The MSME 45-Day Payment Rule: What It Means for Your Contracts

If your supplier is a registered micro or small enterprise, Indian law does not let you negotiate the payment deadline down to whatever you like. Section 15 of the MSMED Act, 2006 fixes it: pay by the date agreed in writing, or, absent agreement, within 15 days, and never beyond 45 days no matter what you agreed. Miss it, and Section 16 imposes compound interest at three times the RBI's notified bank rate, with monthly rests, "notwithstanding anything contained in any agreement." A weaker clause in your contract simply does not count. (Adira, which publishes this guide, sells contract review and CLM software, so it benefits when more companies take contracting seriously. This page is written to be useful whether or not you ever buy anything from us.)

This is not a clause you can draft around: a statute overrides it, plus an income tax provision that bites even if the supplier never sues. Below is the exact wording of both, how to tell whether a supplier is covered, where to file, and a compliance checklist.

The 45-day rule, in the statute's own words

Section 15 of the MSMED Act, 2006 reads:

"Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance."

Source: Section 15, MSMED Act, 2006 (Indian Kanoon)

Three rules follow. A shorter agreed period governs over 45 days, not the other way round. Silence defaults to 15 days from acceptance or deemed acceptance, not 45. And 45 days is a hard ceiling: net-60 or net-90 with a registered micro or small enterprise supplier is unenforceable to the extent it exceeds the cap, whatever both sides signed.

Section 16 is what makes the cap matter:

"Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank."

Source: Section 16, MSMED Act, 2006 (Indian Kanoon)

The RBI's notified bank rate has sat at 5.5% per annum through most of 2026 (check rbi.org.in for the figure on your date, since it moves with policy). Three times that is 16.5% before compounding; with monthly rests, a two-year delay can push interest close to the principal itself, as the case below shows. Because Section 16 overrides "any agreement," writing "12% simple, sole remedy" into your purchase order does not lower real exposure by one rupee. It only delays when you find out.

Who actually qualifies: Udyam registration, and why medium enterprises are left out

The 45-day cap and Section 16 interest protect a "supplier" as the Act defines that word for this chapter: a micro or small enterprise holding valid Udyam registration. Medium enterprises are deliberately excluded, even though covered elsewhere in the Act. A vendor registered as medium falls back to ordinary contract law for payment terms.

Since Budget 2025-26 revised the thresholds, effective 1 April 2025, classification runs on two tests together, investment and annual turnover:

• Micro: investment up to Rs 2.5 crore AND turnover up to Rs 10 crore
• Small: investment up to Rs 25 crore AND turnover up to Rs 100 crore
• Medium: investment up to Rs 125 crore AND turnover up to Rs 500 crore

A business must stay under both limits for its category; crossing either pushes it up. Classification is re-verified each year against ITR and GST filings, so a supplier that qualified as small when you signed the contract can be reclassified as medium later, at which point Sections 15 and 16 stop applying to invoices raised after that reclassification.

This timing point matters more than most buyers assume. In M/S Silpi Industries Etc. v Kerala State Road Transport Corporation (Civil Appeal Nos. 1570-1578 of 2021, Supreme Court, decided 29 June 2021), the Court held that registration has to exist on the date the contract is entered into for the Act's benefits to apply; registering only after a dispute arises does not retroactively cover the earlier transaction. Case: Silpi Industries v Kerala SRTC (Indian Kanoon).

How to check a supplier's status. Ask for their Udyam Registration Number (UDYAM-XX-00-0000000) and verify it yourself: go to udyamregistration.gov.in, use "Print/Verify" then "Verify Udyam Registration Number," enter the number and captcha, and it shows the category and registration date from government records. Source: Udyam portal, Ministry of MSME. Do this before signing, not after a dispute starts.

The tax lever most finance teams miss: Section 43B(h)

Section 16 interest requires the supplier to chase you. Section 43B(h), inserted by the Finance Act, 2023 and effective from Assessment Year 2024-25, does not; it hits your own tax return automatically. It reads:

"any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him."

Source: Section 43B, Income Tax Act, 1961 (Income Tax Department)

In plain terms: if an MSE supplier's invoice is still unpaid past the Section 15 deadline when your financial year closes, you cannot deduct that expense that year, even though it was genuinely incurred and would ordinarily qualify on an accrual basis under Section 37. You claim it only in the year you actually pay. A worked number: owe an MSE vendor Rs 20 lakh, due and unpaid on 31 March. That Rs 20 lakh is disallowed for the year entirely; at a 25% tax rate, that is roughly Rs 5 lakh of tax paid a year early, on money not yet paid out, purely from timing.

One sting is easy to miss: clause (h) is excluded from the general Section 43B proviso that lets other listed items (statutory dues, bonuses) still qualify if paid before the return filing date. For those items, paying late but before filing saves the deduction. For MSE dues it does not; only payment within the Section 15 limit protects it. Separately, Section 23 of the MSMED Act says Section 16 interest you pay is itself non-deductible. Source: Section 23, MSMED Act (Indian Kanoon). A late payment can cost both deductions, on the same invoice, the same year.

Enforcement: where a supplier actually files, and how fast

If a buyer will not pay voluntarily, a registered MSE supplier does not need a civil suit. Each state runs a Micro and Small Enterprise Facilitation Council (MSEFC), and a supplier lodges a delayed payment reference directly. One detail changed recently: from 15 October 2025, the Ministry of MSME made the new MSME ODR Portal at odr.msme.gov.in the exclusive channel for new filings, adding automated negotiation ahead of formal conciliation. The older Samadhaan portal at samadhaan.msme.gov.in still tracks pre-existing cases but takes no new references.

The MSEFC is meant to take up the reference within 15 days, attempt conciliation, and, failing that, arbitrate itself or refer the matter to arbitration under the Arbitration and Conciliation Act, 1996, targeting a decision within 90 days. How hard an award bites is shown by Tirupati Steels v Shubh Industrial Component & Anr. (Civil Appeal No. 2941 of 2022, Supreme Court, decided 19 April 2022): on a principal claim of roughly Rs 1.40 crore, accumulated Section 16 interest reached roughly Rs 1.32 crore, nearly matching it. When the buyer tried to challenge the award, the Court held Section 19's 75% pre-deposit before any challenge is mandatory, not discretionary. Case: Tirupati Steels v Shubh Industrial Component (Indian Kanoon); pre-deposit rule: Section 19, MSMED Act (Indian Kanoon). Once a delayed payment becomes an award, fighting it is gated behind a large mandatory deposit, so most buyers settle rather than contest.

What this means for your contract

A payment clause that ignores this regime is wrong for any registered MSE supplier it applies to. See our guides on payment terms in Indian contracts and the late-payment interest clause for how these terms should be drafted. You can mark up a payment or interest clause against the MSMED Act free in Weave, before you sign or push back on one sent to you.

Bad: "Payment terms: net 60 days from invoice date. Interest on late payment shall be 12% per annum, simple interest, and shall be Vendor's sole and exclusive remedy for delayed payment."

What is wrong: net-60 exceeds the Section 15 cap for a registered MSE supplier, so it is unenforceable to that extent. The 12% simple, sole-remedy language does nothing to stop Section 16's compound interest from applying anyway, so real exposure is far higher than the clause suggests, and finance under-provisions for it.

Better: "Payment terms: within 30 days of acceptance, or, where Vendor is a registered micro or small enterprise under the MSMED Act, 2006, no later than the 45-day maximum in Section 15 of that Act. Late payment bears interest at 1.5% per month, compounded monthly, provided that where Vendor is a registered micro or small enterprise, interest shall instead be calculated under Section 16 of the MSMED Act, 2006 if higher, and nothing in this Clause limits Vendor's rights under Sections 15 and 16. Client acknowledges that a payment to a registered micro or small enterprise supplier made after the Section 15 time limit may be disallowed as a deduction under Section 43B(h) of the Income Tax Act, 1961 until actually paid."

What changed: the term now respects the statutory cap instead of quietly breaching it, the interest rate defers to Section 16 where higher, and the tax exposure is named so finance, not just legal, sees it.

Red flags

Normal	Red flag	Why it matters
Payment term at or below 45 days for any Udyam-registered micro or small vendor	A blanket net-60 or net-90 term, no registration check	Unenforceable against a registered MSE supplier under Section 15
Vendor master flags Udyam status and registration date at onboarding	No process to record or verify status before the first invoice	Cannot apply Section 15/16, or spot Section 43B(h) exposure, without knowing who qualifies
Interest clause defers to Section 16 where higher	A fixed low rate (10-12% simple) as the "sole remedy"	Does not override Section 16, which applies "notwithstanding anything contained in any agreement"
MSE payables closed out before financial year-end where possible	Invoices aged past year-end with no tax flag	Section 43B(h) disallowance, discovered only at tax filing
Registration verified on the Udyam portal, dated before the contract	Certificate accepted without checking the date	Per Silpi Industries, registration must predate the contract
A defined internal escalation step before any formal reference	First notice is an ODR or MSEFC filing	Section 19's deposit rule already runs against the buyer

Compliance checklist

1. Tag every vendor as Udyam-registered micro, small, medium, or unregistered at onboarding, with the registration date, verified independently at udyamregistration.gov.in.
2. Set payment terms for micro and small vendors at 45 days or less, and shorter if agreed in writing.
3. Build an ageing report flagging any MSE invoice approaching the Section 15 deadline before it lapses, not after.
4. Close out MSE payables before financial year-end wherever cash flow allows, to avoid a Section 43B(h) disallowance.
5. Brief finance, not just legal, on Sections 16 and 43B(h); the tax exposure lands on finance's desk long after signing.
6. If a delayed payment reference is filed against you, respond early: the Section 19 pre-deposit makes contesting an award far costlier than settling first.

US and global contrast

The US has no federal statute overriding private payment terms this way. Net-30 or net-60 are conventions, not ceilings, and the federal Prompt Payment Act binds only the government's own payments to contractors. There is no compound-interest override and no tax provision like Section 43B(h) disallowing a deduction purely for paying a small vendor late.

The UK comes closer: the Late Payment of Commercial Debts (Interest) Act 1998 implies the Bank of England base rate plus 8 points into silent B2B contracts generally, not one protected category, and it usually does not compound. India's regime is narrower in who it protects, only Udyam-registered micro and small enterprises, but far more aggressive once it applies: a rate multiple, monthly compounding, a 45-day ceiling that cannot be contracted around, and a tax penalty on top.

FAQ

Does the 45-day rule apply if my written contract says net-60? No, not to a registered micro or small enterprise supplier. Section 15 caps the agreed period at 45 days from acceptance regardless of what the contract states; a net-60 term is unenforceable to that extent.

What if there is no written payment term at all? The fallback under Section 15 is 15 days from acceptance or deemed acceptance, not 45. The 45-day figure is the outer ceiling on what you can agree in writing, not the default when you agreed nothing.

Do medium enterprises get the same protection as micro and small enterprises? No. Sections 15 and 16 apply only to suppliers registered as micro or small under Udyam. A medium enterprise supplier is covered elsewhere in the Act, but not by the 45-day cap or Section 16 interest.

How do I check whether my supplier's Udyam registration was valid when we signed the contract? Verify the Udyam Registration Number at udyamregistration.gov.in, which shows category and registration date from government records. Per Silpi Industries, that registration generally needs to predate the contract, not just exist by the time a dispute arises.

Where does a supplier file if a buyer refuses to pay under Section 15? As of 15 October 2025, new references go on the MSME ODR Portal at odr.msme.gov.in, which forwards the case to the relevant state Facilitation Council. The older Samadhaan portal still tracks pre-existing cases but takes no new filings.

Can Section 43B(h) apply even if the supplier never complains about late payment? Yes. It is self-executing at your own return filing regardless of whether the supplier pursues Section 16 interest or a Council reference. Unpaid MSE dues past the Section 15 deadline at year-end are disallowed that year, whether or not the supplier ever asks.

This guide explains the Section 15 payment cap, the Section 16 interest override, the Section 43B(h) tax consequence, and how to check a supplier's Udyam status. It does not tell you whether a specific vendor currently qualifies, what the RBI bank rate is on your calculation date, or whether a particular clause is enforceable on your facts; that depends on live registration data, current RBI notifications, and your exact contract wording, and none of it is legal advice. Talk to a lawyer or a chartered accountant before you rely on, negotiate, or enforce a payment term or interest claim in a live deal.