The MSME 45-Day Payment Rule: What Buyers Need to Do
A payment term your business has used for years can now cost you a tax deduction. The rule linking payments to micro and small enterprises with allowability under section 43B(h) turns a commercial habit into a tax exposure, and it operates on the buyer.
What the rule does
Where you buy goods or services from an enterprise registered as micro or small under the MSMED Act, the expense is deductible in the year of payment unless you pay within the time limit that Act allows:
- 45 days where there is a written agreement.
- 15 days where there is none.
Pay late and the deduction shifts to the year of actual payment. The expense is not lost — it is deferred, which in a profitable year means paying tax now on money you have already spent.
Note the boundaries. The rule applies to micro and small enterprises, not medium. And it applies to suppliers of goods and services — traders fall outside the MSMED definition of a supplier for this purpose.
Why this is a systems problem, not an accounting one
You cannot apply this rule at year-end. It requires knowing, for every invoice, whether the vendor is a registered micro or small enterprise and what credit period was agreed. That information has to live in the vendor master, not in someone's memory.
What a buyer should put in place
- Collect Udyam registration numbers from every vendor, with the classification stated, and re-confirm annually — a vendor's category can change.
- Flag the vendor master: micro / small / medium / not registered. Ageing reports mean little without this field.
- Align purchase-order credit terms with 45 days for flagged vendors. A standard 60-day term quietly creates a disallowance every month.
- Put the written agreement in place. Without one the limit is 15 days, which almost no payables cycle meets.
- Review MSME ageing monthly, not at the audit. By March the year's disallowance is already fixed.
- Disclose the MSME dues position in the financial statements as required, and retain the supporting workings.
Practical points
- Interest is payable to the supplier on delayed payment under the MSMED Act, and that interest is itself not deductible. Two separate costs arise from one delay.
- A disputed invoice still ages. Resolve disputes formally and quickly, or the clock runs against you regardless of the merits.
- Where cash flow genuinely will not support 45 days, renegotiate the commercial terms. The fix is upstream, in the contract, not in the tax computation.
- Keep the Udyam certificates on file. A vendor's verbal statement of status is not evidence.
Need your vendor master and payment terms reviewed before year-end? Talk to Kunal P Shah & Co.