The MSME 45 days payment rule explained: when the 15/45-day clock starts, 24% compound interest under the MSMED Act, the Section 43B(h) tax disallowance for buyers, MSME Form 1 reporting, and what suppliers must do to claim protection.
Two provisions — Section 15 of the MSMED Act and Section 43B(h) of the Income Tax Act — have quietly turned the Indian B2B payment cycle upside down since FY 2023–24. Buyers now face both 24% interest AND a tax disallowance if they don't pay MSE vendors within 45 days. Here's the practical breakdown for both sides of the invoice. Vendors need a Udyam certificate before they can claim MSE protection — our MSME registration service issues it the same day.
If you buy goods or services from a Micro or Small Enterprise (registered or unregistered, as long as it qualifies under the MSMED Act), you must pay within:
Note: this applies only to Micro and Small enterprises, NOT Medium. The 'M' in MSME for the 45-day rule effectively means 'micro and small'.
Compound interest at 3× the bank rate notified by RBI, computed monthly from the appointed day until actual payment. At current rates, that's approximately 24% per annum — non-deductible for income tax.
Inserted by Finance Act 2023, this provision says: any expense payable to a Micro or Small enterprise is allowed as a deduction ONLY in the year of actual payment, IF payment is delayed beyond the 45-day / contract limit.
Translation: if you book a ₹10 lakh purchase from an MSE in March 2026 but pay only in May, the expense is denied in FY 2025–26 and shifts to FY 2026–27. Your taxable profit for FY 2025–26 goes up by ₹10 lakh.
This is not just an interest hit. It's a real tax hit. A ₹10L disallowance in the 30% bracket means ₹3 lakh additional tax in the current year — even if you pay the vendor on the 46th day.
XYZ Ltd buys ₹5 Cr worth of components from registered MSE vendors during FY 2025–26. As of 31 March 2026, ₹80 lakh of invoices are over 45 days unpaid.
| Item | Amount |
|---|---|
| Unpaid MSE invoices > 45 days | ₹80,00,000 |
| 43B(h) disallowance in FY 2025–26 | ₹80,00,000 |
| Additional tax @ 25% | ₹20,00,000 |
| Interest under MSMED Act (≈24% pa) | ₹4,80,000+ |
Net hit: ₹24.8 lakh — a problem worth more than the entire CFO's annual salary, solved by a simple change in payment workflow.
Each state has a Micro and Small Enterprise Facilitation Council. The MSE files a reference; the Council attempts conciliation; if it fails, it acts as an arbitrator under the Arbitration and Conciliation Act. The award is enforceable in court. The buyer must deposit 75% of the award before challenging it.
Even the threat of an MSEFC reference is usually enough — most buyers settle within 60 days once a notice is served.
False. The appointed day is the day of acceptance of goods/services or 15 days after if no acceptance — automatic, no notice required.
It does — services rendered by MSE service providers fall squarely within the rule.
You can write it, but it's void to the extent it exceeds 45 days. MSMED Act overrides the contract.
The 45-day rule combined with 43B(h) has shifted leverage decisively to small vendors. Buyers who treat this as a paperwork exercise face a real tax hit. Sellers who don't enforce it leave both money and legal protection on the table. Both sides win by making the rule operational — not just acknowledging it exists.
Senior contributor at Taxpex Consultancy. Reviewed by a practising Chartered Accountant. Published on 1 September 2026 · Updated on 1 September 2026.
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