MSME Delayed Payment: The 45 Days Payment Rule Explained

Key Takeaways: Under the MSMED Act, buyers must pay MSME suppliers within 45 days of delivery, or 15 days if no agreement exists. Delayed payments attract compound interest at three times the RBI rate, and Section 43B(h) disallows unpaid amounts, making timely payment critical for buyers.

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The 45 day payment rule in simple words

Where any supplier supplies goods or services to any buyer, the buyer must make payment on or before the date agreed between the buyer and supplier in writing. Provided however that such an agreed period should not exceed 45 days.

45 days counting to begin from the date of the delivery of the goods or services, as per section 2(b) of the MSME Act.

Where supplier and buyer have no agreement for the period within which payments are to be made, payments are to be made before the ‘appointed day’ i.e. within a period of 15 days from the date of the delivery of the goods or services. [Section 2(b) defines appointed day]

What is the time limit in your case

Your situation	Payment due within	Example
Agreement of 15 to 45 days, for example 30 days	The agreed period	Delivery 01.01.2023, pay by 30.01.2023
No agreement	15 days (appointed day)	Delivery 01.01.2023, pay by 15.01.2023
Agreement longer than 45 days	45 days maximum	Delivery 01.01.2023, pay by 15.02.2023

Day 0: Delivery of goods or services

Day 15: Appointed day, pay by here if there is no agreement

Day 45: Last possible due date, even if your agreement says longer

What happens if payment is late

• As per provisions of section 16 of the MSME Act, 2006, if payment is not made during the given period, the supplier is entitled to compound interest at three times the bank rate notified by RBI, as per Section 16 of the MSMED Act.
• The interest is compounding interest, which compounds with monthly rests, at monthly intervals.

Income tax effect: Section 43B(h)

Section 43B(h) of the Income Tax Act was inserted by the Finance Act 2023 and applies from Assessment Year 2024-25. It covers sums payable to a micro or small enterprise; medium enterprises are not covered. If a buyer pays after the time limit in Section 15 of the MSMED Act, the sum is not allowed as a deduction in that year. Paying before the due date for filing the return does not save the deduction, because the proviso to Section 43B does not apply to clause (h). The deduction is allowed in the year in which the amount is actually paid.

Where a supplier can complain: MSME Samadhaan

A micro or small enterprise with Udyam registration can file a delayed payment application on the MSME Samadhaan portal against the buyer. The case is referred to the Micro and Small Enterprises Facilitation Council, which first attempts conciliation and then decides the reference. Under Section 18(5) of the MSMED Act, the reference is to be decided within 90 days.

Why this rule exists

The rule serves the dual purpose of alleviating financial strain on Micro, Small, and Medium Enterprises (MSMEs) while fostering a culture of punctual payments. By ensuring that buyers make payments within the agreed-upon timeframe, the regulation provides a crucial financial stability net for MSMEs. Timely payments are instrumental in empowering these smaller enterprises to not only sustain their operations but also to pursue growth and expansion initiatives.

MSME classification

Classification	Micro	Small	Medium
Manufacturing & Services	Investment less than 1 crore and Turnover less than 5 crore	Investment less than 10 crore and Turnover less than 50 crore	Investment less than 50 crore and Turnover less than 250 crore

Questions on a delayed MSME payment or a 43B(h) disallowance? Email anshul@karwaandassociates.com or call +91 7568160006.