MSME Reporting in Tax Audit Report (AY 2025-26)

MSME Reporting in Tax Audit Report (AY 2025-26)

Background: Due to amendments made by the Finance Act 2023, effective 01.04.2024, Section 43B(h) was inserted into the Income-tax Act, 1961. Now, any payment to an MSME supplier must be paid within the time limit prescribed under the MSMED Act, otherwise it will be disallowed in the year of expense, and allowed only when paid.

Time limits under MSMED Act:

If there is a written agreement: Pay within the agreed credit period (but maximum 45 days). If no written agreement: Pay within 15 days from the date of acceptance of goods/services.

What’s New in the Tax Audit Form (Form 3CD)?

✅ Clause 22 (related to Section 43B disallowances) has been updated.

✅ Tax auditors now need to separately report details of payments falling under Section 43B(h). ✅ It requires clear disclosures of unpaid dues to MSMEs beyond the allowed period.

The Tax Audit Form will now require: 

• Breakup of amounts payable to Micro and Small Enterprises separately.
• Whether paid within the time prescribed under the MSMED Act.
  
• Details of payments made after the prescribed period (eligible for deduction only in the year of payment).

Practical Reporting Flow for AY 2025-26:

• Item Details Required Identify the suppliers list of vendors classified as Micro or Small Enterprises under MSMED Act. Payment Terms Whether there is a written agreement (15 days / 45 days rule).
• Outstanding as on 31st March: list amounts unpaid within the allowed credit period.
• Payments Made After Due Date Mention if any payments made after the time limit but before audit date.
• Disclosure in Form 3CD Reflect disallowed amounts under Clause 22 (Section 43B(h)).
  

Important Points for Taxpayers and Auditors:

• Get MSME Registration Certificates from vendors to validate their MSME status.
• Monitor payment dates carefully to avoid disallowances.
• Even if expense is booked, deduction allowed only when paid if delayed beyond MSMED timelines.
• Large businesses especially need to realign vendor payment cycles.

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