Summary: The MSME 45-day payment rule under sections 15 and 16 of the Micro, Small and Medium Enterprises Development Act, 2006, protects eligible micro and small suppliers against delayed payments. Where a written agreement exists, the agreed credit period cannot exceed 45 days from acceptance or deemed acceptance; without a written agreement, payment is generally due within 15 days. Delayed payments attract compound interest with monthly rests at three times the RBI bank rate. The article explains how suppliers can document delivery, track due dates, send demands and pursue claims through the MSME dispute-resolution mechanism. It also examines the buyer-side consequences, including the income-tax deduction timing rule under section 37(2)(g) of the Income-tax Act, 2025, reporting of overdue amounts in Form MSME-1 and the separate GST input-tax-credit payment condition at 180 days. Practical controls include customer-wise ledgers, proof of delivery, weekly ageing reviews, recording part-payments and computing statutory interest. An illustrative invoice of ₹5.90 lakh shows how interest, income-tax timing and GST can affect a buyer differently. The article also discusses enacted changes under the MSMED (Amendment) Act, 2026 and distinguishes the provisions commenced on 15 October 2026 from dispute-resolution amendments not yet notified as operative under S.O. 5575(E). Suppliers should verify their eligibility, retain written records and obtain advice before pursuing statutory recovery, particularly where registration status, trading activity or disputed acceptance affects the claim.
- Introduction
- What the MSME 45-Day Payment Rule Says
- The Payment Deadline
- Who the Rule Protects
- The Interest Cost of Paying Late
- Why Buyers Now Have Tax Reasons to Pay on Time
- Section 37(2)(g) of the Income-tax Act, 2025
- Form MSME-1 Under the Companies Act, 2013
- The GST 180-Day Rule
- How a Supplier Should Recover an Overdue Invoice
- What the MSMED (Amendment) Act, 2026 Changes
- Receivables Controls That Make the Rule Enforceable
- Worked Example: One Overdue Invoice, Three Costs
- Frequently Asked Questions
- Conclusion
Introduction
The MSME 45-day payment rule requires a buyer to pay a micro or small enterprise by the date agreed in writing, and never later than 45 days from acceptance of the goods or services. Where nothing is agreed in writing, the limit is 15 days. The rule sits in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).
Most writing on this rule speaks to the buyer: how to avoid the disallowance, how to file Form MSME-1. Suppliers get far less attention, even though the law was written for them. A micro manufacturer selling to a large distributor on “60 days” rarely knows that the statute caps the term at 45 days and that interest at three times the bank rate can accrue after the statutory deadline, or that the buyer’s own tax return now carries the cost of the delay.
Tax year 2026-27 is also a change point. The Income-tax Act, 2025 came into force on 1 April 2026, and the familiar section 43B(h) of the 1961 Act now sits in section 37(2)(g) with the same substance, as the Ministry of Finance confirmed in a Rajya Sabha reply on 21 July 2026. Separately, Parliament enacted the MSMED (Amendment) Act, 2026. Its provisions have staggered commencement dates: several provisions commenced on 15 October 2026, but the new mediation and arbitration timelines in sections 8–10 of the Amendment Act were not brought into force by Notification S.O. 5575(E) dated 12 October 2026.
The sections below cover who the rule protects, why buyers now have a direct tax reason to pay on time, how a supplier should escalate an overdue invoice, and which receivables habits turn the rule from a right on paper into cash in the bank.
What the MSME 45-Day Payment Rule Says
Section 15 of the MSMED Act fixes the latest date a buyer may pay a micro or small supplier, and section 16 makes late payment expensive.
The Payment Deadline
| Situation | Payment due by |
|---|---|
| No written agreement on credit terms | 15 days from the day of acceptance or deemed acceptance |
| Written agreement for 45 days or less | The agreed date |
| Written agreement for more than 45 days | 45 days from acceptance; the longer term does not override the statute |
The clock runs from acceptance, not from the invoice date. Under section 2(b) of the MSMED Act, the day of acceptance is generally the day goods are delivered or services rendered. If the buyer raises a written objection within 15 days of delivery, acceptance moves to the day the supplier removes the defect. If no objection is raised within 15 days, delivery is treated as deemed acceptance.
Who the Rule Protects
The protection covers micro and small enterprises holding a valid Udyam registration. Medium enterprises fall outside both the MSMED payment rule and the buyer’s income-tax disallowance.
Traders need a closer look. Retail and wholesale traders were allowed onto the Udyam portal in 2021, but the government’s notification at the time limited the benefit to priority sector lending, so most advisers do not treat traders as protected by the delayed-payment provisions. A trader-supplier should take specific advice before relying on the rule.
The Interest Cost of Paying Late
Under section 16, a buyer who misses the deadline owes compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. The interest runs from the due date until payment, and it applies regardless of any contrary clause in the purchase order. Section 23 adds that this interest is not deductible for the buyer in computing taxable income.
Why Buyers Now Have Tax Reasons to Pay on Time
A buyer that pays a micro or small supplier late now pays for it in three places: its income-tax return, its company-law filings and, for very long delays, its GST credit.
Section 37(2)(g) of the Income-tax Act, 2025
Under section 37(2)(g), which replaced section 43B(h) of the 1961 Act from 1 April 2026, any sum payable to a micro or small enterprise beyond the section 15 limit is deductible only in the year it is actually paid. Section 37(3) does not extend the usual relief for payment before the return due date to this clause. So a purchase booked in tax year 2026-27 and still unpaid past its MSMED deadline on 31 March 2027 is disallowed for that year and allowed in the year of payment.
For a supplier, this is useful leverage. A buyer’s finance team that sees an MSME balance approaching the year-end has a direct cash-tax reason to clear it, and tax auditors report these dues every year.
Form MSME-1 Under the Companies Act, 2013
Specified companies with reportable delayed payments to micro or small suppliers must file a half-yearly return in Form MSME-1 with the Registrar of Companies under section 405. The returns fall due on 31 October (for April to September) and 30 April (for October to March), and they state the amount outstanding and the reason for delay. The revised reporting requirements also cover specified payments made after 45 days; public availability of individual filing details should not be assumed.
The GST 180-Day Rule
The second proviso to section 16(2) of the CGST Act, read with Rule 37 of the CGST Rules, requires proportionate reversal/payment of input tax credit attributable to the unpaid consideration (including tax) where the recipient has not paid the supplier within 180 days of the invoice date, subject to statutory exceptions such as reverse-charge supplies and deemed-payment cases. Applicable interest and re-availment are governed by section 50 and Rule 37. The rule is not confined to MSME suppliers. A supplier chasing an old balance can point to this separate GST consequence, while recognising that the exact reversal depends on the amount unpaid and the recipient’s ITC position.
How a Supplier Should Recover an Overdue Invoice
Recovery under the MSMED Act works best as a fixed escalation path, starting before the invoice is even raised.
- Put the terms in writing before supply. State the Udyam number, the credit period (45 days or less) and the statutory interest under section 16 on the quotation, the order confirmation and the invoice. A written term avoids arguments over whether 15 or 45 days applies.
- Record the acceptance date. Keep a signed delivery receipt or proof of delivery. Since the clock runs from acceptance, this document decides the due date if the buyer later disputes it.
- Remind before the due date, then on it. A reminder five days before the due date, quoting the MSMED deadline, is often enough for buyers that track their own section 37(2)(g) exposure.
- Send a formal demand after the deadline. Quote sections 15 and 16, the amount, the due date and the interest accruing. Mention that dues beyond 45 days must be reported by a company in Form MSME-1.
- File on the MSME ODR portal. If payment does not follow, the supplier can file a delayed-payment claim online. The MSME Online Dispute Resolution portal at odr.msme.gov.in is the mandatory filing channel for new delayed-payment references from 15 October 2025; the earlier Samadhaan portal remains available for transition of existing matters. The claim is referred to the Micro and Small Enterprises Facilitation Council (MSEFC) under section 18.
- Conciliation, then arbitration. The MSEFC first tries to settle the matter; if that fails, it takes up arbitration or refers it to an institution. A buyer that wants to challenge the resulting award must first deposit 75% of the awarded amount under section 19.
What the MSMED (Amendment) Act, 2026 Changes
See the commencement notification and its effective dates.
The MSMED (Amendment) Act, 2026 received Presidential assent on 13 August 2026. It does not change the 15 and 45-day limits in section 15. The enacted amendments provide for mediation within 90 days of first appearance, referral to arbitration within 30 days after unsuccessful mediation, and a minimum 50% release to the supplier when a challenge remains pending beyond six months. However, sections 8–10 of the Amendment Act, containing these dispute-resolution changes, were not commenced by Notification S.O. 5575(E) dated 12 October 2026 and must not be described as currently operative without a further commencement notification. Other provisions, including TReDS-related provisions, commenced on 15 October 2026.
Notification S.O. 5575(E) commenced sections 2–7, 11 and 13–17 of the Amendment Act on 15 October 2026 and schedules section 12 for 15 December 2026. Sections 8–10 were not covered. Suppliers should not rely on the new 90-day mediation, 30-day referral or 50% release mechanisms as operative until their commencement is verified.
Receivables Controls That Make the Rule Enforceable
The 45-day rule only helps a supplier who can prove three facts quickly: the agreed term, the acceptance date and the exact balance outstanding.
In practice, most small suppliers lose that proof in the gap between sales, dispatch and accounts. The order is in one register, the delivery challan in a driver’s folder, and the ledger in the accounting software. When a buyer disputes the due date or claims a part-payment, nobody can answer within the hour.
Five controls close that gap:
- One ledger per customer, with due dates by acceptance. Age each invoice from the acceptance date, not only the invoice date, so the MSMED deadline is visible.
- Proof of delivery attached to the invoice. A signed receipt or photo at the drop point fixes the acceptance date and settles most “never received” disputes.
- An ageing report reviewed weekly. Flag every micro or small enterprise invoice at day 40, and every invoice crossing 45 days, for a call that week.
- Same-day recording of payments. Apply part-payments and field collections to named invoices, so the interest claim is calculated on the correct balance.
- Interest computed, even if waived. Work out the section 16 amount on each overdue invoice. Whether or not you claim it, the figure strengthens the conversation.
The broader discipline of credit limits, collection calendars and DSO tracking is covered in this accounts receivable management guide, which includes a day-by-day collection calendar for distributors. Platforms such as TradeONE CRM keep customer ledgers, aging-wise outstanding reports, payment follow-up reminders and delivery confirmation with proof in one system, which is the record a supplier needs when invoking the MSMED Act. The statutory interest calculation and the ODR filing itself remain manual steps for the accounts team or the supplier’s adviser.
Worked Example: One Overdue Invoice, Three Costs
On a ₹5.9 lakh invoice paid approximately 90 days after the agreed due date, illustrative interest is about ₹29,000 and may face an illustrative ₹1.26 lakh acceleration of income-tax cash outflow, while the GST rule never comes into play.
Facts (illustrative): a Udyam-registered micro manufacturer supplies goods worth ₹5,00,000 plus GST at 18% (₹90,000) to a company buyer. Invoice total: ₹5,90,000. Goods delivered and accepted on 1 December 2026, invoice dated the same day. Written credit term: 45 days. The buyer pays the full amount on 15 April 2027.
| Item | Date or amount | Effect |
|---|---|---|
| MSMED due date | 15 January 2027 | Statutory interest starts after the payment deadline; precise date computation should follow section 15 |
| Days late | Approximately 90 days (modelled as 3 monthly rests) | Interest runs to 15 April 2027 |
| Section 16 interest at 19.5% a year (3 × an assumed 6.5% bank rate) | about ₹29,232 | Payable to supplier; not deductible for buyer (section 23) |
| Buyer’s position on 31 March 2027 | ₹5,00,000 purchase cost unpaid past deadline | Disallowed in tax year 2026-27 under section 37(2)(g); allowed in 2027-28 |
| Illustrative timing impact at assumed effective tax rate of 25.17% | about ₹1,25,850 | Potential cash-flow timing impact, not a permanent additional tax; subject to taxable profits and tax regime |
| GST 180th day | 30 May 2027 | Paid on 15 April, so no Rule 37 reversal |
The following is an illustrative three-month compounding model, not a certified statutory demand calculation:
I = P × [(1 + r/12)n − 1] = ₹5,90,000 × [(1.01625)3 − 1] ≈ ₹29,232
Here P is the amount due, r is three times the bank rate, and n is the number of monthly rests. The bank rate of 6.5% and three equal monthly rests are assumptions for illustration; statutory interest must be recalculated for the actual start and end dates, applicable RBI bank rate and monthly rests before issuing a demand. The disallowance is shown on the purchase cost alone, on the footing that the buyer claimed the GST as input tax credit.
The lesson for suppliers: on a 90-day delay, the GST rule gives no leverage, but the income-tax rule and the interest claim both do. Raising them before 31 March, when the buyer’s year-end tax position is being closed, is when they carry the most weight.
Frequently Asked Questions
What is the new section for 43B(h) under the Income-tax Act, 2025? Section 37(2)(g) of the Income-tax Act, 2025 replaces section 43B(h) from tax year 2026-27. The substance is the same: dues to micro and small enterprises paid after the MSMED Act limit are deductible only in the year of payment.
Is the 45-day limit counted from the invoice date? No. Section 15 of the MSMED Act counts from the day of acceptance or deemed acceptance of the goods or services, which is usually the delivery date unless the buyer objects in writing within 15 days.
Can a buyer and supplier agree on 60 or 90 days? They can agree, but the statute caps the term at 45 days from acceptance. Statutory interest may accrue after the applicable due date, while the income-tax deduction is governed by section 37(2)(g) and the actual payment date.
Does the 45-day rule protect medium enterprises or traders? It does not protect medium enterprises. Retail and wholesale traders registered on Udyam are generally treated as outside the delayed-payment provisions, because their registration was allowed only for priority sector lending.
Has the MSMED (Amendment) Act, 2026 changed the 45-day limit? No. The 2026 amendment retains the 15/45-day payment framework. Its new dispute-resolution timelines and award-release measures are enacted but are not operative under S.O. 5575(E), which did not commence Amendment Act sections 8–10.
Conclusion
The MSME 45-day payment rule is one of the few provisions in Indian law that gives a small supplier real leverage over a larger buyer. The deadline is short and fixed by statute, interest runs at three times the bank rate, and from tax year 2026-27 the buyer’s own income-tax deduction under section 37(2)(g) depends on paying on time. Companies must also disclose overdue MSME dues every half-year in Form MSME-1.
That leverage only works if the supplier can prove its case. A written credit term, a recorded acceptance date, a clean customer ledger and a weekly ageing review turn a statutory right into a phone call the buyer takes seriously. Where calls fail, the ODR portal and the MSE Facilitation Council offer a recovery route. The 2026 dispute-resolution changes require their own commencement notification before they can be relied upon.
For micro and small enterprises, the practical step this quarter is simple: put the 45-day term and the Udyam number on every invoice, and raise overdue MSME balances with buyers before 31 March, when their tax cost of delay is easiest to see.
