Your buyer owes you Rs. 18 lakh. It has been 90 days. Did you know the law entitles you to compound interest — automatically — and that your buyer may have lost a tax deduction too?
I. Introduction — A Law Most MSMEs Don't Know They Have
India has approximately 63 million Micro, Small, and Medium Enterprises — the backbone of formal employment and the engine of domestic manufacturing. Yet a disproportionate number of these businesses operate in a state of chronic receivables stress: goods delivered, services rendered, invoices raised — and payment delayed by 60, 90, sometimes 180 days at the buyer's convenience.
What most MSME owners do not realise is that there is a precise legal framework that places the obligation to pay — and penalises delay — squarely on the buyer. The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) mandates payment within 45 days of the date of acceptance or deemed acceptance of goods or services. Where the buyer fails, compound interest at three times the bank rate notified by the Reserve Bank of India accrues automatically — without the supplier needing to prove damages.
The Finance Act, 2023 gave this rule an additional dimension that transformed it from a civil remedy into a tax compliance issue for buyers: Section 43B(h) of the Income-tax Act, 1961 now disallows the buyer's deduction for MSME payments unless made within the prescribed time limit. A large buyer sitting on unpaid MSME invoices is not just breaching a civil statute — it is now potentially understating its taxable income.
This article examines the 45-day payment rule in its full legal, enforcement, and tax dimensions — from who qualifies as an MSME and how the clock starts running, to how to file a claim before the MSME Facilitation Council, the income-tax disallowance framework for buyers, and the practical steps every registered MSME should take to protect its receivables.
II. Who Qualifies as an MSME — Registration and the Udyam Framework
The benefit of the MSMED Act's payment protection regime is available only to enterprises registered as MSMEs under the Act. Following the revised classification criteria introduced in the Aatmanirbhar Bharat package (2020), an MSME is defined on the basis of investment in plant and machinery / equipment and annual turnover:
| Category | Investment in Plant & Machinery / Equipment | Annual Turnover |
|---|---|---|
| Micro Enterprise | Not exceeding Rs. 1 crore | Not exceeding Rs. 5 crore |
| Small Enterprise | Not exceeding Rs. 10 crore | Not exceeding Rs. 50 crore |
| Medium Enterprise | Not exceeding Rs. 50 crore | Not exceeding Rs. 250 crore |
Registration under the Udyam Registration portal (udyamregistration.gov.in) — which replaced Udyog Aadhaar in July 2020 — is the gateway to all MSME-specific protections. An enterprise that has not obtained its Udyam Registration Certificate cannot invoke the MSMED Act's payment provisions, the MSME Facilitation Council, or the Section 43B(h) tax benefit on behalf of a paying buyer.
III. The 45-Day Payment Rule — How It Works, When the Clock Starts
3.1 Section 15 of the MSMED Act — The Core Obligation
Section 15 of the MSMED Act, 2006 is the cornerstone provision. It states that where any supplier supplies goods or renders services to any buyer, the buyer shall make payment on or before the date agreed upon between the buyer and the supplier in writing. However — and this is the provision that surprises most buyers — where no agreement exists, or where the agreed period exceeds 45 days, the outer limit for payment is 45 days from the date of acceptance or deemed acceptance.
3.2 Interest — Automatic, Compound, at Three Times the Bank Rate
Section 16 of the MSMED Act provides that where a buyer fails to make payment within the time prescribed under Section 15, the buyer shall be liable to pay compound interest with monthly rests at three times the bank rate as notified by the Reserve Bank of India. As of the current RBI bank rate (6.75% per annum as of early 2025), the penal interest works out to approximately 20.25% per annum — compounded monthly.
This interest is not discretionary — the MSME supplier does not need to prove loss or file a suit to trigger it. It accrues as a matter of law from the day after the due date. The only question is whether the buyer acknowledges it voluntarily or must be compelled through the dispute resolution mechanism described in Section V below.
3.3 What Documents Start the Clock — Invoice, Agreement, or Delivery Challan?
The starting point of the 45-day clock is the date of acceptance or deemed acceptance. In practice, this means the date of delivery of goods (supported by a signed delivery challan, lorry receipt, or goods receipt note) or the date of completion of services (supported by a service completion certificate, work order closeout, or equivalent acknowledgement). The importance of maintaining timestamped, signed delivery documentation cannot be overstated — it is the single most important piece of evidence in any MSME payment dispute.
Where a written agreement fixes a payment period of, say, 30 days from invoice, that agreed period governs — but only if it does not exceed 45 days. Any agreement that purports to fix a payment period exceeding 45 days is void to that extent, and the 45-day limit applies instead.
IV. Section 43B(h) of the Income-Tax Act — The Tax Teeth Behind the Rule
The Finance Act, 2023 inserted clause (h) into Section 43B of the Income-tax Act, 1961, with effect from Assessment Year 2024-25. The provision states that any sum payable by the assessee to a Micro or Small Enterprise (registered under the MSMED Act) in respect of goods supplied or services rendered shall be allowed as a deduction only in the year in which the payment is actually made — if the payment is not made within the time limit specified under Section 15 of the MSMED Act.
4.1 Which Enterprises Are Covered Under Section 43B(h)?
A critical distinction: Section 43B(h) applies only to payments due to Micro and Small Enterprises. It does not apply to Medium Enterprises. This distinction matters for buyers who may be dealing with medium-sized MSME-registered vendors — the income-tax disallowance does not apply to that segment, though the MSMED Act's payment protection still does.
| MSME Category | MSMED Act Payment Protection (Section 15) | Section 43B(h) Tax Disallowance |
|---|---|---|
| Micro Enterprise | Yes — 45-day limit applies | Yes — deduction disallowed if unpaid beyond limit |
| Small Enterprise | Yes — 45-day limit applies | Yes — deduction disallowed if unpaid beyond limit |
| Medium Enterprise | Yes — 45-day limit applies | No — Section 43B(h) does not apply to Medium enterprises |
4.2 Practical Impact on Year-End Financial Closing for Buyers
For finance teams of companies with significant MSME vendor bases, this provision has introduced a new year-end closing obligation. At the balance sheet date (31 March each year), any outstanding creditor balance due to a Micro or Small Enterprise where the payment has crossed the 45-day threshold must be identified and added back to taxable income. This requires systematic vendor classification, creditor ageing analysis, and a tax adjustment — ideally captured in the company's tax computation as a Section 43B(h) disallowance.
The MSME and Udyam registration status of every supplier is therefore no longer a procurement-only question — it is a tax data point. Finance teams that do not maintain a vendor-level Udyam registration database are exposed to under-reporting risk at assessment.
V. Enforcement — The MSME Facilitation Council Mechanism
5.1 Section 18 — The MSME Supplier's Legal Remedy
Where a buyer does not pay within the prescribed time — or disputes the payment — Section 18 of the MSMED Act entitles the MSME supplier to make a reference to the MSME Facilitation Council (MSEFC) constituted by each state government under Section 20 of the Act. The MSEFC first attempts conciliation between the parties. If conciliation fails within 45 days, the Council proceeds to arbitration under the Arbitration and Conciliation Act, 1996.
The Facilitation Council mechanism is fast, cost-effective, and exclusively available to registered MSMEs. Unlike a civil suit — which could take years and involves court fees and legal costs — an MSEFC reference is a relatively streamlined process. Most states now allow online filing of MSEFC references through the Samadhaan portal (samadhaan.msme.gov.in), making access significantly easier than it was even a few years ago.
5.2 What an MSME Must Prepare Before Filing
Documentation Checklist for an MSME Facilitation Council Reference:
- Udyam Registration Certificate — confirming MSME status as of the date of supply
- Purchase Order / Work Order — establishing the agreed scope, value, and payment terms
- Delivery challans / Lorry receipts / Service completion certificates — establishing the date of delivery or completion (starting the 45-day clock)
- Tax invoices with GST details — establishing the amount due and the HSN / SAC classification
- Written correspondence with the buyer — demand letters, emails, or WhatsApp messages acknowledging the outstanding amount
- Bank statements — showing the absence of payment for the period in question
- Computation of interest — at three times the RBI bank rate, compounded monthly from the day after the due date
- Copy of any written agreement on payment terms — to establish whether the 45-day rule applies or a shorter agreed period governs
5.3 What Happens After Filing — Timeline
| Stage | Action | Approximate Timeline |
|---|---|---|
| Filing | MSME supplier files application on Samadhaan portal with supporting documents | Day 0 |
| Acknowledgement | MSEFC acknowledges receipt and assigns case number | Within 7–10 days |
| Notice to Buyer | MSEFC issues notice to buyer to appear before the Council | Within 15–21 days |
| Conciliation | Council attempts conciliation between both parties | 45 days from first sitting |
| Arbitration | If conciliation fails, Council refers dispute to arbitration | After conciliation failure |
| Award | Arbitration award — enforceable as a court decree under the Arbitration Act | Varies by state and complexity |
| Recovery | Decree executed through civil court — attachment of assets if needed | Post-award |
VI. The GST Dimension — Input Tax Credit and Delayed Payments
There is an often-overlooked GST implication for buyers who delay payment beyond 180 days. Rule 37 of the CGST Rules, 2017 requires that where a registered person has availed input tax credit (ITC) on an inward supply and fails to pay the supplier within 180 days of the date of invoice, the ITC availed must be reversed. The reversed ITC must be added back to the output tax liability, along with applicable interest under Section 50 of the CGST Act.
For a buyer who is already facing a Section 43B(h) income-tax disallowance on an unpaid MSME creditor, the compounding effect of an ITC reversal creates a double fiscal penalty — income-tax disallowance on the expenditure and loss of the GST credit on the corresponding input. Both consequences are reversed when the payment is eventually made, but the cash flow and working capital cost of delayed compliance can be significant.
VII. Practical Scenarios — Applying the Rules
Scenario A: The Garment Manufacturer Who Didn't Know the Clock Was Running
A small garment manufacturer in Surat (registered as a Micro Enterprise on Udyam) supplies Rs. 22 lakh worth of finished fabric to a large retail chain on 1 June 2024. Delivery is acknowledged by the retail chain's warehouse manager on 5 June 2024. The purchase order specifies 'payment within 60 days of invoice.' The manufacturer raises the invoice on 10 June 2024.
The 60-day agreement exceeds the 45-day statutory limit and is therefore void to that extent. The effective due date for payment is 20 July 2024 (45 days from 5 June 2024, the date of accepted delivery). The retail chain pays on 30 September 2024 — 72 days late. Compound interest at 20.25% per annum (3× 6.75%) for 72 days = approximately Rs. 89,500 that the manufacturer is legally entitled to claim. Additionally, the retail chain cannot deduct the Rs. 22 lakh payment in AY 2024-25 — the deduction is deferred to AY 2025-26 when payment was actually made.
Scenario B: The IT Services Firm and the Ambiguous Acceptance Date
A small IT services company (registered as a Small Enterprise) completes a software development project for a mid-sized corporate client. Work is delivered on 15 August 2024. The client does not acknowledge receipt formally. On 30 August 2024 — 15 days later — the client sends an email stating it is 'reviewing the deliverables'. The IT company raised its invoice on 20 August 2024.
Under the MSMED Act, if the buyer does not raise a formal, documented dispute within 15 days of delivery, the goods/services are deemed accepted as of the delivery date. The client's vague 'review' email — which does not specifically dispute the deliverables — may not constitute a valid rejection. The 45-day clock likely started on 15 August 2024, making payment due by 29 September 2024. The IT company's legal team should document the delivery record carefully and issue a formal demand notice before filing on the Samadhaan portal.
This scenario illustrates the critical importance of obtaining formal written acceptance — or a contemporaneous delivery record — at the time of service completion. An unsigned service completion certificate creates ambiguity that benefits the buyer, not the MSME supplier.
VIII. Key Takeaways
- The MSMED Act, 2006 mandates that buyers pay MSME suppliers within 45 days of acceptance or deemed acceptance of goods/services. Any agreement providing for a longer period is void to that extent — the 45-day limit is a statutory ceiling that cannot be contracted away.
- Where the buyer does not formally dispute goods or services within 15 days of delivery, acceptance is deemed to have occurred on the delivery date itself — starting the 45-day clock immediately.
- Delayed payment automatically attracts compound interest at three times the RBI bank rate (currently approximately 20.25% per annum) from the day after the due date — the MSME supplier does not need to separately prove loss or damage.
- Section 43B(h) of the Income-tax Act, 1961 (inserted by Finance Act 2023, effective AY 2024-25) disallows a buyer's deduction for payments due to Micro and Small Enterprises if not made within the prescribed time limit. The deduction is allowed only in the year of actual payment.
- The ITC reversal obligation under Rule 37 of the CGST Rules, 2017 creates a second fiscal consequence for buyers who delay payment beyond 180 days — compounding the cost of delayed payment beyond the MSMED Act interest.
- The MSME Facilitation Council mechanism under Section 18 of the MSMED Act provides a statutory conciliation-then-arbitration remedy. References can be filed online through the Samadhaan portal (samadhaan.msme.gov.in) — a significantly more accessible route than civil litigation.
- Udyam Registration is the threshold condition for all MSMED Act protections. An unregistered MSME supplier cannot invoke Section 15, Section 16, or Section 18 rights — making timely Udyam registration a business-critical compliance obligation.
- Buyers with significant MSME vendor bases should maintain a vendor-level Udyam registration database, conduct creditor ageing analysis at each financial year-end, and compute Section 43B(h) disallowances as part of their regular tax audit and financial closing process.
IX. Conclusion — A Law Worth Knowing, and Worth Using
The MSMED Act's payment protection regime is one of the few statutes in Indian commercial law that is unambiguously designed to protect the smaller party in a transaction. The 45-day rule, the automatic compound interest, the Facilitation Council mechanism, and the Section 43B(h) income-tax consequence collectively represent a comprehensive legal toolkit that most MSME suppliers have not yet fully utilised.
The Finance Act 2023's insertion of Section 43B(h) transformed the dynamics of MSME receivables enforcement. What was previously a civil matter between buyer and supplier has acquired a direct income-tax dimension — making large buyers acutely aware that prolonged non-payment to MSME vendors now carries a deferred tax cost. This alignment of incentives should, over time, improve payment discipline across the MSME ecosystem.
For MSME owners reading this article: if you have outstanding receivables beyond 45 days from registered buyers, the law is on your side. Document your delivery records, quantify the interest, and consider a formal demand notice before filing on the Samadhaan portal. The process is more accessible than most business owners believe.
For finance and procurement teams of companies that buy from MSMEs: a structured vendor classification exercise, creditor ageing review, and pre-year-end payment sweep are not just good commercial practice — they are now tax-compliance necessities. For situations involving complex buyer-supplier arrangements, multi-state vendors, or disputed deliveries, professional evaluation across legal and tax dimensions is advisable.
Important disclaimer
This article has been prepared by Sandeep Singla & Associates, Chartered Accountants, solely for educational and informational purposes. It does not constitute legal, tax, financial, or professional advice of any nature. The information contained herein reflects the authors' understanding of applicable laws as of the date of publication and is subject to change without notice, including on account of legislative amendments, judicial decisions, and regulatory notifications. The MSMED Act, 2006 and the Income-tax Act, 1961 (as amended by the Finance Act, 2023) are subject to ongoing judicial interpretation and regulatory clarification.
Readers must obtain independent professional advice from a qualified Chartered Accountant, Advocate, or other appropriate professional advisor after full consideration of their specific facts and circumstances before taking any decision relating to MSME registration, payment enforcement, tax computation, or dispute resolution. Sandeep Singla & Associates, its partners, and staff disclaim all liability for any loss, damage, cost, or expense incurred by any person in connection with reliance on this article. This article has been prepared in compliance with the ICAI Code of Ethics and applicable ICAI advertising guidelines.
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