MSME Delayed Payments: The 45-day Rule, Interest and How to Recover Dues

Late payment is one of the biggest problems small businesses face. The MSMED Act gives micro and small enterprises specific rights to be paid on time — rights many don't use. This guide explains them.

Who's Protected

Micro and small enterprises registered on Udyam, supplying goods or services to buyers. Medium enterprises aren't covered by these provisions.

The Payment Deadline

• If there's a written agreement on payment terms, the buyer must pay by the agreed date, which can't be more than 45 days from the day of acceptance of the goods or services.
• If there's no agreement, the buyer must pay within 15 days of acceptance.

Interest on Late Payment

If the buyer pays late, it owes compound interest with monthly rests at three times the bank rate notified by the RBI, from the due date. The interest isn't deductible for the buyer's income tax.

The Buyer's Tax Disallowance

Under the Income-tax Act, a buyer can't deduct amounts owed to micro and small enterprises beyond the MSMED Act time limit until they're actually paid. This gives large buyers a strong reason to pay on time before their year end.

Disclosure by Buyers

Companies must disclose dues to micro and small enterprises in their financial statements, and report dues outstanding beyond 45 days in the half-yearly MSME-1 return.

Recovering Dues: The Facilitation Council

A micro or small enterprise can refer a delayed payment dispute to the Micro and Small Enterprises Facilitation Council of its state. The Council first tries conciliation, and if that fails, arbitrates or refers the dispute to arbitration. A buyer challenging an award must first deposit a large part of the amount.

Delayed payments can also be registered on the central MSME Samadhaan portal.

Practical Steps

1. Register on Udyam and share your certificate with customers.
2. Agree payment terms in writing, up to 45 days.
3. Mention your Udyam status on invoices.
4. Send reminders citing the MSMED Act when payments are late.
5. Use the Facilitation Council if dues remain unpaid.

Getting Help

Think Filing helps MSMEs register, set up payment terms, and pursue delayed payments.