The 45-day MSME payment rule starts in procurement, not in finance

What the rule says

Section 15 of the MSMED Act, 2006 sets the payment period. Where there is no written agreement, a buyer must pay a micro or small enterprise within 15 days of accepting the goods or services. Where there is a written agreement, payment is due on the agreed date, and that date cannot be more than 45 days after acceptance, whatever the contract says.

Section 43B(h) of the Income-tax Act, which has applied since assessment year 2024-25, gives that period a tax consequence. An amount still owed to a micro or small enterprise beyond the limit is deductible only in the year it is actually paid. The test is the position on 31 March. Unlike the other items in Section 43B, paying before the return filing date does not rescue the deduction.

Three further points matter in practice. The rule covers micro and small enterprises, not medium ones. Delayed payment also attracts compound interest at three times the Reserve Bank's notified bank rate, and that interest is not deductible. And from 1 April 2026 the provision moved into the new Income-tax Act, 2025 as Section 37(2)(g), with its substance unchanged.

Where it goes wrong

The supplier's status is unknown. Whether a supplier is micro, small or medium is recorded in its Udyam registration. If that is not captured at onboarding, or is captured once and never refreshed, nobody downstream can tell which invoices carry the 45-day limit.

The purchase order carries the wrong terms. Many organisations apply one standard payment term to every vendor. A 60 or 90 day term on a purchase order to a small enterprise does not extend the legal limit. It only guarantees that the system will schedule the payment late.

The clock starts at acceptance, and acceptance is recorded late. The period runs from acceptance of the goods or services, not from the invoice date. When goods receipts are posted days after delivery, or service confirmations wait in an approval queue, days are lost before finance has seen anything.

The reporting side

Companies with payments to micro or small enterprises outstanding for more than 45 days also report them to the Registrar of Companies in MSME Form 1, every half year. The return for April to September 2026 is due on 31 October 2026. Both obligations draw on the same two facts: which suppliers are micro or small, and how old each payable is from the date of acceptance.

Five things procurement can do

1. Capture Udyam details at registration. Record the registration number and category for every supplier, validate them, and flag micro and small enterprises in the vendor master.
2. Set payment terms by supplier status. Default flagged suppliers to 45 days or fewer and prevent longer terms on purchase orders to them.
3. Record acceptance on time. Measure the gap between delivery and goods receipt, and between service completion and confirmation.
4. Give payables an ageing view by supplier status. It should count days from acceptance, not from invoice date.
5. Review before 31 March, not after. Run the ageing report in February, while there is still time to pay.

The takeaway

By the time a late payment to a small supplier shows up in the tax audit, the decisions that caused it are months old. Getting supplier classification and payment terms right at the start costs far less than the deduction, the interest and the year-end scramble.