TL;DR: Sections 15 and 16 of the MSMED Act, 2006 require a buyer to pay a registered micro or small enterprise within 45 days, failing which compound interest at three times the RBI bank rate accrues automatically. Since the Finance Act 2023, Section 43B(h) of the Income Tax Act disallows the buyer’s deduction for any such amount left unpaid at year end, which has forced faster payment cycles across corporate India. This guide explains the mechanics, the Samadhaan and MSEFC process, the 75 percent pre-deposit rule, and practical steps for both suppliers and buyers.

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What the MSME 45-day payment rule actually says

The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) is the parent statute. Sections 15 and 16 form the payment discipline that everyone refers to as the “45-day rule.”

Section 15 obliges a buyer who has bought goods or availed services from a micro or small enterprise to make payment on or before the date agreed in writing between the parties. Where there is no written agreement, payment is due before the appointed day, which the Act defines separately.

Section 16 is the consequence provision. If the buyer fails to pay within the time required by Section 15, the buyer becomes liable to pay compound interest with monthly rests to the supplier on the amount, from the appointed day.

This is not a discretionary or negotiated remedy. The interest liability arises by operation of law, the moment the payment window under Section 15 is crossed.

The rule exists because micro and small suppliers typically have far less bargaining power than large buyers, who otherwise dictate payment terms through the purchase order. Parliament responded by making the timeline and the penal interest mandatory rather than contractual, so no agreement can lawfully extend the 45-day ceiling described below.

The 15-day default and the 45-day outer limit

Section 15 sets up two scenarios. If the buyer and the micro or small supplier have not agreed on a payment period in writing, the buyer must pay within 15 days of the day of acceptance or the day of deemed acceptance of the goods or services.

“Day of acceptance” means the day the goods or services are actually accepted, or the day the buyer objects in writing within 15 days of delivery. If the buyer raises no objection within that window, acceptance is deemed to have occurred and the clock starts from delivery.

If the parties have agreed on a payment period in writing, that agreed period applies, but subject to a hard cap. The agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance, no matter what the purchase order or contract says.

This means a supplier and buyer cannot lawfully agree to 60-day or 90-day payment terms for a micro or small enterprise transaction, even if the supplier signs a contract that says so. Any clause purporting to extend payment beyond 45 days is void to that extent, since Section 24 gives the Act overriding effect over anything inconsistent in any other law, including purchase order terms and negotiated contracts.

In practice, many corporate buyers still issue purchase orders with 60 or 90-day terms as internal policy. That practice does not extinguish the supplier’s statutory right to interest once 45 days have passed, regardless of what the purchase order states.

Compound interest at three times the RBI bank rate

Section 16 fixes the rate of interest at three times the bank rate notified by the Reserve Bank of India. The bank rate is a specific RBI-published rate distinct from the repo rate, though the two often move together.

The interest is compound interest with monthly rests, not simple interest, so unpaid interest itself starts earning interest at each month end. It runs automatically from the appointed day, the day immediately following the last date payment ought to have been made, with no need for the supplier to issue a default notice first.

Because the rate is punitive by design, three times the RBI bank rate compounded monthly works out to an annualised cost well above typical commercial borrowing in India. This is intentional, meant to make delay more expensive for the buyer than short-term working capital financing.

Suppliers often underestimate how large this liability becomes over an extended delay. A payment of a few lakh rupees delayed by a year or more can accumulate interest that rivals or exceeds the principal itself.

Why the buyer cannot deduct this interest under Section 23

Section 23 of the MSMED Act deals with how this interest is treated for income tax purposes on the buyer’s side. It provides that notwithstanding anything in the Income Tax Act, 1961, the interest payable or paid by the buyer under Section 16 is not allowed as a deduction for computing the buyer’s income under that Act.

In plain terms, if a buyer eventually pays the penal interest to the delayed supplier, the buyer cannot claim that interest amount as a business expense to reduce its own taxable profit. The tax law treats this interest as a penalty for non-compliance rather than a legitimate cost of doing business.

This provision predates the 2023 amendment and has existed since the MSMED Act itself was enacted in 2006, targeting only the interest actually paid once a delay has occurred.

Section 23 alone was not enough to change buyer behaviour at scale. Many buyers simply never paid the statutory interest, and suppliers, wary of upsetting a large customer relationship, rarely pursued it even when legally entitled.

This gap between legal entitlement and practical enforcement is exactly what the Finance Act 2023 amendment was designed to close, not by changing the MSMED Act, but by attacking the underlying unpaid principal itself.

Section 43B(h) of the Income Tax Act: the Finance Act 2023 change

Section 43B of the Income Tax Act, 1961 lists certain expenses that, although accrued on a mercantile basis, are allowed as a deduction only in the year they are actually paid, not merely the year they are incurred. Statutory dues, certain bonuses, and specific liabilities have long appeared on this list.

The Finance Act 2023 inserted a new clause, Section 43B(h), with effect from Assessment Year 2024-25. It adds “any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the MSMED Act” to the list of expenses deductible only on actual payment.

The practical effect is this: if a buyer purchases goods or services from a registered micro or small enterprise and does not pay within the Section 15 timeline (15 days by default, or up to 45 days if agreed in writing), that unpaid amount cannot be claimed as a deduction in the year it was booked as an expense.

The deduction is deferred. The buyer can only claim the expense as a deduction in the financial year in which the payment is actually made to the supplier, no matter how many years the payment is delayed.

This is a fundamentally different lever from Section 23. Section 23 disallowed the interest on a delayed payment, an amount that most buyers were never paying anyway. Section 43B(h) disallows the deduction of the principal purchase amount itself, if it remains outstanding at year end, which directly hits the buyer’s reported taxable profit for that year.

A proviso to Section 43B allows the deduction in the year of accrual, despite non-payment, only if the payment is made within the time limit specified under Section 15 of the MSMED Act. This proviso is narrower than the general first-proviso relief available for other Section 43B items, which typically allows deduction if payment is made before the return filing due date.

For MSME dues specifically, payment after the Section 15 timeline but before the tax return due date does not save the deduction for that year. The clock that matters is the 45-day (or 15-day default) MSMED clock, not the income tax return filing deadline.

How Section 43B(h) changes buyer behaviour

Before Section 43B(h), a buyer’s finance team often treated MSME payment terms as just another negotiable line item, similar to any other vendor. Delaying a registered small supplier by 60 or 90 days carried little visible cost on the buyer’s own books, beyond the largely unenforced Section 16 interest risk.

Section 43B(h) changes the incentive structure completely, because it converts a supplier-side enforcement problem into a buyer-side tax cost. Every unpaid rupee owed to a registered micro or small enterprise, outstanding as at 31 March, becomes a rupee of expense the buyer cannot deduct that year.

For a buyer in the 25 percent (plus surcharge and cess) corporate tax bracket, an unpaid MSME dues balance of INR 2 crore at year end translates into a real cash tax cost of roughly INR 50 lakh plus surcharge and cess for that year, purely because the deduction is deferred.

The deduction is not lost permanently, since it shifts to the year of actual payment. But the timing mismatch between book recognition and tax deductibility creates a real cash flow and reported-profit impact that finance teams cannot ignore.

This has produced visible behavioural shifts since Assessment Year 2024-25. Procurement teams now flag MSME vendors for priority payment before year end, and some large buyers have even pushed suppliers to delay Udyam registration so the supplier falls outside Section 43B(h), a practice that is legally risky and discussed further below.

Other buyers now cross-check Udyam certificates at vendor onboarding, and statutory auditors verify MSME outstanding balances as part of year-end closing, since Schedule III already requires separate reporting of amounts due to micro and small enterprises.

Which enterprises are covered: micro and small only

A frequently missed point is that Section 43B(h), like Sections 15 and 16 of the MSMED Act themselves, applies only to micro and small enterprises. Medium enterprises are expressly excluded from this specific protection.

The MSMED Act classification, as amended with effect from 1 July 2020, defines the three categories based on investment in plant and machinery or equipment, and annual turnover, whichever is read together under the composite criteria.

CategoryInvestment limitTurnover limit
Micro enterpriseUp to INR 1 croreUp to INR 5 crore
Small enterpriseUp to INR 10 croreUp to INR 50 crore
Medium enterpriseUp to INR 50 croreUp to INR 250 crore

A supplier classified as a medium enterprise does not get the 45-day protection under Sections 15 and 16, and a buyer’s dues to it fall outside Section 43B(h). This exclusion has been a point of friction, since many mid-sized suppliers face the same power imbalance without the statutory teeth.

Classification is self-declared at Udyam registration and is subject to periodic reclassification from turnover and investment data drawn from GST and income tax filings. A supplier whose turnover crosses the small enterprise threshold needs to track this, since losing that status also means losing these protections going forward.

Udyam registration and why timing matters

Registration matters enormously here, because both the MSMED Act protections and Section 43B(h) apply only to a supplier holding a valid Udyam registration. Udyam registration is the government’s online, self-declaration based registration system, replacing the earlier Udyog Aadhaar and EM-II systems.

A critical and often litigated point is timing. The settled understanding among tax practitioners is that a supplier must be Udyam-registered on or before the date of the relevant invoice for that specific transaction to qualify for the 45-day protection and the buyer’s corresponding Section 43B(h) exposure.

If registration comes after the invoice date, that earlier transaction generally falls outside Section 15 and Section 43B(h), since the supplier was not yet “registered” when the buyer’s obligation arose. Genuine micro and small suppliers should treat Udyam registration as a day-one compliance step, not something to arrange only once a dispute begins.

For buyers, procurement teams need to capture the registration date, not just the registration number, at vendor onboarding. A vendor master that only stores a yes/no flag makes it impossible to apply Section 43B(h) correctly transaction by transaction, and periodic re-verification catches vendors pressured to delay registration.

The Samadhaan portal and filing a reference

The MSME Samadhaan portal, run by the Ministry of Micro, Small and Medium Enterprises, is the online gateway for a supplier to file a delayed payment reference against a buyer. It is separate from the Udyam registration portal, though registration is a prerequisite to use it.

A registered micro or small enterprise can log onto the Samadhaan portal, enter details of the buyer, the invoice, the due date, and the amount outstanding, and submit an online reference. The reference is then routed to the Micro and Small Enterprises Facilitation Council (MSEFC) having jurisdiction, typically the one located in the state where the supplier’s unit is registered.

The portal displays aggregated, publicly visible data on applications filed against each buyer and the amount involved, searchable by company name. This has created reputational pressure that several corporate boards now track as a compliance metric.

Filing on Samadhaan is not itself an adjudication. It triggers the MSEFC’s statutory process, described next, and the Council proceeds only once a reference is registered with jurisdiction established.

A supplier should retain complete documentation before filing: the purchase order, delivery proof, dated invoices, any written buyer acknowledgment, and correspondence chasing payment. The strength of the eventual award depends heavily on how well this trail is documented.

MSEFC conciliation and arbitration under Section 18

Once a reference is filed, Section 18 of the MSMED Act governs the dispute resolution mechanism. Any party to a dispute over an amount due under Section 17 (which covers both the principal and the Section 16 interest) may make a reference to the Micro and Small Enterprises Facilitation Council.

The Council’s process happens in two stages. First, the MSEFC either conducts conciliation itself or refers the matter to an institution providing alternate dispute resolution, applying the Arbitration and Conciliation Act, 1996 as if conciliation was initiated under Part III of that Act.

If conciliation fails, the MSEFC either arbitrates the dispute itself or refers it out, again applying the Arbitration and Conciliation Act as if the arbitration arose under Section 7(1) of that Act. This deeming fiction matters, since it gives the MSEFC’s award the same legal status as one under a conventional arbitration agreement.

Section 18 further requires every reference to be decided within 90 days of being made. In practice, MSEFC proceedings in many states run considerably longer, given caseloads, though the statutory intent is a fast-track mechanism.

The MSEFC’s award, once made, carries the interest calculated under Section 16 automatically as part of the principal amount claimed, along with the compounding effect. Suppliers filing a Samadhaan reference should specifically claim the Section 16 interest, not just the invoice principal, since some Councils will not compute it suo motu if not pleaded.

The 75 percent pre-deposit requirement and its challenges

Section 19 of the MSMED Act creates a significant barrier for a buyer who wants to challenge an adverse MSEFC award. No application for setting aside a decree, award, or order made by the Council can be entertained by any court, unless the buyer first deposits 75 percent of the amount in terms of the decree, award, or order.

This is a mandatory pre-condition, though the court can order that a portion of the deposit be paid out to the supplier while the challenge is pending. The deposit is meant to prevent buyers from using a challenge purely as a delay tactic.

The 75 percent pre-deposit has attracted constitutional challenges, on the ground that it is an onerous barrier to access to justice for a buyer contesting an award from a summary, largely one-sided MSEFC process. The argument commonly raised is that Article 14 and Article 19(1)(g) are infringed when a party must part with three-fourths of a disputed sum before being heard on the merits.

Courts examining such challenges have generally upheld the requirement as a legitimate legislative choice, given the bargaining power imbalance the MSMED Act is designed to correct. The position is broadly similar to how courts have treated comparable mandatory pre-deposit conditions elsewhere, such as under the GST appeal framework.

For a buyer genuinely disputing liability, the pre-deposit forces a hard choice early: deposit 75 percent to even get a hearing, or forego the challenge. This is one more reason the analysis should happen before an MSEFC reference reaches an award, not after.

Timelines and jurisdiction

The timelines that matter across the process are worth consolidating in one place, since they interact.

StageGoverning provisionTimeline
Default payment period (no written agreement)Section 15, MSMED Act15 days from acceptance or deemed acceptance
Maximum agreed payment periodSection 15, MSMED Act45 days from acceptance or deemed acceptance
Interest accrual startSection 16, MSMED ActFrom the day immediately after the appointed day
MSEFC reference decisionSection 18(5), MSMED Act90 days from date of reference (directory in most states)
Court challenge to MSEFC awardSection 19, MSMED ActRequires 75 percent pre-deposit before entertaining the application
Deduction deferral for buyerSection 43B(h), Income Tax ActDeduction allowed only in year of actual payment

Jurisdiction for filing a Samadhaan reference generally lies with the MSEFC constituted for the state or Union Territory where the supplier’s registered office or unit is located, not the buyer’s location. This is a supplier-friendly jurisdictional rule that reduces the cost and inconvenience of pursuing a claim in the buyer’s home state.

A buyer facing multiple references from suppliers across different states may find itself defending proceedings before several different MSEFCs at once. A buyer weighing a court challenge to an adverse award should also account for the condonation of delay rules that apply once the limitation period for filing that challenge has passed.

Interaction with an arbitration clause in the contract

A common commercial dispute arises where the purchase order or master supply agreement contains its own arbitration clause, naming a specific arbitral institution or seat, and the buyer argues that this contractual clause should override the MSEFC’s Section 18 jurisdiction. The MSMED Act’s non-obstante clause in Section 24 is the starting point for resolving this.

Section 24 states that the MSMED Act has effect notwithstanding anything inconsistent in any other law, which has consistently been read to mean that a separate arbitration clause does not oust the statutory MSEFC mechanism. A supplier retains the right to invoke Section 18 even where the contract points to a different forum.

The Supreme Court has affirmed this, holding that the Section 18 scheme prevails over a general arbitration clause, given the MSMED Act’s special and overriding nature as protective legislation. A buyer cannot draft its way out of MSEFC jurisdiction merely by inserting an institutional arbitration clause into every purchase order.

Where the buyer has already invoked a contractual arbitration clause and a tribunal is seized of the same dispute, courts have had to work through parallel proceedings, but the weight of authority favours the supplier’s right to proceed under Section 18 regardless. An arbitration clause remains useful for non-MSME vendors, but it does not insulate the buyer from Section 18 for a registered micro or small supplier’s claim.

For buyers negotiating new vendor contracts, this also affects how a legal notice responding to a supplier’s payment demand should be framed, since disputing the underlying commercial claim is different from disputing MSEFC jurisdiction itself, and conflating the two arguments in a reply can weaken both.

A recovery playbook for a small supplier

A micro or small enterprise chasing an overdue payment should work through a structured sequence rather than escalating straight to litigation.

Step 1: Confirm Udyam registration predates the invoice. Later registration will not protect earlier invoices, so verify this before relying on the 45-day rule for a specific transaction.

Step 2: Calculate the exact due date and interest. Work out the appointed day under Section 15, then calculate the Section 16 compound interest at three times the RBI bank rate from that date, so the demand is precise.

Step 3: Send a formal payment demand. A clear written demand, referencing invoices, due dates, and the statutory interest, often resolves matters with buyers who are disorganised rather than deliberately non-paying.

Step 4: File on the Samadhaan portal. If the demand goes unanswered, file a formal reference, supported by the purchase order, delivery proof, invoices, and correspondence.

Step 5: Engage in MSEFC conciliation in good faith. A negotiated settlement, even at a discount, is often faster than a prolonged arbitration and post-award enforcement process.

Step 6: Pursue arbitration if conciliation fails. Ensure the claim explicitly includes both principal and Section 16 compound interest, with supporting calculations on record.

Step 7: Enforce the award promptly. An award can be enforced like a decree, and prompt execution reduces the risk of the 75 percent pre-deposit route being used purely as a delay tactic.

Throughout, a supplier should keep detailed, dated records, since the MSEFC process rewards a well-documented claim over a vague one.

A compliance checklist for a buyer

A mid-sized or large buyer should build the following checks into its accounts payable and tax compliance processes.

  • Capture Udyam registration status and registration date at vendor onboarding, not just at year-end audit time.
  • Flag every vendor classified as micro or small in the vendor master, and route their invoices for priority processing against the applicable Section 15 timeline.
  • Track the appointed day for each MSME invoice separately from standard vendor payment terms, since MSME timelines cannot be extended by internal payment cycles or approval workflows.
  • Report outstanding dues to micro and small enterprises separately in financial statements, consistent with Schedule III of the Companies Act, 2013 disclosure requirements.
  • Reconcile the Section 43B(h) disallowance calculation with the statutory auditor before year-end closing, since the disallowed amount directly affects the tax provision and deferred tax computation for that year.
  • Avoid pressuring vendors to delay or forgo Udyam registration, since this practice is both commercially unfair and creates disclosure and governance risk if discovered by regulators or auditors.
  • Monitor the Samadhaan portal periodically for references filed against the company, since these become a searchable public record.
  • Ensure procurement contracts do not attempt to fix payment terms beyond 45 days for MSME vendors, since such clauses are unenforceable to that extent under Section 24.
  • Build an internal escalation trigger at day 30 for any MSME invoice, well before the 45-day statutory ceiling, to avoid inadvertent breach.
Buyer practiceCompliantCommon gap
Vendor onboardingUdyam status and date capturedOnly “registered: yes/no” flag, no date
Payment terms in POCapped at 45 days for MSME vendorsStandard 60/90-day terms applied uniformly
Year-end tax provisioningSection 43B(h) disallowance computed vendor-wiseAggregate estimate only, reconciled late
Financial statement disclosureMSME dues shown separately per Schedule IIIClubbed with general trade payables
Dispute handlingMSEFC jurisdiction accepted alongside contract arbitration clauseBuyer wrongly argues arbitration clause ousts Section 18

How Niyam helps with MSME payment disputes

MSME payment disputes sit at the intersection of commercial law, tax compliance, and dispute resolution procedure, which makes fast, accurate legal research valuable to both suppliers and buyers.

Research grounded in real judgments. Niyam’s research tool draws on over 72,000 Indian judgments, so a question about how courts have treated the Section 18 versus arbitration clause conflict, or how a specific High Court has approached the 75 percent pre-deposit challenge, returns citations to real cases rather than generic summaries. In-house counsel tracking MSME dues exposure across a large vendor base can move faster with grounded answers. See how Niyam’s research tools work.

Drafting support for demand notices and MSEFC filings. Suppliers preparing a Samadhaan reference, or a formal payment demand citing Section 16 interest, can use Niyam’s drafting tools to structure a legally precise notice that references the correct sections and interest computation.

Tracking outstanding matters. For a buyer or supplier managing multiple MSME payment disputes at once, Niyam’s Matters feature helps track invoice-wise due dates, MSEFC reference status, and the 90-day and pre-deposit deadlines that govern the process.

Citator for tracking developments. MSME payment jurisprudence, particularly around the arbitration clause conflict and the constitutional challenges to Section 19, continues to develop across High Courts. Niyam’s Citator flags when a judgment relied on has been affected by a later ruling.

This work often overlaps with broader corporate and commercial law advisory, especially where a supplier dispute intersects with insolvency exposure, discussed further in the context of oppression and mismanagement proceedings before the NCLT for closely held companies facing vendor pressure alongside shareholder disputes.

Frequently asked questions

Does the 45-day rule apply if there is no written contract between the buyer and supplier?

Yes, and in fact the timeline is stricter without a written agreement. Section 15 defaults to a 15-day payment period from the date of acceptance or deemed acceptance when there is no written agreement specifying a longer period, subject always to the 45-day outer ceiling if a period is agreed in writing.

Can a buyer and supplier agree to payment terms longer than 45 days?

No. Any agreement between a buyer and a registered micro or small enterprise for payment beyond 45 days from acceptance is unenforceable to that extent, because Section 24 gives the MSMED Act overriding effect over inconsistent contractual terms.

What is the “appointed day” under the MSMED Act?

The appointed day is the day immediately following the last date by which payment ought to have been made, calculated under Section 15. Interest under Section 16 begins accruing from this day.

Is the compound interest under Section 16 automatic, or does the supplier need to claim it separately?

The interest accrues automatically by operation of law once the appointed day passes. However, if the supplier proceeds to an MSEFC reference, it is important to explicitly plead and claim the Section 16 interest in the reference, since some Councils will not compute it on their own if it is not specifically claimed.

Does Section 43B(h) apply to a medium enterprise supplier?

No. Section 43B(h) refers specifically to the time limit under Section 15 of the MSMED Act, which applies only to micro and small enterprises. Payments to a medium enterprise are outside its scope.

What happens if a supplier registers under Udyam after the invoice date but before the due date?

The prevailing view is that the supplier must hold Udyam registration on or before the invoice date for that specific transaction to attract Section 15, 16, and 43B(h) protection. Registration obtained after the invoice date generally does not retroactively cover that earlier invoice.

Can the buyer claim a deduction if it pays the MSME dues before the tax return filing due date, even if after 45 days?

No, and this is a key difference from other Section 43B items. The proviso specific to clause (h) only allows deduction in the year of accrual if payment is made within the Section 15 time limit itself, not merely before the income tax return filing deadline.

Does Section 43B(h) apply to opening balances outstanding from before Assessment Year 2024-25?

Section 43B(h) applies with effect from Assessment Year 2024-25 onward, to amounts payable that remain outstanding beyond the Section 15 time limit during that year and subsequent years. Opening balances from earlier years, where the timeline had already lapsed before the amendment came into force, require careful year-wise analysis with a tax advisor, since transitional treatment can be fact-specific.

What is the Samadhaan portal used for?

The MSME Samadhaan portal is the online mechanism through which a registered micro or small enterprise files a delayed payment reference against a buyer, which is then routed to the relevant Micro and Small Enterprises Facilitation Council for conciliation and, if needed, arbitration.

Which MSEFC has jurisdiction over a supplier’s reference?

Jurisdiction generally lies with the Council constituted for the state or Union Territory where the supplier’s unit is registered, regardless of where the buyer is located.

Can a buyer challenge an MSEFC award without depositing 75 percent of the amount?

No. Section 19 of the MSMED Act mandates that no application to set aside an MSEFC decree, award, or order can be entertained by a court unless the buyer first deposits 75 percent of the amount specified in that decree, award, or order.

Has the 75 percent pre-deposit requirement been struck down as unconstitutional?

As of August 2026, the pre-deposit requirement continues to be upheld as a valid legislative condition attached to the statutory remedy, notwithstanding periodic constitutional challenges on grounds of access to justice. Courts have generally treated it as a proportionate safeguard against delay tactics, consistent with the protective purpose of the MSMED Act.

Does an arbitration clause in the purchase order override the MSEFC’s Section 18 jurisdiction?

No. The Supreme Court has held that the MSMED Act’s statutory scheme under Section 18 prevails over a separate contractual arbitration clause, given Section 24’s overriding effect, so a supplier retains the right to invoke MSEFC jurisdiction regardless of a contractual arbitration clause.

What documents should a supplier keep to support an MSEFC claim?

At minimum, the purchase order, delivery challans or service completion proof, dated invoices, any written buyer acknowledgment of goods or services, and correspondence chasing payment. These documents establish the acceptance date, which is essential for calculating the appointed day and the resulting interest.

Does the 45-day rule apply to services, or only to the sale of goods?

It applies to both. Section 15 covers a buyer who has bought goods or availed services from a micro or small enterprise, so service providers registered as micro or small enterprises get the same protection as goods suppliers.

How does a company disclose MSME dues in its financial statements?

Schedule III of the Companies Act, 2013 requires separate disclosure of trade payables due to micro and small enterprises, including the principal amount and any interest due or paid under the MSMED Act, distinct from other trade payables.

If a buyer disputes the quality of goods, does that stop the 45-day clock?

If the buyer formally objects in writing within 15 days of delivery specifying the discrepancy, acceptance may not be deemed to have occurred, which can affect when the appointed day begins. A buyer that stays silent and only raises quality objections after the payment dispute arises will find deemed acceptance already triggered.

Key takeaways

  • Sections 15 and 16 of the MSMED Act set a 15-day default and a 45-day maximum payment period for micro and small enterprises, with automatic compound interest at three times the RBI bank rate for delay.
  • Section 23 disallows the buyer’s deduction for interest paid under Section 16, but this alone rarely changed buyer behaviour before 2023.
  • Section 43B(h), effective from Assessment Year 2024-25, disallows the deduction of the unpaid principal itself until actual payment, which has materially accelerated MSME payment cycles across corporate India.
  • Only micro and small enterprises get this protection; medium enterprises are excluded.
  • Udyam registration must generally predate the invoice for that specific transaction to attract the protection and the disallowance.
  • The Samadhaan portal and the MSEFC’s conciliation-then-arbitration process under Section 18 give suppliers a fast-track, supplier-jurisdiction remedy that a contractual arbitration clause cannot override.
  • A buyer challenging an MSEFC award must first deposit 75 percent of the awarded amount, a requirement that has withstood constitutional challenge so far.
  • Suppliers should document every transaction carefully and claim Section 16 interest explicitly; buyers should build Udyam-status and due-date tracking directly into procurement and tax provisioning workflows.

Getting the sequencing right, from Udyam registration through Samadhaan filing to MSEFC enforcement, makes the difference between a claim that recovers real money and one that stalls in procedure. For related recovery and dispute questions, see how a formal legal notice is structured, and how Section 148 income tax notices interact with a company’s broader compliance posture, alongside the general framework under the Income Tax Act.

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