Msme 45 Days Payment Rule Everything You Need To Know

Delayed payments have long been one of the biggest challenges faced by Micro and Small Enterprises (MSMEs) in India. When businesses do not receive payments on time, it affects their cash flow, daily operations, and growth plans.

To address this issue, the government introduced Section 43B(h) of the Income Tax Act through the Finance Act, 2023. The provision encourages timely payments to MSMEs by restricting tax deductions on expenses that remain unpaid beyond the prescribed timeline.

This article explains the MSME 45 Days Payment Rule, its applicability, payment timelines, tax implications, and the consequences of non-compliance.

Key Highlights of the MSME 45 Days Payment Rule

• Buyers must pay Micro and Small Enterprises within 45 days when a written agreement exists.
• If there is no written agreement, payment must be made within 15 days from the acceptance of goods or services.
• Delayed payments may result in the disallowance of business expenses under Section 43B(h).
• Tax deductions can only be claimed in the year in which the payment is actually made.
• The provision aims to improve cash flow and financial stability for MSMEs.
• Businesses must track supplier payment schedules carefully to remain compliant.

What Is the MSME 45 Days Payment Rule? 

Section 43B(h) mandates that businesses pay Micro and Small enterprises within 45 days if a written agreement exists. Without a written agreement, payment must occur within 15 days. Failure results in losing the tax deduction benefit for the current financial year.

The 45-day payment rule extends the MSME payment regulation under the MSME Act. Its purpose is to minimize late payments to MSMEs, thereby strengthening cash flow for small enterprises. Payment delays cause cash flow issues, operational strain, and greater reliance on trade credit.

MSME Payments Rule for Traders and Turnover Limits

The 45-day payment rule's turnover limit depends on MSME classification. The MSME Act identifies micro and small units based on their investment and turnover. Buyers must confirm the supplier's classification before applying payment terms.

Disclaimer: Rates, limits, and other figures mentioned above are accurate as of the date this page was created and are subject to change. Please refer to the official Udyam/MSME portal or consult a professional for the most current figures.

Is Section 43B(h) Applicable to Traders?

Section 34B(h) was brought into force to protect the MSME sector and ensure timely payments for the purchase of goods and services. This includes cash flow for MSMEs and helps them operate their businesses more effectively.

For traders, applicability depends on whether the supplier qualifies as an MSME trader under the MSME Development Act. If a trader purchases goods or services from registered entities and fails to make the payments within 45 days, the expenses cannot be claimed under the business expenses in the said financial year.

Traders are treated as MSMEs in this section only if they are engaged in trading, manufacturing, and other service-related operations. The section applies only to the main income tax implications for buyers who engage in an MSME transaction with the buyer. Businesses must verify the status of their MSME registration to maintain proper payment records and ensure timely settlement of dues, avail tax benefits, and avoid non-compliance issues.

Section 43B(h) Effective Date

Section 43B(h) became effective only from April 1st 2024. This is applicable from the financial year 2023-24. The provision was mainly introduced to ensure timely payments to MSMEs. The section also restricts businessmen from claiming tax deductions for outstanding payments made beyond the prescribed time limit to MSME suppliers.

MSME Payment Time Limit Under Section 43B(h)

Under section 43B(h), payments made to the registered MSME suppliers must be made within the:  

• 15 days if there is no written agreement between the buyer and the MSME.  
• 45 days if there is any written agreement in the transaction.  

If the payments are delayed beyond these timelines, the expense cannot be claimed as a deduction in the financial year and will be allowed only in the year of actual payment.

Example of Section 43B(h) with Tax Calculation

Suppose a business purchases goods worth around Rs. 5 Lakhs from a registered MSME supplier on January 1st, 2026, with a 45-day payment agreement. If the payment is not made within the said 45 days and remains unpaid till March 31st, 2026, the purchase of Rs. 5 Lakh will be disallowed under Section 43B(h) for the financial year 2025-26.

If the company falls under the 30% tax bracket.

• Disallowed Expense: Rs. 5,00,000
• Additional Taxable Income: Rs. 5,00,000
• Additional Tax Liability: Rs. 1,50,000

The deduction can be claimed only when the payment is actually made.

Interest on Delayed MSME Payments

Under the MSME Development Act, buyers who delay payments to MSMEs are liable to pay compound interest on the outstanding amount. The interest rate is generally 3 times the specified RBI rate. The interest is mandatory and cannot be claimed as a tax deduction under the Income Tax Act. This is to protect MSMEs from various cash flow delays and financial stress.  It can have a great impact on their daily operations, salaries, production cycles, and growth.

The Buyer needs to pay compound interest on the outstanding amount. This amount is calculated at 3 times the RBI Bank Rate.

The RBI Bank Rate changes periodically in line with RBI policy decisions. For example, if the RBI Bank Rate is 5.75%, the interest payable is 17.25% p.a., which is significantly higher than the actual commercial interest rate, making delayed payments for businesses very costly.

Penalties for Failure to Pay MSMEs on Time

The following are some of the penalties businesses face when they fail to make timely payments to the MSME sector. Some of the payment penalties include:

• Disallowance of business expenses under section 43B(h))
• Increased taxable income and a higher tax liability
• Liability to pay penal interest under the MSME Act
• Legal disputes and loss of reputation in the business circle

Businesses are advised to maintain the payment tracking systems and verify the MSME registration status to remain compliant.

Benefits of Section 43B(h) for MSMEs

Section 43B(h) was introduced to encourage timely payments to MSMEs by disallowing tax deductions on delayed payments. This helps improve cash flow and supports the growth and financial stability of small businesses.

The following is the list of advantages of Section 43B(h) for the MSMEs:  

• Ensures Prompt Payments: The provision is to ensure that buyers clear the dues within the prescribed period. This ensures MSMEs receive the payments on time.
• Improves Working Capital Management: Timely payments have helped the MSME sector maintain a healthy working capital and manage operational expenses much more efficiently.
• Minimizes Financial Burden: Small businesses generally face difficulties in getting receivables. Section 43B(h) will help you reduce your reliance on external borrowing for regular operations.  
• Boosts the MSME Expansion: Better cash flow enables the MSMEs to invest in business expansion, inventory management, employee salaries, and various infrastructure improvements.
• Encourages Responsible Payment Practices: Businesses dealing with the MSMEs are more accountable and disciplined in making on-time payments.  
• Prevents Payment Conflicts: Legal protection helps MSMEs avoid payment disputes between buyers and suppliers.
• Drives Sustainable Business Growth: Consistent cash inflows help MSMEs operate more sustainably, without disruptions caused by receivable delays.
• Improves Overall Financial Health: Improved cash flow enhances financial stability and can positively affect MSMEs' borrowing capacity and credibility.
• Builds a Strong MSME Ecosystem: By protecting small businesses from payment delays, Section 43B(h) contributes to a healthier, more stable MSME sector in India.

Compliance Checklist for Businesses

Before claiming expenses related to MSME suppliers, businesses should:

• Verify the supplier's Udyam Registration status.
• Identify whether the supplier qualifies as a Micro or Small Enterprise.
• Monitor invoice due dates carefully.
• Maintain written agreements wherever applicable.
• Ensure payments are released within prescribed timelines.
• Review outstanding MSME dues before year-end tax filings.

Conclusion

Section 43B(h) has strengthened the protection available to Micro and Small Enterprises by encouraging timely payments from buyers. Businesses purchasing goods or services from registered MSMEs must ensure that payments are made within 15 days or 45 days, depending on the agreement terms.

Failure to comply can lead to the disallowance of tax deductions and additional financial liabilities. By maintaining proper payment practices and monitoring MSME dues, businesses can remain compliant while supporting the growth and sustainability of India's MSME sector.

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Frequently Asked Questions

1. Can a buyer claim a deduction if payment is made after 45 days?

Yes. If a buyer pays an MSME supplier after the prescribed 45-day period, the expense cannot be claimed as a tax deduction in that financial year under Section 43B(h). However, the deduction is not lost permanently and can be claimed in the year when the actual payment is made. This provision encourages businesses to make timely payments to MSMEs.

2. What happens if MSME is not paid in 45 days?

If payment to a registered Micro or Small Enterprise is not made within the prescribed 45-day period, the buyer cannot claim the expense as a tax deduction in that financial year under Section 43B(h). The deduction will be allowed only when the payment is actually made. Additionally, the buyer may be liable to pay interest on the delayed amount under the MSMED Act.

3. Does Section 43B(h) apply to unregistered MSMEs?

No. Section 43B(h) applies only to payments made to registered Micro and Small Enterprises under the Udyam Registration system. Payments to unregistered MSMEs are not covered by this provision, and the tax deduction restrictions under Section 43B(h) do not apply.

4. What is the difference between Section 15 of the MSMED Act and Section 43B(h)?

Section 15 of the MSMED Act requires buyers to pay Micro and Small Enterprises within 15 days or 45 days, depending on the agreement. Section 43B(h) of the Income Tax Act enforces this requirement by disallowing tax deductions for expenses that remain unpaid beyond the prescribed period. In simple terms, Section 15 sets the payment deadline, while Section 43B(h) imposes tax consequences for delayed payments.

Disclaimer: This page includes information that has been compiled from many sources and is only offered for informational purposes. Given that this type of data may change over time, we cannot guarantee the accuracy of the information supplied or included within it. It is anticipated that the user will confirm with the relevant source before making any choices or taking any actions.