Paying MSME vendors: the 45-day rule for startups

Most startups sit on both sides of the invoice: they buy from vendors and freelancers, and they sell to larger clients. The Micro, Small and Medium Enterprises Development Act, 2006 treats a late payment to a micro or small supplier as a legal and tax problem, not only a commercial one.

Payment and classification rules change by notification. Re-check the latest Ministry of MSME, MCA and CBDT position before you act.

The 45-day ceiling

• Agreed in writing: pay by the agreed date, but never later than 45 days from acceptance (or deemed acceptance) of goods or services. A 60- or 90-day clause cannot override this.
• No written agreement: pay within 15 days of acceptance.
• Deemed acceptance: if the buyer does not object in writing within 15 days of delivery, the goods or services are treated as accepted.
• Late payment: compound interest with monthly rests at three times the RBI bank rate (section 16). Under section 23, that interest is not deductible for the buyer.

Who is covered

Only micro and small suppliers are inside these delayed-payment rules. Medium enterprises are outside that payment regime.

From 1 April 2025, the revised Udyam limits (S.O. 1364(E), 21 March 2025) are: Micro, investment up to ₹2.5 crore and turnover up to ₹10 crore; Small, up to ₹25 crore and ₹100 crore; Medium, up to ₹125 crore and ₹500 crore.

The supplier needs a valid Udyam registration on the date the contract is made. The Supreme Court so held in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (31 October 2022). Registration obtained later helps only for later supplies. Enterprises registered only for trading (NIC codes 45, 46 and 47) cannot use the delayed-payment mechanism.

The tax sting for buyers

Late payment to a micro or small enterprise is allowed as a deduction only in the year it is actually paid. The rule began as section 43B(h) of the Income-tax Act, 1961. For tax year 2026-27 onward it sits in section 37(2)(g) of the Income-tax Act, 2025. The usual relief of paying before the return due date does not apply.

Form MSME-1 and the supplier’s remedy

A company with payments to micro or small suppliers outstanding beyond 45 days must report them in Form MSME-1 (orders under section 405, Companies Act, 2013). The April–September 2026 half-year is widely treated as due by 31 October 2026. Confirm the date on mca.gov.in before you file.

If you are the unpaid supplier: keep proof of Udyam status at contract date, send a written notice quoting sections 15–16, then file on the MSME ODR Portal (odr.msme.gov.in). From 15 October 2025, new cases go there, not to Samadhaan. If online negotiation fails, the matter goes to the MSEFC under section 18. A buyer challenging an award must first deposit 75 percent of the amount (section 19).

What changed in October 2026

The MSMED (Amendment) Act, 2026 received assent on 13 August 2026. Gazette notification S.O. 5575(E) of 12 October 2026 brought several provisions into force on 15 October 2026, including a statutory rule that Central Public Sector Enterprises must route settlement of MSME invoices through an RBI-authorised TReDS platform. Section 12 (MSEFC composition) is notified for 15 December 2026. Not every Amendment Act clause was commenced by that notification. Verify mediation, arbitration-timeline and related enforcement claims against the latest Gazette before you rely on them.

Checklist and common mistakes

• Buyers: record each vendor’s Udyam number and category; cap written terms at 45 days; run a monthly ageing report; reconcile with tax and MSME-1 papers.
• Suppliers: print the Udyam number on invoices; get written acceptance; calculate interest from day 46; file new cases on odr.msme.gov.in.
• Do not assume a long contractual credit period prevails over section 15, or that paying just before the return due date saves the tax deduction.

Confirm the current Udyam limits, Form MSME-1 due date, ODR portal rules and Amendment Act commencement notices on the official sites before you rely on a date or a filing path in this note.