Section 43B(h): Impact on Business Liquidity and Strategic Use of TReDS

Section 43B of the Indian Income Tax Act was amended in the Finance Act 2023 to introduce Clause (h), effective from April 1, 2024. This provision fundamentally alters how businesses claiming deductions for payments made to Micro and Small Enterprises (MSMEs) must time their cash outflows. Under Section 15 of the MSMED Act, 2006, payments to MSMEs must now be made within 15 – 45 days (as per contract terms) for the expense to be eligible for deduction in the same financial year; failure to comply pushes the deduction to the year payment is actually made.

For many companies, particularly those with extended receivable cycles or constrained working capital, this compliance requirement presents a material liquidity challenge. Adequate planning and structured financing solutions, such as TReDS (Trade Receivables Discounting System) platforms, are now critical tools to preserve tax efficiency and strengthen cash flow management.

1. Interpret the Compliance Imperative of Section 43B(h)

Deduction criteria tightened: Businesses can no longer accrue expenses for MSME payments on an accrual basis if not paid within the statutory period. The deduction is deferred to the year of actual payment.

Cash flow implication: For companies with significant purchases from MSMEs, untimely payments inflate taxable income and can materially increase tax liabilities. As, even if the payment is eventually made after the statutory window, the tax benefit is deferred until that later year.

Interest and penalties:
Late payments can incur interest penalties under MSMED provisions, compounding financial cost beyond the tax impact.

Action:
Conduct a payment deadline audit each quarter to segregate MSME payables by statutory due dates under Section 15 of the MSMED Act and Section 43B(h).

2. Quantify the Liquidity Gap and Timing Risk

With delayed receivables, businesses may lack ready cash to satisfy Section 43B(h) timing without resorting to expensive short-term credit.

Many MSMEs operate with 30 – 90+ day payment terms; if buyers do not settle MSME invoices within 45 days, the buyer loses the deduction for that year.

Action:
Build and maintain a rolling 60‑day cash flow forecast, incorporating the payment timing requirements under Section 43B(h) for all MSME payables.

3. Leverage TReDS to Convert Receivables into Compliance‑Ready Cash

The TReDS ecosystem across regulated platforms (including M1xchange) allows MSME suppliers to digitally discount invoices and receive early payment from financiers, significantly strengthening liquidity.

Market momentum for TReDS:

TReDS has financed over ₹2 lakh crore in MSME invoice financing, reflecting substantial uptake among sellers and buyers. Invoice volumes on TReDS have increased multiple‑fold over recent years, with rapid annual growth in financed volumes and success rates near 94 – 95 %.

Action:
Regularly push eligible receivables to TReDS to shorten Days Sales Outstanding (DSO) and align inflows with payment deadlines under Section 43B(h).

4. Prioritize Receivables with High Compliance Impact

Not all receivables materially affect cash flow for statutory payments. To maximize impact:

Segment invoices by value and payment timing.

Prioritize high‑value or long‑dated invoices where liquidity constraints are most acute.

Focus on those receivables from counterparties with a history of swift acceptance on TReDS platforms.

Action:
Maintain a receivable scorecard that identifies invoices based on counterparty acceptance rates, value, and time to convert on TReDS.

5. Reduce Dependence on High‑Cost Credit

Without structured solutions, businesses often resort to overdrafts or short‑term loans to make MSME payments on time. These options can:

• Increase finance costs
• Strain banking relationships
• Add to funded debt on balance sheet

In contrast, financing via TReDS remains off‑balance‑sheet and compliant with RBI regulations, preserving debt ratios and reducing finance cost per unit of working capital accessed.

Action:
Shift a targeted portion of working capital needs from traditional credit to TReDS to improve cost of capital and compliance metrics.

6. Integrate TReDS into Strategic Working Capital Planning

TReDS should not be an adhoc tool used only under stress; it should be embedded into routine working capital management:

• Align TReDS inflows with statutory outflows
• Forecast and schedule expected TReDS funding as part of weekly liquidity reviews
• Use analytics from TReDS platforms to anticipate funding cycles and optimize payment scheduling

Action:
Establish a TReDS financing playbook that integrates with enterprise cash management, ERP triggers, and finance team workflows.

7. Strengthen Compliance through Governance and Documentation

Maintain up‑to‑date documentation of MSME credentials, invoices, and payment confirmations.

• Ensure systematic tagging of MSME invoices in accounting systems so compliance officers can rapidly track eligibility under Section 43B(h).
• Document TReDS transactions with audit trails to support deduction claims and statutory reporting.

Action:
Implement automated tagging and alerts for MSME payables that are nearing statutory deadlines.

Compliance Meets Liquidity Efficiency

Section 43B(h) heightens the stakes for timely payment to MSMEs, directly linking working capital management to tax efficiency. In this environment, digital platforms like TReDS offer a regulated, scalable conduit for governments, buyers, and MSME suppliers to optimize liquidity while preserving compliance.

By embedding TReDS into financial planning, businesses can:

• Avoid unnecessary tax disallowances
• Lower dependency on high‑cost borrowing
• Improve cash flow predictability
• Strengthen ecosystem relationships with MSME partners

In practice, this means a shift from reactive payments to strategic cash conversion and disciplined working capital engineering.