crore).
- Ask the suppliers. A short written request at the year end (or a field in the balance confirmation) asking each supplier to state its Udyam status and classification picks up registrations the client never recorded.
- Payment terms. Section 15 turns on the written agreement. Obtain the purchase orders, contracts or invoice terms. Where there is no written term, 15 days applies.
- Dates. For each micro or small supplier, list invoices with the date of acceptance, the due date and the actual payment date — including payments after the year end.
- Interest. Where payments were late, work out section 16 interest (or obtain the client's working) for the five disclosure items, whether or not the client has provided for it.
- Representation. Cover the completeness of the MSME list in the management representation letter. It supports, but does not replace, the evidence above.
A checklist for the payables file
| Check | Done |
|---|---|
| List of micro and small suppliers, each backed by a Udyam certificate or portal check; medium enterprises and traders identified | |
| Payment terms obtained for each; 15 days applied where there is no written agreement; nothing beyond 45 days | |
| Invoice-wise working: acceptance date, due date, payment date (including after the year end) | |
| Section 16 interest worked out; items (a) to (e) of the MSMED note filled from the working, not carried forward | |
| Face split of trade payables agrees with the MSMED note and with the MSME rows in the ageing schedule | |
| Ageing: not due and unbilled shown separately; disputed MSME dues supported by evidence of dispute | |
| Section 43B(h) amount and section 23 interest computed and agreed with Form 3CD clauses 22 and 26 and the tax computation | |
| Previous-year figures agree with last year's signed accounts; last year's 43B(h) disallowance paid this year traced to the deduction | |
| Representation letter covers completeness of MSME information |
The point to remember
The MSME note, the face split, the ageing table, the tax computation and Form 3CD all describe the same set of suppliers and the same payment dates. Build one working — supplier, status, terms, invoice, due date, payment date, interest — and draw every disclosure from it. Then the "information available with the Company" is information the file can actually show.
Try SignReady: FinalCheck the statements so the trade payables note agrees to the face and the TB.
Start freeFrequently asked questions
Does section 43B(h) apply to dues to medium enterprises?
No. Section 43B(h) applies to sums payable to a micro or small enterprise. Medium enterprises are also outside the MSMED Act definition of "supplier" used for the delayed payment provisions, and the Schedule III face split covers only micro and small enterprises.
If an MSME invoice is outstanding on 31 March but paid within 45 days, is it disallowed?
No, if it is paid within the time allowed by section 15 of the MSMED Act — the date agreed in writing (at most 45 days from acceptance), or 15 days where there is no written agreement. Payment after that time means the deduction is allowed only in the year of payment, even if it is paid before the return due date, because the proviso to section 43B does not apply to clause (h).
Is interest on delayed payment to MSMEs deductible?
No. Section 23 of the MSMED Act provides that interest payable or paid under the Act is not allowed as a deduction in computing income under the Income-tax Act, 1961.
Are purchases from traders registered on Udyam covered?
Retail and wholesale traders were allowed to register on Udyam from 2 July 2021, but the Ministry of MSME restricted their benefits to priority sector lending only, and its Office Memorandum of 1 September 2021 says the delayed payment provisions of the MSMED Act are excluded. Such suppliers are therefore generally treated as outside sections 15 and 16 and section 43B(h). Check the activity on the supplier's Udyam certificate and document the conclusion.
Do non-corporate entities have to give MSME disclosures?
Section 22 of the MSMED Act applies to any buyer required to get its annual accounts audited under any law, so a firm or proprietor under tax audit should also give the information. Schedule III itself applies to companies.
Sources
- Micro, Small and Medium Enterprises Development Act, 2006 — sections 2, 15, 16, 22 and 23 (Gazette of India copy, Ministry of MSME)
- Office of the DC (MSME) — OM 1/4(1)/2021-P&G/Policy, 1 September 2021: delayed payment provisions not available to retail and wholesale traders
- Companies Act, 2013 — Schedule III, Division I, as amended (India Code)
- Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette)
- ICAI — Guidance Note on Division I – Non Ind AS Schedule III (Revised January 2022), paras 8.4.2 to 8.4.5 and 8.6
- Memorandum explaining the provisions in the Finance Bill, 2023 — section 43B(h)
- Income Tax Department — Form 3CA/3CB-3CD webinar (September 2024): clause 22 and section 43B(h)
- CBDT Notification No. 23/2025, 28 March 2025 (G.S.R. 207(E)) — Form 3CD clause 22 substituted and clause 26 amended
- PIB — Government announces inclusion of Retail and Wholesale trades as MSMEs (2 July 2021)
- Ministry of MSME — revised classification of MSMEs, S.O. 1364(E), 21 March 2025 (Gazette)
In SignReady, the work programme, the editable Schedule III draft from the trial balance and FinalCheck on the finished statements sit in one finalisation — so arithmetic and cross-reference differences between the notes and the face are flagged before you sign. First 3 finalisations free.
Version history: 7 Oct 2026 — first published.
