Paying small suppliers late can cost you the deduction
Amounts owed to micro and small enterprises beyond the permitted period are not deductible until they are paid.
Since the year beginning 1 April 2023, amounts payable to micro and small enterprises registered under the MSMED Act are allowed as a deduction only when paid, if payment is made later than the time limit in that Act.
The limit is 15 days from acceptance where there is no written agreement, and the agreed period where there is one, but never more than 45 days.
Why it matters at year end
An invoice from a registered micro or small supplier still unpaid past the limit on 31 March is added back to income for that year. The deduction is allowed in the year it is eventually paid. For businesses with many small suppliers, the effect on the year's tax can be significant.
What to do
Ask suppliers for their Udyam registration status and record it in the vendor master. Track payables ageing against the 15- and 45-day limits through the year, not only in March. Medium enterprises are outside the rule.
General information, current at the date shown. It is not advice on your circumstances; write to us before acting on it.