MSME 45-Day Payment Rule: How Micro and Small Suppliers Can Recover Delayed Payments

Summary: The Micro, Small and Medium Enterprises Development Act, 2006 provides statutory protection to eligible micro and small suppliers against delayed payments by requiring buyers to settle dues within the agreed period, subject to a maximum of 45 days from acceptance or deemed acceptance, or within 15 days where no written payment terms exist. Under Sections 15 and 16, delayed payments attract compound interest with monthly rests at three times the RBI-notified bank rate, while Section 23 disallows deduction of such interest for income-tax purposes. The article explains the importance of obtaining Udyam registration before entering into qualifying transactions, the exclusion of medium enterprises and generally of wholesale and retail traders from delayed-payment protection, and the consequences of written objections concerning supplied goods or services. It also examines the impact of Section 43B(h) of the Income-tax Act, 1961, under which payments made beyond the prescribed MSMED Act deadline are deductible only on actual payment, along with disclosure obligations under Section 22 of the MSMED Act and MSME Form I. For recovery, Section 18 provides access to the Micro and Small Enterprises Facilitation Council through conciliation and arbitration, while Section 19 requires buyers challenging awards to deposit 75% of the awarded amount. The article further discusses limitation, documentation, legal notices, recovery proceedings, dishonoured cheques and settlement safeguards, emphasising that suppliers should preserve delivery and acceptance evidence, establish clear credit terms, calculate statutory interest and initiate recovery promptly rather than allowing unpaid invoices to accumulate.

The MSME 45-Day Payment Rule: How Micro and Small Suppliers Can Recover Delayed Payments

A small manufacturer ships goods on 1 April. The buyer, a larger company, accepts them without complaint and then pays in September. For most suppliers that delay is simply the cost of doing business. It need not be. The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) gives registered micro and small suppliers a statutory deadline, a punitive interest rate and a fast-track forum. Since 2024, the Income-tax Act has added a tax cost for buyers who pay late. This article explains how the rules work together and what a supplier should do, step by step.

1. Who is protected

The delayed-payment provisions (Sections 15 to 24 of the MSMED Act) protect a “supplier”, which the Act defines as a micro or small enterprise that has filed its memorandum, today meaning Udyam registration. Three points matter in practice:

• Medium enterprises are not covered. Only micro and small enterprises get the 45-day protection.
• Registration should come before the supply. The Supreme Court in Silpi Industries v. Kerala State Road Transport Corporation (2021) held that a supplier cannot claim the Act’s benefits for a contract entered into before it registered. Register first, then supply.
• Pure traders are generally outside. Since 2021, wholesale and retail traders can register on Udyam for priority-sector lending, but the government clarified that this registration does not extend the delayed-payment benefits to them.

2. The deadline: 45 days, or 15 days if nothing is agreed

Under Section 15, the buyer must pay on or before the date agreed in writing. That agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance of the goods or services. Where there is no written agreement on credit terms, the buyer must pay within 15 days.

“Day of acceptance” is defined in Section 2(b). It is the day the goods are delivered or the services rendered. If the buyer raises a written objection within 15 days of delivery, acceptance is the day the objection is resolved. If no objection is raised within 15 days, the day of delivery counts as deemed acceptance.

Two consequences follow. A purchase order that says “payment in 90 days” does not extend the statutory limit beyond 45 days. And a buyer who first complains about quality only after the due date has missed the window to delay acceptance.

3. The interest: three times the RBI bank rate, compounded monthly

If the buyer misses the deadline, Section 16 makes it liable to pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. Interest runs from the “appointed day”, the day after the agreed or statutory period ends, until payment. Section 24 gives these provisions overriding effect, so a contract term that waives or lowers the interest does not bind the supplier.

Example. Assume the RBI bank rate is 6.5%, so the statutory rate is 19.5% a year, or 1.625% a month compounded. On an unpaid invoice of ₹5,00,000, the interest after 3 months of delay is about ₹24,773. After 6 months it is about ₹50,774, and after 12 months about ₹1,06,704. Use the bank rate in force during each period of delay when you compute an actual claim; it changes with RBI policy.

Section 23 adds that this interest is not an allowable deduction for the buyer under the Income-tax Act. The buyer pays it out of post-tax profit.

4. The buyer’s tax and disclosure exposure

Three further provisions put pressure on the buyer, and a supplier should know them before writing a demand.

• Section 43B(h), Income-tax Act (effective from assessment year 2024-25). A buyer can deduct an amount payable to a micro or small enterprise only in the year it is actually paid, if it is paid after the time limit in Section 15 of the MSMED Act. A late payment straddling the year end pushes the buyer’s expense into the next year and raises its tax for the current one. Many finance teams now track MSME payables closely for this reason.
• Section 22, MSMED Act. A buyer whose accounts are audited must disclose in its annual accounts the principal and interest remaining unpaid to micro and small suppliers.
• MSME Form I, Companies Act. Specified companies must file a half-yearly return with the Registrar of Companies listing amounts due to micro and small enterprises for more than 45 days, with the reasons for delay.

A demand that quotes these provisions is read differently by a buyer’s CFO than a polite reminder.

5. The forum: MSME Samadhaan and the Facilitation Council

Under Section 18, either party may refer a dispute about amounts due to the Micro and Small Enterprises Facilitation Council (MSEFC). The application is filed online on the MSME Samadhaan portal (samadhaan.msme.gov.in). Five features make this route attractive:

1. Jurisdiction follows the supplier. The Council of the state where the supplier is located has jurisdiction, wherever the buyer is.

2. No court fee is payable to file the reference.

3. Conciliation comes first. If it fails, the Council arbitrates itself or refers the matter to an arbitration institution.

4. It is meant to be quick. The Act asks the Council to decide within 90 days of the reference.

5. Appeals are expensive for the buyer. Under Section 19, a buyer who challenges the award must first deposit 75% of the amount awarded.

The Supreme Court in Silpi Industries also held that the Limitation Act applies to these proceedings. A supplier should therefore treat three years from the due date, or from the buyer’s last written acknowledgement or part-payment, as the outer limit, and file well before it.

6. What a supplier should do, step by step

1. Before supplying, confirm your Udyam registration and put credit terms of no more than 45 days in writing, in the quotation, purchase order acceptance or invoice.

2. On every invoice, state your Udyam number and that interest under Sections 15 and 16 of the MSMED Act applies to late payment.

3. At delivery, keep proof of acceptance: signed challan, GRN, acceptance email or e-way bill. Answer any quality objection in writing.

4. On the due date, send a statement of account by email, with a short reminder of the interest.

5. About 15 days after the due date, send a formal legal notice through an advocate. It should state the invoices, acceptance dates and interest computed to date, and cite Sections 15, 16, 22 and 23 of the MSMED Act and Section 43B(h) of the Income-tax Act. Many buyers pay at this stage.

6. If payment does not follow, file on MSME Samadhaan with the invoices, delivery proof, ledger and notice. Keep a cheque-bounce complaint under Section 138 of the Negotiable Instruments Act as a parallel route if a cheque was given and dishonoured.

7. Once settled, document the settlement terms and secure instalments with post-dated cheques or an e-mandate.

7. Common mistakes

• Registering on Udyam only after the dispute arises.
• Agreeing in writing to 60 or 90 days’ credit and then assuming interest runs from day 46. The cap applies, but a clean 45-day term avoids argument.
• Accepting partial payments without a written acknowledgement of the balance.
• Waiting more than a year before acting. Evidence weakens and limitation runs.

Conclusion

The MSMED Act turns a supplier’s polite request into a legal claim with a deadline, a penalty and a forum. Section 43B(h) gives the buyer’s own tax team a reason to pay on time. Suppliers who register before supplying, write clean credit terms and act within weeks of the due date recover far more, and far faster, than those who wait.

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About the author: The FundRaksha Legal team works with micro and small suppliers across India on recovering delayed business payments through legal notices, MSME Samadhaan and Section 138 proceedings.  This article is general information, not legal advice for a specific case.