Section 43B(h) Compliance Checklist: How to Track MSME Vendor Payments & Avoid Disallowance

Collect Udyam Registration from every vendor

Send a one-time request to all vendors asking for their Udyam Registration Certificate. This certificate shows their MSME classification (Micro, Small or Medium) and their Udyam Registration Number (URN). You can verify any URN on the official portal at udyamregistration.gov.in.

Tag every vendor in your accounting system

In your vendor master, add a field for MSME Classification with four values: Micro, Small, Medium, Not MSME. Also record the Udyam Registration Number. This tag is what drives your ageing reports and year-end computation.

In Zoho Books: use a Custom Field on the Contact module (Settings → Preferences → Contacts → Custom Fields). Create a dropdown for MSME Classification and a text field for Udyam Number. You can then filter any payables report by this field.

In Tally: use a user-defined field on the Ledger master, or maintain a separate Excel tracker linked to ledger names.

Capture the date of acceptance - not the invoice date

Ensure your purchase workflow captures the acceptance date on every bill. In Zoho Books, use the "Received Date" or a Custom Field for acceptance date, and build your ageing logic from that field.

Know your deadline: 15 days or 45 days

The deadline depends on whether a written agreement exists with the vendor:

• Written agreement exists: payment due within the agreed period, but not exceeding 45 days from acceptance.
• No written agreement: payment due within 15 days from acceptance.

Many businesses default to "45 days for everyone" without realising that 45 days only applies with a written agreement. Without one, you have just 15 days - and most informal vendor relationships have no written contract.

Run MSME ageing reports fortnightly

Do not wait until March. Run an MSME-filtered payables ageing report at least every two weeks and flag any Micro or Small vendor invoices approaching the 15-day or 45-day mark. This gives your finance team enough time to prioritise payments before the deadline.

In Zoho Books: create a Custom View on the Bills module filtered by MSME Classification = Micro or Small, sorted by due date. Set up a scheduled report to email this to your finance lead fortnightly.

Year-end reconciliation: compute the exact disallowance

Before closing your books for the year, run a full reconciliation of every MSME vendor payment to identify any that breached the 15/45-day limit. For each breach, compute:

• The disallowed amount - the expense that must be added back in your tax return for the year of accrual.
• The year of deduction - the year in which the payment was actually made (when the deduction becomes allowable).
• Section 16 interest liability - compound interest at 3× the RBI Bank Rate, with monthly rests, payable to the supplier (and non-deductible under Section 23, MSMED Act).

This reconciliation feeds into your Form 3CD (Clause 22 and Clause 26) for tax audit purposes and into your MSME Form-1 disclosure under the Companies Act.

Re-verify vendor MSME status annually

MSME classification is dynamic - a vendor can graduate from Small to Medium (or vice versa) as their investment and turnover change. If a vendor moves to Medium mid-year, the 43B(h) disallowance applies only for invoices where they were classified as Micro or Small at the time of the transaction.

At the start of each financial year, request updated Udyam certificates from key MSME vendors and update your vendor master accordingly. This also catches vendors whose registration may have lapsed.