The MSME 45-Day Payment Rule — Both Sides Explained

The Rule in Four Lines

1. A buyer must pay a micro or small supplier within 45 days where there is a written agreement, or 15 days where there is not.
2. Late, and the buyer owes compound interest at three times the RBI bank rate, with monthly rests — automatically, by law.
3. That interest is not tax-deductible for the buyer (MSMED Act, Section 23).
4. And under Section 43B(h) of the Income-tax Act, the buyer cannot deduct the purchase itself until it is actually paid.

Point 4 is what makes this rule bite. It converts a supplier's collection problem into the buyer's tax problem — which is a conversation the buyer's own accountant will have with them, on your behalf, for free.

Who It Covers — and Who It Does Not

MSME Classification Limits

The thresholds were raised with effect from 1 April 2025 — investment limits by 2.5 times and turnover limits by 2 times. Both tests must be satisfied for a category.

The revision widened the net considerably: businesses that were medium under the old limits may now be small, and therefore inside the payment protection. If you last checked your suppliers' categories before April 2025, that list is out of date.

15 Days or 45 — Which Applies, and From When

• No written agreement on credit period → 15 days.
• Written agreement → the agreed period, but never more than 45 days. A contract saying 90 days does not give you 90 days; the excess is simply void against the statute.
• The clock runs from the day of acceptance — the day the goods or services are accepted, or the day any objection raised within 15 days of delivery is resolved.

That last point is worth noting on both sides: a genuine, promptly-raised quality objection moves the start date. An objection invented after the due date does not.

The Interest — and How It Compounds

Section 16 of the MSMED Act sets the rate at three times the bank rate notified by the RBI, compounded with monthly rests, from the appointed day to the date of actual payment.

Three features make it much heavier than ordinary trade interest:

• It applies automatically. The supplier does not need it in the contract, and does not need to have demanded it.
• It overrides the contract. A clause agreeing to a lower rate, or to none, does not displace the statute.
• It compounds monthly, so a long delay grows the liability faster than most buyers expect.

And under Section 23 of the MSMED Act, that interest is not deductible when computing the buyer's taxable income. The buyer pays it out of post-tax money.

Section 43B(h) — the Real Teeth

Section 43B(h) of the Income-tax Act, in force from FY 2023-24 onward, says that a buyer's deduction for a sum payable to a micro or small enterprise is allowed only in the year the payment is actually made, where payment is not made within the MSMED Act time limit.

What it costs, in numbers

A buyer has ₹40,00,000 payable to micro and small suppliers, unpaid at 31 March and beyond the statutory period.

• ₹40,00,000 is added back to taxable income for that year.
• At around 30% plus cess, that is roughly ₹12.5 lakh of additional tax in the current year.
• The deduction is not lost forever — it comes back in the year of payment — but the cash outflow happens now.
• Plus MSMED interest, which is not deductible at all.

For most buyers, simply paying the suppliers before 31 March is dramatically cheaper than the alternative. Which is exactly the behaviour the provision was written to produce.

If You Are the Buyer — a Six-Point Checklist

1. Collect written MSME declarations from every supplier, stating category (micro / small / medium) and Udyam number. Refresh them annually, and again after the April 2025 limit change.
2. Flag MSME suppliers in your accounting system so they are identifiable on the payables report rather than by memory.
3. Run a payables ageing every month filtered to micro and small suppliers, and watch anything approaching 45 days. See Part 2.
4. Put written agreements in place where you need the full 45 days — without one, you only have 15.
5. Clear MSME dues before 31 March, without exception. Make it a fixed year-end task.
6. File MSME-1 if you are a company — see below.

If You Are the Supplier — Using It Properly

1. Register on Udyam. It is free, online, and takes minutes. Without it you have no claim at all.
2. Print your Udyam number on every invoice, every quotation and in your email footer. Buyers cannot claim ignorance of something printed on the document they booked.
3. Send a written declaration of your MSME status when you open the account, and keep the acknowledgement.
4. Get the credit period in writing — and note that without an agreement your entitlement is 15 days, which is stronger, not weaker.
5. Raise it early and factually. The Stage 6 script in Part 4 is written for exactly this moment. It works because it is calm and points at a consequence on their side.
6. Keep your proof of acceptance — delivery challans, acknowledgements, emails. The clock runs from acceptance, so that date is the foundation of any claim.

How to Check a Supplier's MSME Status

1. Ask for the Udyam Registration Number — format UDYAM-XX-00-0000000.
2. Verify it on the government Udyam portal. The verification shows enterprise type and activity.
3. Check the activity type. A trader shown on Udyam is not covered by the payment provisions — this is the single most commonly missed point on the buyer side.
4. Check the category. Micro and small are covered; medium is not.
5. Keep the evidence on file, dated. Your auditor will ask, and a declaration you cannot produce is a declaration you did not have.

Udyam Registration

For suppliers who are not yet registered, this is the cheapest business decision available to you.

• Cost: free. There is no government fee, and any site charging one is not the government site.
• What you need: Aadhaar of the proprietor, partner or director; PAN; and GSTIN where applicable. Investment and turnover figures are pulled from linked PAN and GST data.
• Time: minutes, online, self-declaration based.
• What you get: a permanent Udyam Registration Number and certificate.

Beyond the payment protection, registration is what gives you access to priority sector lending, various government scheme benefits, and preference in public procurement. The payment rule alone justifies it.

MSME-1 — the Half-Yearly Return

A separate obligation, under the Companies Act rather than the MSMED Act, and one that catches companies out.

• Who: companies with amounts payable to micro and small suppliers outstanding beyond 45 days.
• What: e-form MSME-1, filed with the Registrar of Companies, giving supplier-wise outstanding amounts and the reasons for delay.
• When: half-yearly — due 30 April and 31 October.
• Why it matters: it is a public filing that puts your delayed MSME payments on record, and non-filing carries penalties under the Companies Act.

This applies to companies. Proprietorships and partnerships are outside the MSME-1 requirement, though they remain fully within the 45-day rule, the interest and Section 43B(h).

If They Still Do Not Pay

The MSMED Act provides a dedicated route: the Micro and Small Enterprises Facilitation Council in the state where the supplier is located.

• The Council first attempts conciliation, and moves to arbitration if that fails.
• It is designed to be faster and cheaper than a civil suit, and the reference can be made online in most states.
• A buyer wishing to challenge an award generally has to deposit a substantial portion of the amount first — a deliberate deterrent to appeals used purely for delay.

In practice the Council is used less often than it should be, and the mere mention of a reference frequently produces payment. Take advice before filing, and get your acceptance-date evidence in order first.

What's Next?

• Part 4 — Reminder Scripts: the Stage 6 message that uses this rule
• Part 6 — Customer Advances
• Part 2 — Ageing Analysis: run it on payables to spot MSME suppliers nearing 45 days
• Allowable Business Deductions