The MSME 45-day payment rule: cash cycle, interest and income-tax disallowance

This article concerns any business that buys goods or services from a supplier registered on Udyam as a micro or small enterprise. Many Nashik manufacturers occupy both positions at once. Large OEM customers pay them late, while their own micro and small vendors (plating shops, fabricators, packing units) are entitled to payment within the period fixed by section 15 of the MSMED Act: the term agreed in writing, never more than 45 days from acceptance, or 15 days where nothing is agreed.

A missed date has two costs. The supplier may claim compound interest under the Act, and the buyer loses the income-tax deduction for the unpaid amount until the year in which payment is actually made, under section 37(2)(g) of the Income-tax Act 2025 (section 43B(h) of the 1961 Act). The practical response lies in classifying each supplier from its Udyam record, ageing payables by the statutory due date and clearing those dues before 31 March, as the sections below explain.

1. What section 15 of the MSMED Act requires

Where a supplier is a micro or small enterprise, the buyer must pay for goods or services:

• within the period agreed in writing, which cannot exceed 45 days from the day of acceptance or deemed acceptance; or
• within 15 days if there is no written agreement on the period.

Acceptance and deemed acceptance follow the Act. If the buyer does not object in writing within fifteen days of delivery, the goods or services are deemed accepted, and quality disputes must therefore be raised within that window. An objection made months later, at the point when the tax auditor requests an ageing schedule, has no effect on the due date.

Interest. Under section 16, unpaid amounts carry compound interest with monthly rests at three times the bank rate notified by the Reserve Bank. Section 23 states that this interest is not allowable as an income-tax deduction, whether or not it is paid.

2. Who is micro, small or medium

Udyam classification is based on investment in plant and machinery or equipment and on turnover, as notified by the Central Government. The limits were revised with effect from 1 April 2025 (micro and small ceilings moved up; a small enterprise may have turnover up to ₹100 crore with investment up to ₹25 crore under that notification). Medium sits above small.

For the payment rule and for section 37(2)(g):

In every case the buyer should obtain the Udyam Registration Certificate, or a portal extract that shows enterprise type and activity. A vendor that appears small but is registered as medium falls outside section 37(2)(g). Conversely, a vendor registered as small keeps that status even when one year's sales to the buyer are large.

3. The income-tax disallowance

Section 37(2)(g) of the Income-tax Act 2025 carries forward the substance of section 43B(h) of the 1961 Act:

• a sum payable to a micro or small enterprise that is otherwise deductible;
• is allowed only if paid within the time allowed under section 15 of the MSMED Act;
• if paid later, is allowed in the tax year of actual payment.

There is no extension to the due date of the return, unlike several other payment-linked deductions under section 37. Any balance unpaid at 31 March that has already passed its MSMED due date is added back in the tax computation, even if it is cleared in April.

Financial statement disclosure. Section 22 of the MSMED Act and Schedule III require disclosure of principal and interest due to micro and small enterprises. When dues beyond 45 days exist, companies covered by the Specified Companies Order 2019 must also file MSME Form 1 half-yearly with the MCA.

4. Cash cycle: why factories incur the add-back

The pattern is usually as follows:

1. OEM payment terms of 60–90 days (or longer with quality retentions).
2. Micro plating or machining vendors on 15–30 day informal terms, legally capped at 45 days if agreed in writing.
3. Working-capital limit already tight against stock and debtors (see stock statements and drawing power).

In this situation the tax add-back operates as a timing cost. Tax on the unpaid expense is paid a year early, and MSMED interest may accrue as well. At a 25.17% effective rate under the section 200 / 115BAA-style regime (22% plus surcharge and cess, where that regime applies), each ₹10 lakh disallowed brings forward about ₹2.5 lakh of tax, before interest under the MSMED Act.

5. Worked example: an Ambad auto-component unit

The figures are illustrative. No real business is described.

At 31 March 2027 a company in Ambad MIDC owes:

Tax add-back for 2026-27: ₹6,40,000 + ₹1,10,000 = ₹7,50,000 under section 37(2)(g). The balances owed to the medium supplier and the trader are excluded from that add-back, although they may still raise commercial or other disclosure questions.

If the ₹7,50,000 is paid on 20 May 2027, the deduction moves to tax year 2027-28. MSMED interest under section 16 may still accrue from each due date until payment, and that interest is not deductible.

6. Operating checklist

• Collect Udyam class and activity for every regular supplier; refresh once a year.
• Tag micro and small vendors in the purchase ledger and payment run.
• Age payables by MSMED due date in addition to invoice date or 30/60/90 buckets.
• Put written payment periods (≤ 45 days) in contracts where more than 15 days is needed.
• Raise quality objections within the acceptance window.
• Before year-end, clear or schedule payments that would otherwise be added back (see the year-end checklist).
• Budget MSMED dues inside the creditors for goods figure that reduces bank drawing power.

What this means for a manufacturer

• Treat section 15 as a fixed calendar that binds the buyer.
• Use Udyam evidence to separate micro/small from medium and from traders on Udyam for PSL.
• Model section 37(2)(g) add-backs in the tax computation every quarter, in addition to the March review.
• Remember that section 16 interest is both a payable to the supplier and a permanent tax disallowance under section 23.

This article is general information on the law as at 1 October 2026 and is not advice on any particular case. Classification limits and Form 1 coverage change by notification; check the current MSME and MCA texts before acting.