The Tax Rule That Turned Your Unpaid Invoice Into Your Customer's Problem

You know the conversation. The material went out in February. The payment was “end of the month.” Then it was “after Holi.” Then the purchase officer stopped taking your calls, and in April somebody in accounts told you the file was with their head office.

For a long time that was simply how this business worked. You financed your customer’s working capital and you did not push too hard, because the next order mattered more than this payment.

Something changed, and most of the industry has not noticed.

What actually changed

Section 43B(h) of the Income Tax Act says that when a buyer owes a micro or small enterprise and does not pay within the limit set by the MSMED Act, the buyer cannot claim that expense as a deduction that financial year. It moves to whichever year they actually pay.

The limits are short. Fifteen days where there is no written agreement on payment terms. Forty-five days where there is one — and forty-five is a ceiling, not a target. A contract that says ninety days does not override it.

Here is the part that gives the rule its teeth. For almost every other disallowance under Section 43B, a buyer can rescue the deduction by paying before the income tax return is filed. Clause (h) is carved out of that rescue. If the invoice is sitting unpaid on 31 March, the deduction is gone for that year — and paying you in July does not bring it back. It only shifts the benefit a full year forward.

So an unpaid bill of ₹40 lakh does not just sit on their books as a liability. It adds ₹40 lakh to their taxable profit for the year.

One detail that surprises people: the size of the buyer is irrelevant. A ₹5,000 crore FMCG company and a ₹5 crore trader are in exactly the same position. What matters is the classification of the supplier — you.

Why this is different from every earlier attempt

We have had rules since 2006. The MSMED Act provides for interest at three times the RBI bank rate, compounded monthly, on delayed payments. Almost nobody claimed it, because claiming meant going to a Facilitation Council and effectively ending the relationship.

Section 43B(h) works differently. You do not have to do anything to trigger it. No complaint, no fight with the customer who gives you forty percent of your volume. The pressure comes from inside their own organisation — their auditor has to flag it, and their finance head has to explain a tax hit nobody budgeted for.

For the first time, someone on the buyer’s side of the table has a reason to want you paid.

The catch that will cost many converters this benefit

The protection only applies if you are registered on Udyam as a micro or small enterprise. Not eligible to be registered. Registered, with a live Udyam number.

In my own conversations across this industry, this is where I keep finding the gap. Small units — two-machine rotogravure shops, single-line pouch makers, job-work laminators — that qualify comfortably on investment and turnover, and simply never completed the registration. Every one of them sits outside a rule written specifically for them. I cannot tell you what share of the industry that is. I can tell you it is not a rare conversation.

If you take one thing from this article: check whether your Udyam registration is active, and make sure the number appears on your invoices. It takes an afternoon.

A second thing to raise with your CA: the treatment of trading activity is not the same as manufacturing and services. If part of your business is trading in films or raw material, get specific advice rather than assuming the whole entity is covered.

Now the uncomfortable question

Suppose their auditor does ask which supplier invoices crossed the limit, and when the clock started.

What document of yours will they look at?

The clock runs from the day the goods were accepted. So the thing you need to be able to evidence is what was supplied, on what terms, and when it was accepted.

Note the asymmetry here, because it runs opposite to what most people assume. If there is no written agreement on payment terms, your limit is the shorter one — fifteen days. A written agreement is what allows the buyer to stretch to forty-five. So the absence of paperwork does not weaken your clock. What it weakens is your ability to prove the transaction and its dates at all.

In the packaging industry that is where it falls apart. The rate was settled on a phone call. The revision after the film price moved was agreed on WhatsApp. The purchase order says “payment as per discussion.” No quotation was ever issued on letterhead.

That business is owed the money. It simply cannot evidence the supply.

The fix is boring, which is why nobody does it

Issue a proper quotation before the material moves. Convert it into a proforma invoice. Keep both, dated, against every order.

Converters resist this for an understandable reason — it is slow. Costing a laminate honestly means working through structure, film rates, printing, lamination, wastage and margin. In a spreadsheet that is an hour, and at nine at night after a day on the shop floor it tends not to happen at all. The price goes out as a WhatsApp message instead.

This is the problem we built the cost calculators on GPN to solve. You set your cost model once — rates, conversion costs, wastage, margin. After that an inquiry becomes a fully formatted Quotation and Proforma Invoice in about two minutes, reaching the customer while the inquiry is still warm.

The commercial argument for quoting fast is obvious. The documentary one is newer: you end up holding a dated record of what was offered and agreed.

Now check the other side of your own ledger

Everything above describes you as the supplier. Turn the page around.

You buy film, ink, adhesive, solvent, cylinders and job-work. A good number of those suppliers are themselves micro or small enterprises. Section 43B(h) applies to your payables exactly as it applies to your customers’.

If you are sitting on a cylinder-maker’s bill from January because your own receivables are stuck, that disallowance lands on your return, not theirs. The rule does not care that you were squeezed from the other end.

So before you send anyone a reminder, run the same test on your own creditors: which of your suppliers are Udyam-registered as micro or small, and where did those balances stand on 31 March.

A rule that only ever gets quoted downward is not one anybody respects for long.

What to do this week

1. Confirm your Udyam registration is active and the number is printed on your invoices. Without this, none of the above protects you.
2. Issue the quotation and proforma invoice before dispatch, not after. The dated record is the asset.
3. Pull your ageing report and mark everything past the limit.
4. Pull your creditors ageing too, and flag the micro and small suppliers on it. That is your own exposure.
5. Talk to your CA before you talk to your customer. This is general information, not tax or legal advice, and the facts of your own case matter.

You are not asking anyone for a favour. You are pointing at a provision their own auditor is going to raise anyway — and making sure it is not pointing back at you.

Related reading: What a B2B lead actually costs a packaging converter and Who will supply your recycled content when the target doubles in 2027.

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Sources: Section 43B(h), Income-tax Act 1961, inserted by the Finance Act 2023; Micro, Small and Medium Enterprises Development Act 2006, Sections 15 and 16. This article is general information and not tax or legal advice.