TL;DR
This note sets out the reporting requirements for Micro, Small and Medium Enterprises (MSME) dues under Clause 22 and Clause 26 of Form 3CD, the statutory basis for each clause, and the audit points relevant to compiling them.
Statutory Background
The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) requires a buyer to pay a registered micro or small supplier within the timeline prescribed under section 15, failing which compound interest accrues automatically under section 16. The Finance Act, 2023 inserted clause (h) in section 43B of the Income-tax Act, 1961, with effect from Assessment Year 2024-25. Under this provision, any sum payable to a micro or small enterprise beyond the section 15 timeline is deductible only in the year of actual payment, on a cash basis, rather than on accrual.
Form 3CD was amended to give effect to this change. Following an initial notification and a corrigendum issued in March 2024 (CBDT Notification No. 27/2024 dated 5 March 2024, corrected by Notification No. 34/2024 dated 19 March 2024), the reporting is structured as follows: Clause 22 covers the interest disallowance under the MSMED Act and the principal disallowance under section 43B(h); Clause 26 is confined to the remaining categories under section 43B, clauses (a) to (g).
Applicability — Micro and Small Enterprises
Sections 15 and 16 of the MSMED Act, and the disallowance under section 43B(h), apply to suppliers registered as micro or small enterprises on the Udyam portal. Medium enterprises are outside the scope of this specific provision, although they are covered by the MSMED Act for other purposes. Classification under the MSMED Act is based on investment in plant, machinery or equipment together with annual turnover: micro enterprises are those with investment up to ₹1 crore and turnover up to ₹5 crore; small enterprises are those with investment up to ₹10 crore and turnover up to ₹50 crore.
Retail and wholesale traders were included under Udyam registration for the limited purpose of priority sector lending. On this basis, trader-suppliers are generally not treated as covered by the delayed-payment protection under sections 15 and 16. The registration category of each supplier should be verified before applying this treatment.
Payment Timeline — Section 15 of the MSMED Act
Section 15 prescribes the payment timeline for dues to a micro or small supplier: in the absence of a written agreement, payment is due within 15 days from the date of acceptance (or deemed acceptance) of the goods or services; where a written agreement specifies a credit period, payment may be deferred, subject to a maximum of 45 days from that date. This 45-day limit cannot be extended by agreement.
Where payment is not made within this timeline: (i) compound interest accrues under section 16, computed at three times the bank rate notified by the Reserve Bank of India, with monthly rests; and (ii) if the amount remains unpaid as at the end of the previous year, the corresponding expense is disallowed for that year under section 43B(h).
The starting point for this timeline is the “day of acceptance” or “day of deemed acceptance”, as defined in section 2(b) and section 2(c) of the MSMED Act. Day of acceptance means the day of actual delivery of goods or rendering of services, or, where the buyer raises a written objection to the goods or services within 15 days of delivery, the day on which the supplier removes that objection. Day of deemed acceptance means the day of actual delivery, where no written objection is raised by the buyer within 15 days of delivery. In practice, the 15-day or 45-day clock runs from one of these two dates, not from the invoice date, and the two can differ where goods are received before the invoice is raised, or where an objection is recorded.
Illustrative Computation of Interest under Section 16
The following illustrates the computation of interest under section 16 for a single delayed payment, assuming no written agreement on credit period (statutory limit of 15 days applies) and a notified bank rate of 6.50% per annum (three times the bank rate = 19.50% per annum, compounded with monthly rests):
- Date of acceptance of goods: 1 January
- Due date for payment (15 days from acceptance): 16 January
- Invoice value: ₹10,00,000
- Actual date of payment: 15 April (89 days beyond the due date)
- Interest accrues from 17 January to 15 April at 19.50% per annum, compounded monthly, on ₹10,00,000
- Approximate interest for the period (89 days, monthly compounding): ₹47,000, subject to exact computation based on the number of days in each monthly rest
This interest amount is disallowed in full under section 23 of the MSMED Act, whether or not it is paid, and whether or not it has been provided for in the books of account. Firms should maintain a standard working paper — supplier-wise and invoice-wise — recomputing this interest at year end for every MSE payable that crossed the due date, rather than relying on amounts (if any) booked by the client.
Transitional Treatment — Dues Pertaining to Earlier Previous Years
Section 43B(h) applies in relation to Assessment Year 2024-25 and subsequent years, that is, previous year 2023-24 onward. Interest under section 16 and its disallowance under section 23 are not new — these have applied since the MSMED Act came into force in 2006 — and continue to apply to delayed payments outstanding in any year. The principal disallowance under section 43B(h), however, is prospective.
A commonly encountered situation is a sum relating to a purchase made in an earlier previous year (for example, 2022-23), where the expense was already claimed as a deduction on accrual basis in that year under the normal provisions, and the amount remains unpaid as at the end of previous year 2023-24 or a later year. Since the deduction for that expense stands allowed in the year it was incurred, section 43B(h) does not operate to disallow it again merely because it remains unpaid in a subsequent year — the provision applies to sums that are otherwise allowable as a deduction for the year in question, not to sums already allowed in an earlier year. This is a matter on which practitioners have taken a consistent interpretational position, though it has not been the subject of specific CBDT clarification, and the position should be documented with reasoning in the audit working papers for any material amount.
Clause 22 — Reporting Requirements
Clause 22 of Form 3CD requires reporting of two amounts:
- Interest inadmissible under section 23 of the MSMED Act — the compound interest computed under section 16 on delayed payments to registered micro or small suppliers during the year. Section 23 disallows this interest under the Income-tax Act irrespective of whether it has been paid or provided for in the books of account.
- Amount disallowed under section 43B(h) — the principal value of goods or services procured from micro or small suppliers that remained unpaid beyond the section 15 timeline as at the year end. This amount is disallowed for the year and is deductible only in the year of actual payment.
Audit points for this clause:
- Obtain Udyam registration certificates or vendor declarations, and maintain a vendor master classifying suppliers as micro, small, medium or not registered.
- Age payables to identified MSE suppliers from the date of acceptance of goods or services, which may differ from the invoice date.
- Compute interest under section 16 irrespective of whether the liability has been recognised in the books, as the disallowance under Clause 22 does not depend on such recognition.
- Note that the second proviso to section 43B, which allows deduction where payment is made before the due date of filing the return under section 139(1), specifically excludes clause (h). This relief is therefore not available for MSME dues.
- Reconcile the trade payables ageing schedule against the MSE vendor list as at the year end to identify amounts attracting disallowance.
No prescribed columnar format applies to the section 43B(h) figure within Clause 22. The auditor is required to form an opinion on the amount disallowable and report the total, after confirming that the expense is otherwise allowable under the applicable business deduction provisions.
Clause 26 — Reporting Requirements
Clause 26 covers sums referred to in clauses (a) to (g) of section 43B, set out below. Deduction in respect of these items is allowed for the year in which the liability was incurred if payment is made on or before the due date of filing the return under section 139(1), even where payment falls after the year end.
Clause |
Nature of sum covered |
| (a) | Tax, duty, cess or fee, by whatever name called, under any law for the time being in force |
| (b) | Employer’s contribution to provident fund, superannuation fund, gratuity fund or any other fund for the welfare of employees |
| (c) | Bonus or commission to employees for services rendered |
| (d) | Interest on any loan or borrowing from a public financial institution, State financial corporation or State industrial investment corporation |
| (e) | Interest on any loan or advance from a scheduled bank or co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank) |
| (f) | Sum paid to an employee in lieu of leave at his credit (leave encashment) |
| (g) | Sum payable to the Indian Railways for use of railway assets |
Reporting under Clause 26 requires two categories to be stated separately: sums payable and disallowed in an earlier year, indicating whether paid during the current year; and sums that became payable during the current year, indicating whether paid on or before the due date of filing the return. This bifurcation determines whether a brought-forward disallowance is reversed in the current year.
Clause (b) — employer’s contribution to provident fund, superannuation fund, gratuity fund or other employee welfare fund — should not be confused with the employees’ contribution deducted from salary. The employer’s share falls within section 43B and is reported under Clause 26, with the accrual-basis deduction preserved if paid before the due date of filing the return. The employees’ contribution, being deducted from the employee and held in trust, is governed separately by section 36(1)(va) read with section 2(24)(x), and is deductible only if credited to the employee’s account under the relevant fund on or before the due date prescribed under that fund’s governing Act — the extended timeline under section 43B does not apply to it. This distinction was affirmed by the Supreme Court in Checkmate Services (P.) Ltd. v. CIT (2022), and any employees’ contribution deposited late is disallowable in full, with no due-date relief. This amount is reported under Clause 20(b) of Form 3CD (details of contributions received from employees), not under Clause 26.
Financial Statement Disclosure — Schedule III Cross-Reference
Where the assessee is a company, Schedule III to the Companies Act, 2013 requires the following disclosures in the notes to accounts in respect of dues to micro and small enterprises, to the extent the company has such information available with it:
- Principal amount and interest due thereon remaining unpaid to any supplier as at the year end.
- Amount of interest paid, along with the amount of payment made to the supplier beyond the appointed day during the year.
- Amount of interest due and payable for the period of delay in making payment, other than interest specified under the MSMED Act.
- Amount of interest accrued and remaining unpaid at the end of the year.
- Amount of further interest remaining due and payable even in succeeding years, until such interest is actually paid, for the purpose of disallowance as a deductible expenditure under section 23 of the MSMED Act.
These disclosures apply only to micro and small enterprises, consistent with the scope of Clause 22. As a working practice, the figures disclosed in the Schedule III notes and the amounts reported under Clause 22 of Form 3CD should be reconciled before finalisation — a mismatch between the two is a frequent point raised in quality review, and typically indicates either an incomplete vendor master or an error in the ageing computation.
Clause 22 and Clause 26 — Comparison
Point of comparison |
Clause 22 |
Clause 26 |
| What it reports | Interest inadmissible under section 23 of the MSMED Act, plus the principal amount disallowed under section 43B(h) | Section 43B items other than MSME dues — clauses (a) to (g) |
| Who it applies to | Payments to Udyam-registered micro and small enterprises only (not medium) | Any assessee with statutory dues, employee-benefit contributions, specified interest, leave encashment or railway dues |
| Relief if paid before the return due date (u/s 139(1)) | Not available — the second proviso to section 43B specifically excludes clause (h) | Available — deduction allowed if paid on or before the due date of filing the return |
| Interest angle | Interest under section 16 of the MSMED Act is disallowed permanently, whether paid, provided for, or not | No parallel interest disallowance — only the underlying sum is deferred until payment |
Audit Checklist
- Maintain a Udyam-status vendor master, updated during the year rather than compiled at the time of audit.
- Record acceptance dates and agreed credit periods for MSE suppliers alongside the payables ledger.
- Compute interest under section 16 as a standard year-end working paper, irrespective of whether the client has recorded the liability.
- Maintain Clause 26 items (statutory dues, PF/ESI, bonus, specified interest, leave encashment, railway dues) on a separate tracker showing opening balance, movement during the year and payment status.
- Reconcile both clauses against the disallowance summary in the computation of income before the report is finalised.
- Reconcile the Schedule III MSME notes (for company assessees) with the Clause 22 working papers, and investigate any variance.
- Identify amounts pertaining to earlier previous years and document the basis on which section 43B(h) has, or has not, been applied to them.
- Where the assessee has aggregate turnover exceeding ₹250 crore, confirm registration on the Trade Receivables Discounting System (TReDS) platform as required for companies procuring from MSE suppliers, as this is a related compliance point often reviewed alongside MSME reporting.
Points Requiring Attention
- Udyam registration alone does not establish coverage under sections 15 and 16; trader-suppliers registered for priority-sector-lending purposes are typically excluded.
- The relief for payment before the due date of filing the return, available under the second proviso to section 43B, does not apply to amounts disallowable under clause (h).
- Interest under section 16 is disallowable under Clause 22 irrespective of whether it has been recorded in the books of account.
- MSME principal disallowances are reported under Clause 22, not Clause 26, under the current form.
- Employees’ contribution to PF/ESI deposited after the due date under the relevant fund legislation is disallowable in full under section 36(1)(va); it is not a Clause 26 item and is not saved by payment before the return filing due date.
- The 15-day and 45-day timelines run from the day of acceptance or deemed acceptance under section 2(b)/2(c) of the MSMED Act, which may differ from the invoice date.
Disclaimer
This document has been prepared for general informational purposes only and is intended to provide a broad overview of the subject matter. It does not constitute, and should not be relied upon as, legal, tax, accounting or other professional advice, opinion or service. The information contained herein is based on the provisions of applicable law as on the date of preparation, which are subject to change, and no assurance is given that the information is complete, accurate or current as of any later date.