🚨 Tax Audit Alert for AY 2025–26: MSME Reporting in Form 3CD

As the assessment year 2025–26 approaches, significant amendments are reshaping the compliance landscape for tax audits—particularly concerning payments to Micro and Small Enterprises (MSMEs). Whether you’re a business owner, finance professional, or Chartered Accountant, these changes demand your immediate attention.

🔵 Background: What Is Section 43B(h)?
The Finance Act, 2023 added Section 43B(h) to the Income Tax Act, 1961. It requires businesses to pay their MSME suppliers promptly—and penalizes delays.

✅ Key Provisions:

• 15-day deadline if no written agreement exists

• 45-day deadline when an agreement is in place

• If you miss these deadlines, you must disallow the expense when computing taxable income for AY 2025–26.

• You can reclaim that deduction only in the year you actually make the payment.

By enforcing clear payment windows, the amendment strengthens MSME liquidity and encourages businesses to prioritize small-vendor cash flows.

🔵 What’s New in Form 3CD for AY 2025–26?
To align audit reports with Section 43B(h), the CBDT has revamped Clauses 22 and 26 of Form 3CD (Tax Audit Report), effective 28 March 2025.

✅ Clause 22: Expanded MSME Reporting

Before: Auditors reported only

• Interest disallowed under Section 23 of MSMED Act, 2006

• Expenses disallowed under Section 43B(h)

After (w.e.f. 28.03.2025): You must now disclose:

1. Interest inadmissible under Section 23 of the MSMED Act

2. Total amount payable to MSMEs during the year

3. A break-up showing:

   • Payments made within 15/45 days

   • Payments delayed (hence disallowed under 43B(h))

This extra detail gives you—and the tax authorities—a sharper view of your MSME payment practices.

✅ Clause 26: Broader Disallowance Scope

Before: Clause 26 covered only Sections 43B(a)–(g), namely:

• (a) Taxes, duties, cess, or fee

• (b) Employer contributions (PF/ESI)

• (c) to (f) Interest on borrowings

• (g) Leave encashment

After: The list of specific clauses (a–g) has been removed. Now, all disallowable expenses—including MSME dues under clause (h)—must be reported. This change ensures real-time compliance checks and improves tax governance.

🔵 Important Points to Remember

• ✅ Only Micro and Small Enterprises (not Medium) fall under Section 43B(h).

• ❌ Any interest under the MSMED Act remains non-deductible.

• 🧾 Only expenses debited to your Profit & Loss account can be disallowed.

🔵 What This Means for Businesses
With these tighter audit requirements, you should:

1. Verify MSME Status.
   Obtain and store valid Udyam Registration Certificates from every small-vendor.

2. Automate Due-Date Alerts.
   Configure your accounting software to flag payments at Day 10 and Day 40.

3. Tag MSME Vendors.
   Clearly label them in your ledger so teams recognize priority suppliers immediately.

4. Train Your Teams.
   Hold brief workshops for procurement, accounts payable, and legal staff.

5. Prepare for Granular Disclosures.
   Keep all contracts, invoices, and payment proofs organized for your next tax audit.

Even a one-day delay can push a legitimate expense into disallowance and raise your tax liability.

🔵 Final Thought: A Step Forward for MSMEs
Though these updates add reporting layers, they also reinforce a vital national goal—empowering India’s MSMEs. By paying smaller suppliers on time and reporting accurately, you help secure their working capital, sustain jobs, and build stronger supply chains.

So, whether you’re gearing up for an audit or advising clients, now is the time to update systems, align teams, and ensure full compliance with these requirements.

📢 Stay proactive. Stay compliant. Support MSMEs. 🚀

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