The MSME 45-day payment rule

What the MSMED Act says

Under the Micro, Small and Medium Enterprises Development Act, 2006, a buyer who purchases from a supplier registered as a micro or small enterprise must pay:

• by the date agreed in writing, which cannot be more than 45 days from the day of acceptance (or deemed acceptance) of the goods or services; or
• where there is no written agreement, within 15 days.

If the buyer pays late, the Act provides for compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India, payable to the supplier. The supplier can also file a delayed-payment case through the government's MSME Samadhaan system.

The rule protects micro and small suppliers. Medium enterprises are not covered by this payment provision.

What section 43B(h) of the Income-tax Act added

The Finance Act 2023 inserted clause (h) in section 43B of the Income-tax Act, 1961, applying from FY 2023-24 (assessment year 2024-25). In simple terms:

• An amount you owe to a micro or small enterprise, which is not paid within the time limit under the MSMED Act, is allowed as a deduction only in the year you actually pay it.
• So if a purchase from a small supplier is still unpaid beyond the limit at 31 March, that expense can be disallowed for that year and claimed in the year of payment instead. Your taxable profit for the first year goes up.

From 1 April 2026 the Income-tax Act, 2025 replaces the 1961 Act and section numbers change. Ask your CA how this rule appears under the new Act and confirm the current position on incometax.gov.in.

A worked example

A trader buys packing material for ₹3,00,000 from a supplier registered as a small enterprise (manufacturer). There is a written agreement for 45 days. Goods are accepted on 10 February 2026.

• The payment is due by 27 March 2026.
• If the trader pays on 25 March, there is no issue.
• If the bill is still unpaid at 31 March and paid on 20 May, the ₹3,00,000 may not be allowed as an expense for FY 2025-26. It is allowed in FY 2026-27 when paid. At a 30% tax rate, that is roughly ₹90,000 of extra tax in the first year (before cess and surcharge), plus a possible interest claim from the supplier.

Points that need care

• Is the supplier actually micro or small? Ask every supplier for their Udyam Registration Certificate and keep a copy. Classification can change; check it at least yearly.
• Traders as suppliers. Retail and wholesale traders can register on Udyam, but there is a widely held view that the delayed-payment protection, and so 43B(h), applies to manufacturers and service providers rather than traders. Confirm this with your CA for each case.
• Written terms. Without a written agreement the limit is 15 days, not 45. Put your agreed credit period on the purchase order.
• Disclosure. Companies have disclosure and filing requirements for dues to micro and small enterprises. Your CA will advise on what applies to you.

This is general information, not tax or legal advice. Rules and interpretations can change by amendment or circular.

A simple checklist for buyers

1. Collect Udyam certificates from all suppliers; mark each supplier ledger as micro, small, medium or not registered.
2. Agree payment terms in writing on every purchase order, at 45 days or less for micro and small suppliers.
3. Review a payables ageing for MSME suppliers every week.
4. Before 31 March each year, clear or at least list all MSME dues that will cross the limit.
5. Share that list with your CA well before finalising accounts. See our year-end closing checklist.

Keeping track with Tally and Cashflow OS

If supplier ledgers in TallyPrime are maintained bill-wise, Cashflow OS shows payables with ageing on your phone and the web, so you can see which supplier bills are getting close to the limit. Export the list to Excel for your CA. Identifying which suppliers are micro or small still depends on the records you keep. See payables tracking and the Udyam registration guide.