The 45-Day Payment Rule and its Tax Consequence
Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 mandates that a buyer must pay a micro or small enterprise supplier within the time agreed in writing (not exceeding 45 days from the date of acceptance of goods/services), or within 15 days if no payment period is agreed. This obligation applies only to Micro and Small enterprises as defined by the Act — Medium enterprises are excluded from this specific protection.
Failure to pay within the prescribed period does not just expose the buyer to compound interest liability under Section 16 of the MSMED Act (at three times the RBI bank rate, compounded monthly) — it also has a direct income tax consequence. Section 37 of the Income-tax Act, 2025 (which absorbed the effect of erstwhile Section 43B(h), inserted by the Finance Act 2023) disallows the deduction of any expense payable to a micro or small enterprise supplier unless it is actually paid within the Section 15 MSMED time limit, on an accrual basis this deferred deduction is only permitted in the year of actual payment, not the year the expense accrued.
This creates a mismatch risk: a business can book an expense in its books in Year 1 under the mercantile system, but if the corresponding payment to an MSE supplier crosses the 45-day (or agreed shorter) window and remains unpaid at year-end, the expense must be added back for tax purposes in Year 1 and can only be claimed as a deduction in the year actual payment is made — inflating taxable income in the interim year.
This tracker monitors your accounts payable ledger against each MSE supplier's acceptance date, flags invoices approaching or breaching the 45-day (or shorter agreed) window, and computes the resulting disallowance exposure under Section 37 so it can be provided for before the tax audit.
Worked Example: Disallowance on Unpaid MSE Invoice
A business receives goods from a registered micro enterprise supplier on 1 February 2026, with no written payment terms agreed (so the default 15-day limit applies), and pays the ₹4,00,000 invoice only on 15 April 2026.
Frequently Asked Questions (FAQs)
Does the 45-day rule apply to all suppliers or only some?
It applies only to suppliers registered as Micro or Small enterprises under the MSMED Act, 2006. Medium enterprises and unregistered suppliers are not covered by this specific 45-day/15-day payment protection or the Section 37 disallowance consequence.
What is the maximum payment period allowed under Section 15?
45 days from the date of acceptance (or deemed acceptance) of goods or services, but only if this period is agreed in writing between the buyer and the MSE supplier. If no written agreement specifies a period, the default limit drops to 15 days.
Is the expense permanently disallowed if payment is late?
No, it is a timing disallowance, not a permanent one. The expense is added back to taxable income in the year it accrued but was not paid within the Section 15 limit, and becomes deductible in the year the payment is actually made — on a payment basis rather than accrual basis for that specific expense.
How is the interest under Section 16 of the MSMED Act calculated?
At three times the RBI's notified bank rate, compounded monthly, running from the day after the statutory due date until the date of actual payment. This interest itself is not tax-deductible and is separate from the Section 37 expense disallowance.
How do I know if a supplier qualifies as an MSE for this rule?
The supplier must hold Udyam Registration classifying them as Micro or Small (not Medium) at the time of the transaction. It is good practice to collect and verify Udyam Registration certificates from suppliers to correctly flag which payables fall under Section 15's 45-day protection.