MSME 45-day payment rule in India

Running a business often involves buying goods and services from multiple suppliers. In India, a large part of this supply chain consists of Micro, Small, and Medium Enterprises (MSMEs). These enterprises form the backbone of the Indian economy, but delayed payments have long been a challenge for them. To address this, the government introduced the 45 day payment rule under Section 43B(h) of the Finance Act, 2023, effective from 1 April 2024.

This rule is more than just a legal obligation—it’s a move to ensure timely cash flow for MSMEs and to build healthier business relationships across industries. Whether you’re an MSME or a large corporation, understanding this regulation can help you avoid penalties, optimise taxes, and maintain strong supplier ties.

In this blog, we’ll break down the 45-day payment rule, how it works, its benefits, and how insurance solutions like MSME insurance and business insurance can protect you in the long run.

What is the MSME 45-Day Payment Rule?

The 45-day payment rule is a provision that requires buyers to pay MSMEs within a specific time frame to claim the expense as a tax deduction. Here’s how it works:

●     If a company buys goods or services from an MSME and fails to pay within 45 days (or within the agreed date, whichever is earlier), they cannot claim that expense as a deduction for the same financial year.

●     The deduction can only be claimed in the year the payment is actually made.

●     This rule applies from the assessment year 2024–2025 onwards.

The main goal is to solve the liquidity crunch in the MSME sector by ensuring timely payments.

Time Limits for Payment to MSMEs

The payment deadline depends on whether there is a written agreement between the buyer and the MSME seller:

1. With Written Agreement – Payment must be made within the agreed date or within 45 days from the purchase/invoice date, whichever comes first.
2. Without Written Agreement – Payment must be made within 15 days from the purchase/invoice date.

Example:

If an MSME issues an invoice on 10 April 2024 to a large retailer, the retailer must pay by 25 May 2024 (within 45 days). Any delay will result in the expense being disallowed for tax purposes for that year.

Also Read: Employers' Liability Insurance: What It Covers and Why Your Business Needs It

What is an MSME?

As per the MSMED Act, 2006, MSMEs are divided into two categories—manufacturing and service enterprises—and are classified based on their investment and turnover:

When is the Rule Applicable?

The 45-day payment rule applies when:

●     The seller is registered as an MSME under the MSMED Act, 2006.

●     The buyer can be any business—registration under MSME is not required for the buyer.

●     Goods or services are purchased from the MSME.

Penalty for Non-Compliance

Delaying payment beyond the allowed period has consequences:

●     Interest Charges – Buyers must pay compound interest three times higher than the bank rate.

●     Interest Disallowance – This interest cannot be claimed as an expense under the Income Tax Act, 1961.

Advantages of the 45-Day Payment Rule for MSMEs

The rule directly benefits small and medium enterprises by:

1. Ensuring Timely Cash Flow – Payments within 15 or 45 days prevent cash shortages.
2. Reducing Financial Stress – MSMEs can manage budgets better without taking costly short-term loans.
3. Encouraging Growth – Timely payments help MSMEs invest in equipment, research, and hiring.
4. Strengthening Negotiating Power – Legal backing ensures fair treatment from bigger companies.
5. Improving Credit Profiles – Regular payments enhance the MSME’s ability to secure future loans.

Benefits for Large Companies

While the rule aims to protect MSMEs, large companies also gain:

1. Tax Deduction Advantage – Paying within the limit ensures expenses are deductible in the same year.
2. Reputation Boost – Timely payments build trust with suppliers.
3. Supply Chain Stability – Avoids delays in delivery caused by payment disputes.
4. Legal Compliance – Prevents disputes and penalties.
5. Operational Efficiency – Streamlined payment processes improve financial management.

How to Stay Compliant with the Rule?

Compliance involves more than just paying on time. Businesses should:

●     Keep accurate records of invoices and payment dates.

●     Create written agreements with MSMEs to avoid disputes.

●     Set up reminders for payment deadlines.

●     Maintain updated MSME vendor details, including registration numbers.

Digital accounting tools can help businesses track due dates and prioritise payments.

How Bajaj General Insurance Can Help Businesses?

Bajaj General Insurance not only supports MSMEs through tailored MSME insurance solutions but also helps larger companies safeguard their operations with comprehensive business insurance.

MSME Insurance can:

●     Protect against risks like fire, theft, natural disasters, and liability claims.

●     Provide coverage for business interruptions that can disrupt cash flow.

●     Help secure credibility with clients and financial institutions.

Business Insurance for larger companies can:

●     Cover operational and legal risks.

●     Protect against liabilities that may arise from contractual obligations.

●     Safeguard supply chains by ensuring business continuity during unexpected events.

By combining timely payment practices with the right insurance cover, companies can build stronger financial health and long-term trust with their MSME partners.

Also Read: What is MSME? —Meaning, Full Form, Features, Importance, and Role in India

Practical Tips for Businesses to Implement the 45-Day Payment Rule

1. Audit Vendor List – Identify which suppliers are registered as MSMEs.
2. Negotiate Payment Terms – Ensure contracts are aligned with the legal time frames.
3. Automate Payment Schedules – Use accounting software to avoid human error.
4. Train Finance Teams – Ensure they understand the impact of delayed payments on tax liabilities.
5. Integrate Insurance Planning – Use insurance as a safety net to manage unforeseen expenses.

Conclusion

The 45-day payment rule under Section 43B(h) is a game-changer for India’s MSME sector, ensuring small businesses get paid on time and fostering healthier supplier-buyer relationships. For larger companies, it’s a chance to maintain tax benefits, improve operational efficiency, and build a positive market reputation.

With the right payment practices and protective measures like MSME insurance and business insurance from Bajaj General Insurance, businesses can stay compliant, financially secure, and ready for growth. By respecting timelines and supporting MSMEs, we can create a more robust, fair, and thriving business ecosystem in India.

FAQs

1. What is the MSME 45-day payment rule?

The 45-day payment rule is a regulation under Section 43B(h) of the Finance Act, 2023, effective from 1 April 2024. It requires buyers to pay registered MSMEs within 45 days (if a written agreement exists) or within 15 days (if no agreement exists) from the purchase or invoice date. Failure to comply means the expense cannot be claimed as a tax deduction in the same financial year—it will only be deductible in the year of actual payment.

2. Who does the 5-day payment rule apply to?

The rule applies when goods or services are purchased from a seller registered as an MSME under the MSMED Act, 2006. The buyer does not need to be registered under MSME for the rule to apply.

3. How are Micro, Small, and Medium Enterprises defined?

MSMEs are classified based on investment and turnover:

●     Micro – Investment up to ₹1 crore, turnover up to ₹5 crore

●     Small – Investment up to ₹10 crore, turnover up to ₹50 crore

●     Medium – Investment up to ₹50 crore, turnover up to ₹250 crore

4. What happens if I don’t pay within the time limit?

 If you miss the payment deadline:

●     You cannot claim the expense as a tax deduction for that year.

●     You must pay compound interest at three times the bank rate, starting from the due date.

●     The interest cannot be claimed as an expense under the Income Tax Act.

5. How is the payment timeline calculated?

If a written agreement exists, payment must be made within the agreed date or within 45 days from the purchase/invoice date, whichever is earlier. Without a written agreement, payment must be made within 15 days from the purchase/invoice date.

6. Can I still claim a tax deduction if I delay the payment?

Yes, but not in the same year. The deduction can only be claimed in the financial year when you actually make the payment to the MSME.

7. Does the rule apply if the seller is not registered under MSME?

No, the rule applies only when the seller is registered as an MSME under the MSMED Act, 2006.

8. How can large companies ensure compliance?

Large companies can:

●     Keep updated records of MSME vendor registrations.

●     Automate payment reminders.

●     Draft written agreements aligned with the 45-day limit.

●     Train finance teams on the new compliance requirements.

9. What are the benefits of the rule for MSMEs?

It ensures timely cash flow, reduces dependence on short-term loans, improves creditworthiness, and strengthens their negotiating power with bigger companies.

10. How does the rule benefit large companies?

Paying MSMEs on time allows large companies to claim expenses in the same financial year, maintain a positive reputation, and avoid disputes or penalties.

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