MSME 45-Day Payment Rule and Section 43B(h): What Buyers and Suppliers Must Know

Delayed payments are the classic MSME killer: the small supplier delivers, the big buyer pays “whenever convenient”, and the supplier’s working capital chokes. Indian law now attacks this from both sides — the MSMED Act mandates payment within 45 days, and the Income-tax Act’s Section 43B(h) makes late payment expensive for the buyer at tax time.

Whether you are the supplier protecting cash flow or the buyer structuring payments, these rules are mandatory knowledge.

The payment rule itself (MSMED Act, Section 15)

• A buyer must pay a registered micro/small supplier within the day agreed in writing, capped at 45 days from acceptance of goods or services.
• No agreed term? Payment is due on the day of acceptance — no free credit period.
• Late payment attracts compound interest with monthly rests at three times the RBI bank rate (roughly 14–15% p.a. in recent years) — from the day after the due date until paid.
• The interest belongs to the supplier; buyers cannot contract it away. Waiving it can itself be treated as an unfair practice.

Section 43B(h) — the tax stick for buyers

Effective from FY 2023-24, Section 43B(h) says: if you buy from a registered micro/small supplier and do not pay within the MSMED timeline, you can deduct that purchase cost only in the year you actually pay it — not the year you booked it. Your accounts payable quietly become taxable income pulled forward.

Buyers who are regular taxpayers effectively lose the time value of that deduction. Auditors now ask for MSME payable ageing as standard — a good nudge for finance teams to age and clear MSME dues first.

MSME Samadhaan — the supplier's enforcement tool

1. Supplier holds a valid Udyam registration (registration must predate or cover the supply).
2. File a delayed-payment grievance on msmesamadhaan.msme.gov.in against the buyer.
3. The case routes to the Micro and Small Enterprises Facilitation Council (MSEFC) of the supplier’s state.
4. MSEFC hears both sides and issues an award for principal + compound interest. Buyer appeals require 75% of the awarded amount deposited upfront.
5. Awards are enforceable like a decree of a civil court — no lengthy civil suit needed.

Suppliers should keep delivery Challans, e-way bills, invoices and buyer acknowledgements together — acceptance date drives everything. If the buyer disputes quality, raise it immediately in writing; silent acceptance with later excuses rarely impresses the Council.

Practical compliance for buyers

• Identify MSME vendors: collect Udyam certificates during vendor onboarding and flag them in your ERP.
• Age MSME payables separately: aim to clear them within 30–45 days; many corporates now prioritise MSME payouts over large-vendor payouts.
• Watch the acceptance date: quality disputes must be documented fast, or the 45-day clock (and 43B(h) exposure) runs.
• Budget the interest: if a genuine cash crunch delays payment, accrued MSME interest is deductible only on payment — and reputational cost on Samadhaan is public.

Frequently Asked Questions