MSME 45-Day Payment Rule: What Buyers Need to Know

If your business buys from micro or small enterprises, you have to pay them within 45 days at the most. That rule has been in the MSMED Act since 2006, but for years a lot of buyers ignored it because nothing much happened if they did. Section 43B(h) of the Income Tax Act changed that. From financial year 2023-24, a late payment to a micro or small supplier can't be claimed as an expense in your books for that year. It's allowed only in the year you actually pay.

This guide explains the rule from the buyer's side: which suppliers it covers, when the clock starts, what it costs to miss it, and what to change in your purchasing so it doesn't happen.

The rule in plain words

Section 15 of the MSMED Act sets the payment deadline. It depends on whether you have a written agreement with the supplier:

• If you have a written agreement on payment terms, you pay by the agreed date, and that date can't be more than 45 days from the day you accepted the goods or services.
• If there's no written agreement, you have to pay within 15 days of acceptance.

So '45 days' is the ceiling, not the default. A buyer who never signed payment terms with a small supplier is actually on a 15-day clock. Many purchase orders say 'payment 60 days' or 'payment 90 days' out of habit. For a micro or small supplier, anything past 45 days has no legal effect.

Which suppliers it covers

The rule applies to suppliers that are micro or small enterprises registered on the Udyam portal. A few points trip people up:

• Medium enterprises are not covered by Section 43B(h), even though they are also MSMEs.
• Traders can register on Udyam, but the delayed payment protection under the MSMED Act is meant for manufacturers and service providers. Most advisers treat payments to wholesale and retail traders as outside the rule.
• What counts is the supplier's Udyam classification. A small workshop without Udyam registration isn't covered, however small it is.

The practical answer is to ask every vendor for their Udyam certificate during vendor onboarding and record the category (micro, small, medium) and the activity (manufacturing, services or trading) against the vendor.

When the 45 days start

The clock runs from the day you accept the goods or services, not from the invoice date and not from when the invoice reaches accounts. If you don't raise an objection within 15 days of delivery, the law treats the goods as accepted anyway. That's called deemed acceptance.

This is why the goods receipt note matters. The GRN date is your best record of acceptance. If stores takes a week to post the GRN, or quality holds material without telling anyone, you lose days you didn't know you had. And if you reject material, reject it in writing and quickly, with a reason, so the supplier knows the clock hasn't started.

What happens if you pay late

There are two costs, and they come from two different laws.

1. Tax: the expense moves to the next year

Under Section 43B(h), an amount owed to a micro or small enterprise that isn't paid within the Section 15 time limit is allowed as a deduction only in the year it's actually paid. In practice this bites at year end, on 31 March.

Say a company in Bengaluru buys ₹5 lakh of machined parts from a small enterprise in Peenya. The parts are accepted on 10 March 2026 and the written terms are 45 days, so payment is due by 24 April 2026. If the company pays on 20 April, nothing changes: the expense stays in FY 2025-26. If it pays on 15 May, the ₹5 lakh is added back to income for FY 2025-26 and allowed in FY 2026-27 instead. At a 25% tax rate that's about ₹1.25 lakh of tax paid a year early. Across dozens of small suppliers, it adds up quickly.

2. Interest owed to the supplier

Section 16 of the MSMED Act says a buyer who pays late owes the supplier compound interest, with monthly rests, at three times the bank rate notified by the RBI. That's far higher than normal borrowing costs. And that interest can't be claimed as a business expense either. Many suppliers never ask for it, but they are entitled to, and they can take the claim to the MSME Samadhaan portal or the state's facilitation council.

The MSME Form 1 filing

Companies that owe micro or small suppliers for more than 45 days also have to report it. MSME Form 1 is a half-yearly return filed with the Registrar of Companies, listing the dues and the reasons for delay. The April to September return is due by 31 October, and the October to March return by 30 April. If your vendor master doesn't know which vendors are micro or small, you can't file this correctly.

How to set up purchasing so you stay on time

Most late payments aren't a decision. They happen because the invoice sat in someone's inbox, or the GRN wasn't posted, or the PO said 90 days and nobody questioned it. A few changes fix most of it:

1. Record Udyam status (category and activity) in the vendor master, and ask vendors to update it each year, since classification can change with turnover.
2. Put written payment terms of 45 days or less on every PO to a micro or small vendor. Your purchase order format should pull the terms from the vendor record, not from a default.
3. Post GRNs on the day material is received, and log rejections in writing within 15 days.
4. Calculate the due date from the acceptance date and show it on the invoice queue, with MSME invoices sorted to the top.
5. Run a report before every payment run, and a bigger one in the first week of March, listing MSME dues that are close to or past the limit.
6. Clear disputes quickly. An invoice stuck on a small price difference is still ageing.

Clean three-way matching helps here more than anything else. When the PO, GRN and invoice agree, the invoice can be approved the day it arrives. When they don't, it waits, and the MSME clock keeps running. Procupy keeps the vendor's MSME status, the PO, the GRN and the invoice in one place, so the due date is worked out from the actual acceptance date.

A note on relationships

Small suppliers often carry big buyers for months because they're afraid of losing the account. The 45-day rule gives them a legal floor, and paying on time is also plain good sense. A small supplier who is paid on time can quote you better prices, buy raw material without borrowing, and prioritise your orders when capacity is tight. The rule is a compliance item, but it also makes you a better customer.