Why this rule matters to every buyer
If your business buys goods or services from micro or small enterprises, the MSME 45-day payment rule directly affects your taxes. Introduced through Section 43B(h) of the Income Tax Act and effective from April 2024, it links your tax deduction to paying these suppliers on time. It continues under the new Income Tax Act framework too.
The 15-day and 45-day timelines
The payment timeline depends on whether you have a written agreement with the supplier:
- No written agreement — pay within 15 days of acceptance of goods or services
- Written agreement — pay within the agreed period, but this cannot exceed 45 days
Even if your agreement says 60 or 90 days, the law caps the protected period at 45 days for micro and small suppliers.
The tax consequence of paying late
If you do not pay within the permitted time, the expense is not deductible in that financial year. Instead, the deduction is deferred to the year in which you actually pay. For a business with large unpaid balances to micro and small vendors at year-end, this can increase taxable income significantly.
Interest is separate — and costly
Beyond the tax effect, the MSMED Act allows the supplier to charge compound interest on late payments at a rate linked to the RBI bank rate, which is much higher than ordinary commercial interest. Importantly, this interest is generally not tax-deductible, making delays doubly expensive.
Who and what it applies to
The rule applies when your supplier is a Udyam-registered micro or small enterprise. It does not apply to medium enterprises, and traders are treated differently. The single most important control is verifying each vendor's Udyam status and classification — verbal claims are not enough.
How to stay compliant
- Maintain a vendor database with Udyam status and classification
- Flag micro and small suppliers in your accounting system
- Track due dates and prioritise these payments
- Run a focused year-end review of unpaid micro and small balances
How Aidwish helps
Aidwish helps you identify micro and small vendors, set up payment controls, and run a year-end review so you protect your deductions and avoid interest — keeping your accounts and taxes clean.
Note: Tax and compliance rules change through government notifications and Budgets. Verify the current rules or consult a professional before acting. Aidwish can help you stay updated and compliant.