India has tens of millions of micro, small, and medium enterprises, yet many operate under chronic receivables stress: work delivered, invoices raised, and payment deferred at the buyer's convenience.
The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) mandates payment within 45 days of acceptance or deemed acceptance of goods or services. On default, compound interest at three times the Reserve Bank of India's notified bank rate accrues by law — without the supplier having to prove damages.
The Finance Act, 2023 added Section 43B(h) to the Income-tax Act, 1961: for buyers, payments to Micro and Small Enterprises (registered under the MSMED Act) are deductible only when actually made if the payment is not within the Section 15 time limit — so delayed payment can become a tax compliance issue for the buyer as well as a civil liability. This article covers Udyam registration, how the 45-day clock runs, Section 43B(h), the MSME Facilitation Council (MSEFC) and Samadhaan portal, GST Rule 37, and practical enforcement steps.
II. Who qualifies as an MSME — Udyam and classification
MSMED Act payment protections apply only to enterprises registered as MSMEs. Udyam Registration (udyamregistration.gov.in), replacing Udyog Aadhaar from July 2020, is the gateway to those protections and to how buyers treat vendors for Section 43B(h) purposes.
| Category | Investment in plant & machinery / equipment | Annual turnover |
|---|---|---|
| Micro | Not exceeding Rs. 1 crore | Not exceeding Rs. 5 crore |
| Small | Not exceeding Rs. 10 crore | Not exceeding Rs. 50 crore |
| Medium | Not exceeding Rs. 50 crore | Not exceeding Rs. 250 crore |
III. The 45-day payment rule — Sections 15 and 16
Section 15: the buyer must pay by the date agreed in writing between buyer and supplier. Where there is no agreement, or the agreed period exceeds 45 days, payment must be made within 45 days from the date of acceptance or deemed acceptance. Any written term purporting to allow more than 45 days is void to that extent — 45 days is a statutory ceiling.
| Deemed acceptance | Effect |
|---|---|
| Buyer does not dispute goods or services within 15 days of actual delivery | Goods or services are deemed accepted as of the date of delivery — the 45-day clock runs from delivery unless a documented written dispute is raised within 15 days. |
Section 16: if payment is late, the buyer must pay compound interest with monthly rests at three times the RBI bank rate. The rate is not discretionary — it runs from the day after the due date until payment. Verify the current RBI bank rate when computing interest (illustrative examples in public materials have used rates such as 6.75% annually, implying roughly 20.25% on the 3× basis before monthly compounding).
IV. Section 43B(h) of the Income-tax Act — tax disallowance for buyers
Inserted by the Finance Act, 2023, with effect from Assessment Year 2024-25, Section 43B(h) provides that any sum payable to a Micro or Small Enterprise (registered under the MSMED Act) for goods supplied or services rendered is allowed as a deduction only in the year in which payment is actually made, if payment is not made within the time limit under Section 15 of the MSMED Act.
| MSME category | MSMED Act Section 15 protection | Section 43B(h) disallowance |
|---|---|---|
| Micro | Yes — 45-day (or shorter agreed) limit | Yes if unpaid beyond the time limit |
| Small | Yes | Yes |
| Medium | Yes — MSMED payment rules still apply | No — Section 43B(h) does not apply to Medium enterprises |
Practical impact: at financial year-end, buyers should identify creditors outstanding beyond the statutory/agreed period to Micro and Small suppliers, map Udyam status, and book Section 43B(h) disallowance where required — typically reflected in tax computation and tax audit Form 3CD disclosures. Deduction generally follows in the year of actual payment.
V. Enforcement — MSME Facilitation Council and Samadhaan
Section 18 of the MSMED Act allows a registered MSME supplier to refer a payment dispute to the MSME Facilitation Council (MSEFC) constituted under Section 20. The Council first attempts conciliation; if conciliation does not succeed within 45 days, the matter may proceed to arbitration under the Arbitration and Conciliation Act, 1996. Many states support online filing via the Samadhaan portal (samadhaan.msme.gov.in).
- Udyam Registration Certificate (MSME status as of supply date).
- Purchase order / work order — scope, value, payment terms.
- Delivery challans, lorry receipts, or service completion evidence.
- Tax invoices with GST particulars.
- Written demands — email, letter, or traceable messages.
- Bank statements showing non-payment.
- Interest working — 3× RBI bank rate, compounded monthly from day after due date.
- Copy of written payment-term agreement (if any).
| Stage | Approximate timeline |
|---|---|
| Filing on Samadhaan with documents | Day 0 |
| Acknowledgement / case number | Often within 7–10 days |
| Notice to buyer | Often within 15–21 days |
| Conciliation | Up to 45 days from first sitting |
| Arbitration if conciliation fails | Varies |
| Award and execution | Per Arbitration Act and civil execution practice |
VI. GST — Rule 37 and delayed payment beyond 180 days
Rule 37 of the CGST Rules, 2017: where a registered person has availed input tax credit (ITC) on an inward supply and does not pay the supplier within 180 days of the invoice date, the ITC availed must be reversed and added to output tax liability, with interest under Section 50 of the CGST Act where applicable.
VII. Practical scenarios
Scenario A — Agreed 60 days void beyond 45 days: Micro supplier delivers 5 June; acceptance 5 June; PO says 60 days from invoice. Statutory cap applies — due date is 45 days from acceptance (20 July if acceptance is 5 June). Payment 30 September is late; supplier may claim Section 16 interest; buyer's deduction timing follows Section 43B(h) for that payable.
Scenario B — Ambiguous acceptance: services delivered 15 August; client emails 30 August that it is 'reviewing' without a specific dispute. If no formal documented dispute within 15 days of delivery, deemed acceptance may attach from 15 August — payment due ~29 September (45 days later). Obtain written acceptance or strong contemporaneous completion records to reduce ambiguity.
Key takeaways
- MSMED Act Section 15 caps payment at 45 days from acceptance or deemed acceptance unless a shorter period is agreed in writing; longer agreed periods are void beyond 45 days.
- Deemed acceptance on the delivery date arises if the buyer does not dispute within 15 days of delivery — the clock can run from delivery.
- Section 16 interest is compound, monthly rests, at three times the RBI bank rate — statutory from the day after the due date.
- Section 43B(h) (AY 2024-25 onwards) defers deduction for sums payable to Micro and Small enterprises until payment if the MSMED time limit is breached; it does not apply to Medium enterprises.
- Rule 37 CGST can force ITC reversal where payment to the supplier exceeds 180 days from invoice — an additional fiscal lever on buyers.
- MSEFC reference under Section 18 offers conciliation then arbitration; Samadhaan supports online filing for many cases.
- Udyam registration is a precondition to invoke MSMED payment rights; maintain delivery and acceptance evidence.
- Buyers should maintain vendor Udyam data, ageing analysis, and year-end Section 43B(h) processes alongside tax audit documentation.
Frequently asked questions
Does Section 43B(h) apply to our Medium-enterprise supplier?
No — Section 43B(h) applies only to sums payable to Micro and Small enterprises. MSMED Act payment obligations can still apply to Medium suppliers, but the specific income-tax disallowance under clause (h) does not.
We agreed 90 days payment in the PO — is that binding?
To the extent any agreement exceeds 45 days from acceptance or deemed acceptance, that part is void under the MSMED Act framework described in public commentary; the 45-day outer limit governs for statutory purposes.
Can we claim interest without going to court?
Section 16 interest accrues by law; the buyer may pay voluntarily. If not, the MSME may pursue MSEFC / arbitration under the MSMED Act mechanism rather than only a long civil suit — subject to documentation and registration requirements.
Conclusion
The MSMED Act payment regime is one of the clearer statutory protections for smaller suppliers. Section 43B(h) aligns buyer tax outcomes with prompt payment to Micro and Small enterprises.
Suppliers should register on Udyam, document acceptance dates, calculate interest, and use formal demand and Samadhaan/MSEFC routes where needed. Buyers should treat Udyam classification and creditor ageing as part of tax closing and procurement master data.
Complex multi-state or heavily disputed supply chains warrant coordinated advice from a Chartered Accountant and counsel.
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. The MSMED Act, 2006, the Income-tax Act, 1961 (including Section 43B(h)), GST law, and portal procedures are subject to amendment, notification, and judicial interpretation; RBI rates change. Verify current law, rates, and portal requirements before acting. Obtain independent advice from a qualified Chartered Accountant or Advocate for your specific facts. Sandeep Singla & Associates, its partners, and staff disclaim liability for loss or expense arising from reliance on this article. Prepared in compliance with the ICAI Code of Ethics and applicable ICAI advertising guidelines. © 2026 Sandeep Singla & Associates. All rights reserved. Reproduction requires prior written permission.