The MSME 45-Day Payment Rule in India: Ensuring Timely Payments to Small Businesses

Introduction

In India, Micro, Small, and Medium Enterprises (MSMEs) are not just support structures but critical engines of economic activity. They employ over 11 crore Indians and contribute nearly 30% to the country’s GDP. Yet, MSMEs have been plagued by one chronic issue: delayed payments. Many small businesses face the nightmare of waiting for 60 to 120 days to receive payments for services or products delivered, which suffocates their cash flow and hampers growth.

To address this, the government introduced a legal safeguard known as the "MSME 45-Day Payment Rule." It mandates that any buyer must pay MSME suppliers within 45 days of accepting the goods or services. Backed by the MSMED Act of 2006 and reinforced through the Finance Act, 2023, this rule aims to promote liquidity, reduce dependency on high-cost borrowings, and restore balance in commercial relationships.

Let’s break down what the rule is, how it works, and why it’s a game-changer for MSMEs.

Understanding the Legal Foundation

The MSMED Act, 2006 introduced mandatory payment timelines under Section 15 and 16:

• If there’s no written agreement, payment is due within 15 days of delivery.
• If there's an agreement, the credit period cannot exceed 45 days.
• If the buyer delays beyond this, they must pay compound interest at three times the RBI Bank Rate, calculated monthly.

Recent Strengthening: Section 43B(h) of the Income Tax Act (effective April 1, 2024)

• If a buyer delays payment beyond 45 days to a micro or small enterprise, they lose tax deductibility of that expense for the year.
• This rule ties the Income Tax Act directly to the MSMED Act, making it risky and costly for companies to delay payments.

This synergy of legal deterrents aims to protect MSMEs while promoting a fairer business ecosystem.

The "46+ Day" Problem: What Happened Before This Rule Was Enforced

Before enforcement picked up pace, small businesses suffered in silence due to:

1. Severe Cash Flow Crunch: Delayed payments meant MSMEs couldn't pay their own suppliers, salaries, or utility bills. Working capital dried up, halting operations.

2. High-Interest Bridge Loans: Many turned to private lenders or short-term bank loans at interest rates as high as 26% just to survive until payments arrived.

3. Loan Defaults and NPAs: Inability to service bank loans due to blocked receivables pushed MSMEs into non-performing asset (NPA) status, further choking their access to formal finance.

4. Missed Growth Opportunities: Long delays meant capital was locked in receivables. Businesses couldn’t accept new orders or invest in growth.

5. Exploitative Power Imbalance: Larger buyers imposed unfair payment terms. MSMEs, fearing loss of business, often accepted delays quietly.

6. Weak Legal Recourse: Though the law existed, enforcement was lax. Filing cases with MSME Facilitation Councils (MSEFCs) involved long delays, discouraging small players from pursuing claims.

The cumulative impact was devastating. Delayed payments to MSMEs once accounted for nearly 7.8% of India’s GDP. This was not a small business issue; it was a systemic economic threat.

National-Level Impact: When MSMEs Don’t Get Paid

Delayed payments have a cascading effect on the economy:

• Working Capital Deficit: The MSME sector faces an estimated credit gap of ₹20–25 lakh crore. Payment delays worsen this gap.
• Ripple Effect in Supply Chains: When MSMEs delay their own payments, it disrupts entire supply chains, especially in manufacturing and exports.
• MSME Bankruptcies & Job Losses: Delays cause shutdowns and layoffs. MSMEs are among India’s largest employers.
• Loss of Trust in the Business Ecosystem: Persistent payment delays erode trust, making business relationships more transactional and risk-averse.
• Higher Cost of Doing Business: With blocked capital, MSMEs raise prices to cover financing costs, reducing competitiveness.

The Rule’s Real Impact: Promoting Smoother Money Rotation

The 45-day rule aims to restore liquidity discipline:

• Timely Cash Flow: Quick payments mean MSMEs can pay salaries, suppliers, and reinvest faster.
• Reduced Debt Reliance: Avoiding high-interest borrowing strengthens balance sheets and lowers financial stress.
• Faster Order Turnaround: With better liquidity, MSMEs can scale up and accept more orders.
• Healthier Buyer-Supplier Relationships: Buyers following this rule build trust and attract better vendors.
• Creditworthiness Improves: Steady cash flow enhances the MSME's profile with banks and investors.

When money rotates faster, the whole economy benefits. Payment certainty turns the wheels of commerce faster.

Real-World Case Studies: When the Rule Works (or Fails)

1. Textile Market (Ahmedabad): Traditionally ran on 90-120 day payment cycles. When Section 43B(h) kicked in, many buyers initially canceled orders due to fear of the tax penalty. However, within months, the market adapted. Today, MSME suppliers in this space report significantly faster payments.

2. Auto-Part Supplier: A small supplier to a large automobile firm regularly faced 90-day cycles. With the new tax law, the auto company restructured payments, and the MSME now receives payments within 45 days, improving production cycles.

3. Government Contractors: Municipal bodies often delayed payments. Post-2023 reforms, government departments have received strict mandates to clear dues in 45 days. Complaints filed on the MSME Samadhaan portal now carry more weight, with councils directing public entities to settle dues.

FAQs on the 45-Day Rule

Q1. Who is covered under the 45-day rule?
Only micro and small enterprises registered under the MSMED Act. Medium enterprises are not covered.

Q2. What if the contract says 60 days?
The law overrides such clauses. 45 days is the maximum legal limit. Any delay beyond that is a violation.

Q3. From when does the 45-day period start?
From the "date of acceptance" of goods/services, or 15 days after delivery if acceptance is not disputed.

Q4. What’s the penalty for buyers?
Compound interest at 3x RBI Bank Rate, plus loss of tax deduction under Section 43B(h).

Q5. How can an MSME claim delayed payments?
Via the MSEFC or MSME Samadhaan portal. They can seek interest and invoice value recovery.

Q6. What if I’m a small trader stuck between a late-paying client and an MSME supplier?
Use short-term credit, negotiate timelines, or offer discounts for quicker settlements. Push clients to adopt timely payment practices.

Final Thoughts

The 45-day rule is more than just a regulatory requirement. It’s a structural reform that aligns India’s business practices with global standards. MSMEs are no longer invisible. With legal backing and financial incentives (and penalties), the government has made timely payments non-negotiable.

For MSMEs, it’s vital to:

• Register on the Udyam portal
• Clearly communicate credit terms
• Use legal tools if needed

And for buyers: respecting the 45-day limit isn't just about compliance. It's about strengthening the business ecosystem that ultimately supports everyone.