Understanding MSME Payment Rules: What Every Startup and Small Business Must Know

Micro, Small, and Medium Enterprises (MSMEs) are the quiet giants of the Indian economy. They create over 11 crore jobs and contribute about 30% to our GDP. Yet despite their scale, many MSMEs struggle with one chronic issue: delayed payments.

If you're a startup founder, MSME owner, or even a company working with MSMEs, there's a lot you must know about the legal changes that now protect small vendors. Because as of 2024, payment delays don’t just strain relationships they can cost you tax benefits, lead to interest penalties, and even damage your compliance record.

Let’s break it all down in human terms.

Why MSME Payment Rules Matter?

Cash flow is oxygen for small businesses. A delay of 60–120 days in payments which used to be the norm could easily suffocate operations. That’s why India passed strong laws under the MSME Development Act, 2006. And more recently, Section 43B(h) of the Income Tax Act added teeth to those protections.

Now, not paying an MSME on time can cost buyers real money, tax benefits, and reputation.

The 45-Day Rule, Explained

At the heart of MSME payment law is a simple rule:

No MSME can be given more than 45 days’ credit.

• If there is no written agreement, payment is due within 15 days.
• If a contract exists, payment must be made within 45 days of accepting goods/services.
• Beyond that, interest kicks in and it’s steep: 3× the RBI bank rate, compounded monthly.

For context, if the RBI’s rate is 6%, the interest becomes 18% per year far more than most loans.

New Tax Rule: Section 43B(h)

This is where things get serious.

From April 1, 2024, any payment to a registered MSME that isn't made within the 45-day window is not tax-deductible.

That means:

• The unpaid invoice is treated as your income until it’s cleared.
• You lose the tax deduction until actual payment happens.
• Large companies, startups, or government buyers all are impacted.

This has made on-time MSME payments a tax compliance issue, not just a courtesy.

MCA Reporting and Public Disclosure

To add even more pressure, buyers delaying payments beyond 45 days must now:

• File MSME-1 (a half-yearly return to the Ministry of Corporate Affairs).
• Disclose overdue amounts and reasons for delay.
• Accept that these delays could be public.

This transparency aims to shame non-compliance into action especially among large corporations.

How Does the Rule Apply in Real Deals?

Here’s how it works:

1. You receive goods or services from a registered micro/small business.
2. If you don’t reject it within 15 days, it's “accepted.”
3. From that acceptance date, the 45-day clock starts ticking.
4. If you pay late:
   • You owe interest (3× RBI rate, monthly compounded).
   • You lose the right to deduct this expense in your taxes that year.
   • You must report the delay publicly (if required).

Even if your contract says “60 days,” the law overrides it. Contracts cannot legally extend MSME payment beyond 45 days.

Who Is Covered?

• MSME Sellers (Micro + Small): Must be registered under Udyam. Only these are protected.
• Medium Enterprises: Not covered. They don’t get 45-day protection.
• Startups: Covered if they qualify as micro/small and have valid MSME registration.
• Buyers (anyone buying from an MSME): Must comply. Doesn’t matter if the buyer is a startup, large firm, or government entity.

So, if you’re a startup buying from a small MSME vendor, you must pay within 45 days or lose your tax benefits.

What Happens If You Miss the Deadline?

Two major hits:

1. Interest Penalty
   You pay compound interest at 3× RBI rate on overdue amounts calculated monthly.
2. Tax Disallowance
   Under Section 43B(h), you can’t claim the expense in your profit and loss until payment is made. So your taxable income goes up.

In short: delaying payments is expensive.

How MSMEs Can Enforce Their Rights

MSMEs don’t have to chase or beg. The law is on their side.

If a client delays payment:

• File a complaint via the MSME Samadhaan portal.
• Approach the Micro & Small Enterprise Facilitation Council (MSEFC) in your state.
• Demand full invoice + interest as per law.

Many cases are now resolved through Samadhaan without lengthy court fights.

What Startups and MSMEs Should Do (Action Plan)

If You’re an MSME:

• Register on the Udyam portal.
• Put the 45-day term on every invoice and contract.
• Maintain delivery acceptance proof.
• Use Samadhaan if clients delay.
• File MSME-1 (if required).

If You’re a Buyer (Startup or Company):

• Pay within 45 days set up alerts in your finance software.
• Track invoice acceptance dates.
• Avoid longer payment terms in contracts.
• Consult your CA on 43B(h) risks.
• File half-yearly returns if applicable.

Why This Rule Matters to India’s Economy?

Studies once showed MSME payment delays caused cash blockages worth 7–8% of GDP. That’s massive.

With the new rules:

• MSMEs get faster access to working capital.
• They avoid high-interest borrowing.
• They can hire, scale, and compete better.

Timely payments don’t just help small businesses they build a fairer, more reliable business ecosystem.

StartupFlora’s Take

At StartupFlora, we work with founders and MSMEs every day. And we see this rule as a positive shift not a burden.

We advise:

• MSMEs: Use the tools available. The law is on your side register, document, and don’t hesitate to escalate.
• Startups & Buyers: Think of on-time payment as part of your brand ethics. Build trust, avoid penalties, and stay tax-compliant.

Need help with Udyam registration or understanding compliance? We’re just a click away.

FAQs on MSME Payment Rules

Q1. What is the 45-day MSME rule?
It mandates that buyers must pay registered micro/small businesses within 45 days of accepting delivery. Interest and tax penalties apply on delays.

Q2. Does this rule apply even if my contract says 60 days?
Yes. The MSMED Act overrides any contract that extends payment beyond 45 days.

Q3. Who qualifies as an MSME?
Businesses registered under the Udyam portal as micro or small enterprises. Medium enterprises are not included.

Q4. What’s Section 43B(h)?
It disallows tax deductions on delayed payments to MSMEs. The invoice is treated as income until paid.

Q5. How do I report overdue payments?
Through MSME-1 filings (for companies with outstanding dues beyond 45 days). This is a compliance requirement under MCA.

Q6. Can MSMEs take legal action?
Yes. Use the MSME Samadhaan portal or file with the state MSE Facilitation Council to recover dues plus interest.

Q7. What if my startup is both a seller and a buyer?
Follow the rule both ways: register if you're eligible and enforce your rights as a seller; pay other MSMEs on time as a buyer.

Final Thoughts: Compliance is Clarity

The MSME 45-day rule isn’t a trap it’s a tool. For small businesses, it unlocks faster cash flow. For buyers, it enforces financial discipline. For the ecosystem, it means trust and transparency.

Whether you're a startup or a supplier, learn the rules, follow the timeline, and build a business that respects both growth and integrity.