Two laws work together to make buyers pay micro and small enterprises on time. The MSMED Act, 2006 sets the time limit and the interest for delay. The income-tax law stops the buyer from claiming the expense until the money is paid, if it is paid late.
For a small supplier, this gives weight to a polite conversation about dues. For a buyer, it is a rule to build into the purchase process. The position below is as of October 2026, and it is general information and not legal or tax advice.
01Who counts as micro or small
The MSMED Act classifies enterprises by investment in plant and machinery or equipment, and by turnover. The limits revised from 1 April 2025 are:
| Category | Investment up to | Turnover up to |
|---|---|---|
| Micro | ₹2.5 crore | ₹10 crore |
| Small | ₹25 crore | ₹100 crore |
| Medium | ₹125 crore | ₹500 crore |
The payment protections described here apply to suppliers that are micro or small. Medium enterprises are outside the income-tax rule. Classification is shown on the supplier's Udyam registration.
02The time limit under the MSMED Act
Under the Act, a buyer must pay a micro or small supplier:
- By the date agreed in writing,
- and any agreed period cannot be more than 45 days from the day the goods or services are accepted, or deemed accepted.
- Where nothing is agreed in writing,
- within 15 days of acceptance.
If the buyer pays late, the buyer owes the supplier compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. This interest is payable whatever the contract says.
An example
A Rajkot casting unit, registered as a small enterprise, supplies ₹4,72,000 of castings to a pump maker on 1 August. The purchase order says 45 days. The pump maker accepts the goods the same day. Payment is due by 15 September. If the pump maker pays on 30 November, the casting unit is entitled to interest from the due date at three times the bank rate, compounded monthly.
03The income-tax rule
The income-tax side makes late payment costly for the buyer. Under section 43B(h) of the Income-tax Act, 1961, inserted by the Finance Act, 2023, an amount payable to a micro or small enterprise beyond the MSMED Act time limit is allowed as a deduction only in the year it is paid.
From 1 April 2026, the Income-tax Act, 2025 replaced the 1961 Act. The same rule is in section 37(2)(g) of the new Act. Payments of this kind made late do not get the usual relief of being allowed if paid before the return due date.
What it means in rupees
A Coimbatore textile mill buys ₹30,00,000 of yarn in March from a micro supplier on 45 day terms and has not paid by 31 March, the last day of its tax year. If it pays on time in April, within the 45 days, the expense is allowed in the year of purchase. If it pays in July, beyond 45 days, the ₹30 lakh is allowed only in the year of payment. At a 25 percent tax rate, that is ₹7,50,000 of tax paid a year early.
04What a supplier should do
- Keep your Udyam registration current, and share the certificate with buyers when you open the account.
- Print your Udyam number on invoices and on your quotation, so the buyer's accounts team classifies you correctly.
- Agree payment terms in writing, within 45 days, on the purchase order or in a short letter.
- Record the acceptance date. A signed delivery challan or an email confirming receipt helps.
- Follow up politely before the due date. Mention the terms and your registration when you do.
- If payment is badly delayed, you can file a case on the MSME Samadhaan portal, which goes to the Micro and Small Enterprises Facilitation Council of your state. Speak to your CA or lawyer first.
Many suppliers hesitate to bring this up for fear of losing the customer. A factual line on the invoice ("Payment terms: 45 days as per MSMED Act. Udyam No. UDYAM-GJ-01-0012345") often does the job without a difficult conversation.
05What a buyer should do
- Ask every supplier for their Udyam status
- when you add them, and record it on the supplier's record.
- Keep payment terms at 45 days or less
- for micro and small suppliers.
- Track acceptance dates,
- since the clock runs from acceptance.
- Run a list before each year end
- of unpaid bills from micro and small suppliers, and how old each one is.
- Pay on time
- The tax cost of paying late is usually higher than the benefit of holding the money.
06How buyers' accounts teams usually respond
Many large buyers now ask suppliers to declare their MSME status in writing when they register, and some send a declaration form every year. Fill it in promptly and attach the Udyam certificate. If you are not micro or small, say so; a wrong declaration causes trouble for both sides at audit time.
Some buyers try to keep terms long by asking micro and small suppliers to agree to more than 45 days. The Act does not allow an agreed period above 45 days from acceptance, whatever the purchase order says.
07For larger buyers
A manufacturer with 400 suppliers should mark each supplier's MSME category in the purchase system, set the payment term on the purchase order, and run a weekly report of micro and small supplier bills that will cross 45 days in the next two weeks. Payment runs can then pick those first.
In MatruOS, each supplier has a record page with documents, balance and payments, so you can see which supplier bills are still open and pay them from the same place.