With the evolving regulatory landscape, businesses working with Micro, Small, and Medium Enterprises (MSMEs) in India must pay close attention to new compliance norms. The Government of India, through the Finance Act 2023 and various CBDT notifications, has introduced significant changes effective from April 2024 and April 2025. These changes include stricter deduction rules under the Income-tax Act, revised reporting norms, and enhanced disclosure under the Companies Act.
This article highlights the revised MSME classification, tax implications under Section 43B(h), and updated reporting in Form 3CD. These updates aim to ensure timely payments to MSMEs and promote financial transparency and discipline.
MSME Revised Classification (Effective 1st April 2025)
Composite Criteria: Investment in Plant & Machinery/Equipment and Annual Turnover
| Classification | Investment Limit | Turnover Limit |
| Micro | Up to Rs. 2.5 crore | Up to Rs. 10 crore |
| Small | Up to Rs. 25 crore | Up to Rs. 100 crore |
| Medium | Up to Rs. 125 crore | Up to Rs. 500 crore |
Applicable to manufacturing and service enterprises.
Section 43B(h) of Income Tax Act: MSME Payment Rule
Key Highlights:
- Introduced via Finance Act 2023
- Effective from: April 1, 2024
- Applicable from: AY 2024–25 onwards
Core Rule:
Payments to Micro and Small Enterprises must be made within the timelines defined under Section 15 of the MSMED Act:
- 15 days (if no written agreement)
- 45 days (if there is a written agreement)
If payment is delayed beyond the above limits, the expense will not be allowed as a deduction in the year of accrual and can only be claimed in the year of actual payment.
Note: Section 43B(h) is not applicable to traders as they are not covered under the MSMED Act’s definition of enterprises for this section.
Examples Under Section 43B(h)
| Invoice Date | Credit Period | Payment Date | FY Allowed |
| 01/04/2024 | 45 days | 21/05/2024 | 2024–25 |
| 31/01/2024 | 15 days | 20/02/2024 | 2023–24 |
| 15/12/2023 | – | 05/04/2024 | 2024–25 |
If the due date is missed, deduction is allowed only in the actual year of payment.
CBDT Notification No. 23/2025 – Amendment to Form 3CD
Issued: March 28, 2025
Applicable from: April 1, 2025 (AY 2025–26 onwards)
Clause 22 – New Reporting Requirements:
- Interest Disallowance under Section 23 of the MSMED Act
- Total dues payable to Micro and Small Enterprises under Section 15
- Breakdown of dues:
- a) Paid within the prescribed timeline
- b) Not paid within time → Disallowed u/s 43B(h)
Purpose:
- Aligns tax audits with new Section 43B(h)
- Ensures accurate MSME dues disclosure
- Encourages prompt payments
Company Law Disclosure – MSME Form 1
All companies (except those with nil dues) must file Form MSME-1 if payments due to MSMEs exceed 45 days.
Half-Yearly Filing:
- April – September: Due by October 31
- October – March: Due by April 30
Required Details:
- Supplier info & PAN
- Amount due
- Delay reason
Implications for Businesses
- Delayed payments = Disallowed deduction of expenses
- Interest on delayed MSME dues = Permanently disallowed (u/s 23)
- Companies must maintain clear vendor classification and payment audit trails
Action Points:
- Collect MSME registration proof from vendors
- Realign AP systems to MSME timelines
- Ensure tax teams coordinate with finance for accurate reporting
Conclusion
The integration of MSMED Act compliance into tax and company law frameworks shows the government’s focus on protecting MSMEs. With new rules under Section 43B(h) and revised Form 3CD Clause 22, businesses must proactively update their accounting and vendor management systems. Timely payment is not just a good practice—it’s now a legal necessity.
Stay compliant, stay ahead.
