Delayed payments to micro and small enterprises: what the law gives you and how to use it
The MSMED Act caps credit to micro and small suppliers at 45 days, adds compound interest on delays and now costs the buyer a tax deduction. A practical guide for both sides of the invoice.
A profitable small business can still run out of cash if its customers pay late. Indian law gives micro and small enterprises more protection here than most owners use. This note explains the rules and, more usefully, the paperwork you need to rely on them.
Who is covered
The protection is for micro and small enterprises registered on the Udyam portal. Medium enterprises are not covered by the payment rules. Under the classification in force from 1 April 2025:
| Class | Investment in plant and machinery or equipment | Turnover |
|---|---|---|
| Micro | Up to ₹2.5 crore | Up to ₹10 crore |
| Small | Up to ₹25 crore | Up to ₹100 crore |
| Medium | Up to ₹125 crore | Up to ₹500 crore |
The rules protect suppliers of goods and providers of services. The position of pure traders is narrower, so a trading business should check its own status before relying on these provisions.
The 15-day and 45-day limits
Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 sets the payment deadline:
- If there is no written agreement on credit, the buyer must pay within 15 days of accepting the goods or services.
- If there is a written agreement, the agreed period applies, but it cannot be longer than 45 days.
A purchase order that says "payment in 90 days" does not override the Act. For this purpose the limit is still 45 days.
Interest on delay
Under section 16, a buyer who pays late owes compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. This applies whatever the contract says. Under section 23, the buyer cannot claim that interest as a deduction for income tax.
The tax consequence for the buyer
Since financial year 2023-24, a buyer who has not paid a micro or small supplier within the section 15 time limit cannot deduct that expense in the year it was incurred. The deduction is allowed only in the year of actual payment. This rule was section 43B(h) of the Income-tax Act, 1961. Under the Income-tax Act, 2025, which applies from 1 April 2026, the corresponding provision is section 37(2)(g).
In practice this is the rule that has changed buyer behaviour. Finance teams of larger companies now ask suppliers for Udyam certificates and track MSE invoices separately before year end.
If you are the supplier
- Register on Udyam and tell your customers. Send the certificate, and print the Udyam number and your micro or small status on every invoice.
- Put credit terms in writing. A signed agreement or accepted purchase order with a term of 45 days or less removes arguments later.
- Get acceptance on record. The clock runs from acceptance of goods or services. Keep delivery challans, signed timesheets or completion certificates.
- Follow up on a fixed schedule. A reminder before the due date, one on the due date and an escalation a week after works better than occasional calls.
- Know the remedy. A dispute can be referred to the Micro and Small Enterprises Facilitation Council through the MSME Samadhaan portal. The Council first attempts conciliation and can then arbitrate.
Most suppliers never file a reference, because they do not want to lose the customer. That is a commercial decision. Having the documents in order still matters, because it changes the conversation with the customer's accounts team.
If you are the buyer
- Identify which vendors are micro or small enterprises and record it in the vendor master.
- Set payment terms of 45 days or less for them in the system, so the due date is calculated correctly.
- Review unpaid MSE invoices before 31 March each year.
- Companies must also report amounts outstanding to micro and small suppliers beyond 45 days in the half-yearly Form MSME-1 filed with the Ministry of Corporate Affairs, and disclose dues to such suppliers in their financial statements.
The process point
Late collection is rarely only a legal problem. In most small businesses nobody owns the receivable after the invoice is raised. Decide who follows up, how often, and when the owner is told. The law then becomes a support for a process that already works.
This article is general information as on the date of publication. Law and practice change, and the facts of each business differ, so please take professional advice before acting on it.