MSME Payment Within 45 Days: Understanding Your Legal Obligations and Tax Implications for Startups

Overview : Timely payments to the registered MSME (Micro, Small, and Medium Enterprises) are not merely good business ethics; they are a legal obligation with significant tax and compliance consequences in case of delay or default in making payment to the MSME. The government of India has enacted robust legal protections for smaller businesses through provisions in both the Income Tax Act and the Companies Act, apart from that of the MSME Act, which every startup founder and business owner needs to understand.

Meaning of MSME and Classification Framework

MSME stands for Micro, Small, and Medium Enterprises, broadly representing small businesses in India. They contribute to approximately 30% of India’s GDP and provide employment to over 110 million people. The MSME Act provides for investment or turnover criteria for recognition or classification of MSME, which went through several changes; the most relevant change in MSME classification criteria was made in the union budget of 2025, effective April 1, 2025

The MSME Classification for the FY 2025-25 is as follows:

The MSME classification is based on the ‘either/or’ criterion, meaning an enterprise qualifies for a specific category by meeting either the investment or turnover threshold. It is important for MSMEs to regularly review their investment and turnover figures to ensure they remain within their designated category. Any change in these criteria necessitates an update to the MSME registration on the Udyam Registration Portal.

Note that the tax implications under Section 43B(h) of the Income Tax Act specifically apply to Micro and Small Enterprises, not Medium Enterprises. This distinction becomes crucial when managing your vendor relationships and payment schedules.

Previous MSME Classification Criteria (1 July 2020 to 31 March 2025)

Understanding the 45-Day Payment Window

Section 15 of the MSME Act establishes clear payment obligations for buyers of goods or services from MSME suppliers. If there is a written agreement between the parties, the timeline in the said written agreement must be followed. However, if there is no written agreement on the payment terms, then the buyers must pay MSME suppliers within 15 days of acceptance of the goods or services. These delayed payment provisions of the MSME Development Act became operational with Notification S.O. 1722(E) dated October 5, 2006.

45-Day Context (Income Tax and Accounting Practices): While the MSME Development Act explicitly defines the 15-day ‘appointed day’ deadline, the 45-day period frequently arises in the context of Section 43B(h) of the Income Tax Act, effective from April 1, 2024, which provides that if payments to Micro and Small Enterprises are not made within the time allowed under Section 15 of the MSME Act, or within 45 days, whichever is earlier, the expense cannot be claimed in the financial year in which it was incurred.

This practical application of the Income Tax Act, coupled with accounting practices often aligning with a 45-day payment cycle, contributes to the common understanding of a 45-day standard. It is essential to recognise that the 45-day period is not directly prescribed by the MSME Development Act itself but instead emerges from the interaction of various financial regulations and established accounting procedures, particularly the Income Tax Act.

When does the 45-day countdown begin?

Many businesses are confused about this critical starting point. The 45-day period starts from the date of acceptance of goods or services—not from the invoice date. This distinction is crucial for proper compliance and was further clarified in the Ministry of MSME Office Memorandum No. 58(12)/MSME-POL/9, dated May 10, 2012.

When you receive goods or services from an MSME supplier, the clock starts ticking immediately upon your acceptance of those deliverables, regardless of when the formal invoice is received. Various MSME Facilitation Councils established under Section 20 of the MSME Development Act for dispute resolution have consistently upheld this interpretation.

For example, if you accept a shipment of materials on January 15 but receive the invoice on January 25, your 45-day window still begins on January 15. This means payment would be due by March 1 (or February 29 in a leap year), not March 11.

Impact of Section 43B(h) of the Income Tax Act:

Section 43B(h) of the Income Tax Act of 1961 introduces a critical provision regarding payments to Micro and Small Enterprises. The MSME Development Act, 2006, through Section 15, mandates payment within 15 days of acceptance of goods or services in the absence of a written agreement. Non-compliance potentially leads to complications under the MSME Act, such as those addressed by MSME Samadhan.

Section 43B(h) of the Income Tax Act establishes a separate maximum payment window of 45 days. If a taxpayer exceeds this 45-day timeframe, the expense can only be claimed as a tax-deductible expense in the financial year in which the actual payment is made to such MSME. For income tax purposes, Section 43B(h) creates a 45-day ceiling, overriding the MSME Act’s 15-day default. This provision was implemented through CBDT Notification No. 35/2023, dated April 18, 2023, which clarified the application of this section.

Let’s consider a practical example: Your company receives consulting services worth ₹5 lakhs from an MSME in February 2025. If you pay this amount by mid-April (within 45 days), you can claim the entire ₹5 lakhs as a deduction in FY 2024-25. However, if you delay payment until May 2025 (beyond 45 days), you must wait until FY 2025-26 to claim this deduction, potentially increasing your tax liability for the current year.

Companies to File MSME Form – 1 Every Six Months

The Ministry of Corporate Affairs mandates the filing of MSME Form 1 every six months to enforce timely payments to micro and small enterprises (MSEs) and enhance transparency. The recent MCA Form MSME-1 V3 transition (effective July 15, 2024) has significantly modified the Nil Return concept. Companies are required to file MSME Form 1 if payments to Micro and small entrepreneurs remain unpaid for more than 45 days during the reporting period, even if there are no outstanding amounts at the end of the half-year.

Due date of filing MSME Form 1 by companies

Earlier, a ‘Nil MSME-1 Return’ was generally not required if there were no outstanding dues to MSME suppliers at the end of the reporting period. However, the rules have changed with the recent amendments effective July 15, 2024 (Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Amendment Order, 2024). According to the amendment above, a company must file MSME Form 1 if payments to micro or small enterprises remain unpaid for more than 45 days during the reporting period even if there is no outstanding amount at the end of the half-year.

Exceptions and Special Considerations

While the 45-day rule, as discussed above, is generally applicable to payments to Micro and small businesses, the following are exceptions to this rule.

Conclusion

Compliance with MSME payment within 45 days of receipt of goods and services by the companies is a regulatory requirement for all businesses in India. It helps ensure healthy vendor relationships and prevent tax issues. Payment within or before the mandatory period of 45 days as per Section 43B(h) of the Income Tax Act and proper filing of MSME Form 1 are necessary. We facilitate these compliance processes for you by assisting by explaining what you have to do, filing disclosures within the mandatory timelines, and vendor payments. Our qualified team ensures that your startup remains compliant so that you can focus on growing your company.

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This article is for informational purposes only and should not be construed as tax or legal advice. For guidance specific to your startup’s specific situation, please consult with qualified professionals.