MSME Payment Rules: How 45-Day Norms Changed Buyer Behaviour

The MSME payment rules got real teeth in April 2023 when Section 43B(h) of the Income Tax Act came into force for FY 2023-24 onwards. The rule is simple: if your business buys from a registered MSME and you don't pay within the agreed time (maximum 45 days), you cannot claim that expense as a deduction in the year of purchase. You can only claim it when you actually pay. This one change has quietly rewritten how lakhs of businesses deal with their MSME vendors — and if you are on either side of that transaction, you need to understand the mechanics precisely.

What the 45-Day Rule Actually Says

The MSMED Act, 2006 sets the payment timeline. If you have a written agreement with an MSME supplier, you must pay within the time agreed — but that agreed period cannot exceed 45 days from the date of acceptance of goods or services. If there is no written agreement at all, payment must happen within 15 days. Section 43B(h) of the Income Tax Act then links directly to this: any sum payable to a micro or small enterprise that crosses these limits becomes deductible only in the year it is actually paid, not when it is accrued.

One important clarification: this rule applies only to Micro and Small enterprises — not Medium enterprises. And the supplier must be registered on the Udyam portal at the time of the transaction. An unregistered MSME supplier does not trigger Section 43B(h) for the buyer.

A Worked Example: What Delayed Payment Costs a Buyer

Let's make this concrete. Imagine Rakesh runs a trading company (FY 2026-27) and purchases raw materials worth ₹12,00,000 from a Udyam-registered micro enterprise in October 2026. There is no written agreement, so the 15-day rule applies. Rakesh pays only in February 2027 — well past the deadline.

Here is what happens to his tax position:

• The ₹12,00,000 expense cannot be deducted in FY 2026-27 even though the purchase happened that year.
• Rakesh's taxable profit for FY 2026-27 increases by ₹12,00,000.
• Assuming he is in the 30% tax bracket (plus surcharge and cess, effective ~31.2%), he pays approximately ₹3,74,400 extra tax for FY 2026-27.
• He will finally get the deduction in FY 2027-28 when payment is made — but he has suffered a cash outflow of ₹3,74,400 a full year early.
• The MSME supplier can additionally charge compound interest at three times the RBI bank rate on the overdue amount from the due date. At a notional 18% per annum (illustrative — check the current RBI bank rate), interest on ₹12,00,000 for roughly 90 days of delay works out to approximately ₹54,000.

So the total pain for Rakesh: ~₹3,74,400 in accelerated tax plus ~₹54,000 in potential interest — nearly ₹4,28,400 on a ₹12,00,000 purchase, just because he paid late. That is a 35% effective penalty on the invoice value.

How Buyer Behaviour Has Visibly Changed

Since the rule kicked in, buyers have responded in several ways — some legitimate, some not:

• Accelerated payment cycles: Many corporates and traders who had 60-90 day payment terms have quietly moved to 30-45 day cycles for MSME vendors specifically.
• Splitting large orders: Buyers place smaller orders more frequently so that each invoice is easier to clear within 45 days.
• Demanding de-registration: Some buyers have asked (or pressured) their MSME suppliers to surrender their Udyam certificate. This is ethically wrong and potentially exposes the buyer to reputational and legal risk, but it does happen.
• Switching to unregistered vendors: Buyers have started preferring vendors who are not Udyam-registered, even if the MSME is equally capable. This ironically punishes MSMEs for registering.
• Advance or milestone-based payments: Progressive payment structures tied to delivery milestones have become more common, keeping both sides within the 45-day window.

Quick Reference: MSME Payment Rules at a Glance

What MSME Suppliers Should Do Right Now

If you are the supplier, this law is your friend — but only if you are registered. Here is your action list:

1. Register on the Udyam portal if you have not already. Without registration, you cannot invoke Section 43B(h) or the MSMED Act interest provisions.
2. Always raise invoices with a clear date of acceptance or delivery noted. The 45-day clock starts from this date, not the invoice date.
3. Issue a written agreement or purchase order acknowledgment with payment terms explicitly within 45 days.
4. Track overdue invoices and send formal reminders. Interest under the MSMED Act compounds, so delayed follow-up costs you money.
5. Use the MSME Samadhaan portal to file a delayed payment application if a buyer refuses to pay. This is a free, statutory remedy.

Common Mistakes

1. Assuming the rule applies to all MSMEs

Section 43B(h) covers only Micro and Small enterprises. Medium enterprises are excluded from the tax disallowance provision, though the MSMED Act's interest provisions have a broader reach. Many buyers wrongly extend the same panic-payment treatment to medium enterprises, creating unnecessary cash flow disruption.

2. Counting days from the invoice date instead of the acceptance date

The 45-day (or 15-day) clock runs from the date of actual or deemed acceptance of goods/services, not from the date on the invoice. If goods are received on the 10th but invoiced on the 1st, the clock starts on the 10th. Buyers who count from the invoice date often think they are late when they are not — or vice versa.

3. Ignoring this rule for year-end accruals

Many businesses book expenses in March by journal entry and intend to pay in April or May. If the supplier is a registered MSME and the 45-day window from acceptance has already passed by 31 March, that accrual is not deductible in the current year. This regularly triggers surprise during tax filing.

4. Thinking a payment after 31 March "cures" the disallowance for the previous year

It does not. If the payment was due in, say, January and you pay in April, the deduction shifts entirely to the next financial year. You cannot amend the previous year's return to claim it once the due date for filing has passed.

5. Not verifying Udyam registration before every large purchase

A supplier's Udyam status can change. They may upgrade to Medium or their registration may lapse. Buyers who assume last year's status carries forward are taking a risk. Verify on the Udyam portal before each financial year or each significant contract. You can use Legal Tools on KyaTax to cross-check vendor registration details and build payment tracking checklists into your procurement workflow.

Frequently asked questions

Does Section 43B(h) apply if my supplier has not yet submitted an invoice?

The clock runs from the date of acceptance of goods or services, not the invoice. If goods are accepted and no invoice is raised, the 15-day rule (no agreement) still applies from the date of acceptance. Waiting for an invoice does not pause the deadline.

Can a buyer and MSME supplier mutually agree to extend the payment period beyond 45 days?

No. The MSMED Act specifically caps the maximum agreed credit period at 45 days. Any contract clause that provides for longer credit is void to that extent. The buyer gets no protection from such a clause, and Section 43B(h) will still disallow the deduction if payment goes beyond 45 days.

If my MSME supplier upgrades to a Medium enterprise during the year, does the rule still apply?

The classification that matters is the supplier's status at the time of the transaction (supply of goods or services). If they were Micro or Small when you bought from them, Section 43B(h) applies to that invoice regardless of what happens to their classification later.

I am a sole proprietor buying from an MSME. Does Section 43B(h) apply to me?

Yes, if you are running a business or profession and claiming the expense as a business deduction, Section 43B(h) applies regardless of your legal form — sole proprietor, partnership, LLP, or company. It applies to any taxpayer claiming a deduction under the Act for payments to Micro or Small enterprises.

General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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