How Does the MSMED Act Protect Suppliers Against Delayed Payment?

Late payment is a chronic threat to the survival of small businesses, which often lack the cash reserves to absorb a buyer's delay. The Micro, Small and Medium Enterprises Development Act, 2006 responds with a hard statutory deadline for payment, a punitive rate of interest that no contract can bargain away, and a dedicated dispute-resolution forum that displaces even an agreed arbitration clause. This article sets out how that protection works - the 45-day rule under Section 15, the compound-interest liability under Section 16, the facilitation-council mechanism under Sections 18 and 19, the disclosure obligations, and the amendments and tax rules that have sharpened the regime.

The core obligation: pay within 45 days

The MSMED Act, 2006 (Act No. 27 of 2006) came into force on 2 October 2006. Its central protection is Section 15, which fixes when a buyer must pay a micro or small enterprise supplier:

"Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance."

Three consequences follow. If the parties agree a payment date in writing, payment is due on that date, but the agreed period can never exceed 45 days from acceptance or deemed acceptance. If there is no written agreement, the default period is 15 days, so the "appointed day" for payment is the 16th day from acceptance. And in no case may the outer limit stretch beyond 45 days. Goods are treated as accepted, and "deemed acceptance" occurs, where they are not rejected within the period specified (or, absent a specified period, within a reasonable time), which matters for fixing when the clock starts. The 45-day timeline applies uniformly to both goods and services; there is no separate, longer window for service vendors.

A point worth emphasising is that this 45-day mandate has not been amended since the Act came into force. Across every subsequent revision of the statute, the payment deadline has remained the fixed outer limit.

The price of delay: compound interest at three times the bank rate

If the buyer misses the deadline, Section 16 imposes interest that is deliberately severe and cannot be contracted out of:

"Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day ... at three times of the bank rate notified by the Reserve Bank."

Three features stand out. The interest runs from the appointed day (or the day following the agreed date). It is compounded monthly. And the rate is fixed at three times the RBI's notified bank rate. The non-obstante clause means the statutory rate overrides any lower rate the parties may have agreed. To illustrate the magnitude: if the RBI bank rate were 6.5% per annum, the MSMED Act rate would be 19.5% per annum, compounded monthly. Section 17 completes the picture by making the buyer liable for the principal together with the interest calculated under Section 16.

The forum: the Facilitation Council, and its override of arbitration agreements

Section 18 gives suppliers a dedicated statutory forum. Either party may refer a dispute over an amount due under Section 17 to the Micro and Small Enterprises Facilitation Council (MSEFC):

"Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council."

The Council either conducts conciliation itself or refers the dispute to an alternative-dispute-resolution institution. If conciliation fails, the matter proceeds to arbitration under the Arbitration and Conciliation Act, 1996. Because Section 18 opens with a non-obstante clause, the MSEFC mechanism overrides even an independent arbitration agreement between the parties.

The Supreme Court confirmed this in Union of India v. M/s Ekta Telecommunications Systems (16 August 2023). The Court held that Chapter V of the MSMED Act has overriding effect over other laws, including the Arbitration and Conciliation Act; that a party may invoke the MSEFC under Section 18 regardless of an existing arbitration agreement; that the Council is not barred from acting first as conciliator and then as arbitrator in the same dispute; and that the compound-interest liability under Section 16 is a statutory liability that cannot be waived or modified by contract.

Section 19 backs the Council's decisions with a stiff pre-deposit rule for anyone seeking to challenge them in court:

"No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services ... shall be entertained by any Court unless the appellant has deposited with it seventy-five per cent, of the amount in terms of the decree, award or, as the case may be, the other order."

As the memo notes, a subsequent amendment softened this for suppliers: where the appellant is the supplier, the pre-deposit is not required, and where the appellant is a buyer, the court may direct that not less than a portion of the deposited amount be released to the supplier pending the appeal.

The scope question: works contracts

One genuinely unsettled boundary concerns works contracts. A line of High Court decisions has held that composite works contracts - those involving design, fabrication, installation and commissioning - fall outside the MSMED Act's dispute-resolution mechanism, which is directed at the pure supply of goods or rendering of services. The memo records that in M/s Bridge and Roof Company (India) v. State of Orissa (Orissa High Court, 9 January 2026) the court noted a consensus among several High Courts that works contracts are excluded from Section 18 MSEFC arbitration and must proceed under the ordinary Arbitration and Conciliation Act. There is, as yet, no Supreme Court ruling fixing the precise line between a supply or service contract and a works contract, so the position on composite contracts remains open.

Disclosure obligations on buyers

The Act reinforces the payment discipline through mandatory disclosure. Section 22 requires a buyer whose accounts are audited to state, in the audited annual accounts, the principal and interest due and unpaid to any supplier at year-end, the interest paid, the interest due and payable, the interest accrued and unpaid, and the further interest remaining due in succeeding years until actually paid (relevant to disallowance under Section 23). Beyond the annual accounts, the Ministry of Corporate Affairs requires companies with payments to MSMEs outstanding beyond 45 days to file a half-yearly return in Form MSME-1, disclosing the amount due, the reasons for delay, and the outstanding principal and interest. The MSME Samadhaan portal is the online gateway through which suppliers lodge and track delayed-payment complaints and invoke the Council's mechanism.

The tax consequences of paying late

Two tax provisions turn timely payment into a financial imperative for buyers. Section 23 of the MSMED Act itself provides that interest payable or paid under the Act is not deductible as an expense under the Income-tax Act, 1961, so the interest cost can never be written off against tax.

More significantly, the Finance Act 2023 inserted Section 43B(h) into the Income-tax Act, 1961. Although not an amendment to the MSMED Act, it bites directly on MSME payment discipline: a sum payable to a micro or small enterprise beyond the Section 15 time limit is allowed as a deduction only in the year of actual payment. The practical effect is that if a buyer misses the 45-day deadline, it loses the deduction for the principal in that financial year and can claim it only when payment is actually made. The combined result is a double impact for the buyer - interest is never deductible, and the principal is deductible only on actual payment rather than on accrual.

Who counts as an MSME: classification and registration

The protections apply to enterprises that qualify as, and are registered as, MSMEs. The classification criteria have changed twice in recent years, each time enlarging the population of protected enterprises.

The 2020 revision (notified on 1 June 2020, effective 1 July 2020) replaced the old investment-only test with a composite test of investment in plant, machinery or equipment and annual turnover, with exports excluded from turnover. A further upward revision was notified on 21 March 2025, effective 1 April 2025, announced in the Union Budget 2025-26. The current thresholds are:

Both criteria must be satisfied concurrently; if either the investment or the turnover exceeds the ceiling, the enterprise moves up to the next category. Registration is through the Udyam Registration portal, which launched on 1 July 2020 in place of the earlier Udyog Aadhaar system, and is online, free and paperless. Registration is, in practical terms, essential: an enterprise must be registered to access the delayed-payment protections, the MSEFC forum and government schemes. The definition of "supplier" in Section 2(n) is itself tied to having filed the requisite memorandum with the authority.

Recent amendments in brief

The 2018 Amendment Bill (introduced in the Rajya Sabha in 2019) proposed several changes, including extending the delayed-payment protections in Chapter V to medium enterprises, a new Section 15A on refund of earnest-money deposits, the softened pre-deposit rule under Section 19, recovery of dues as arrears of land revenue, and penalties for contravention. On the dispute-resolution side, the Ministry of MSME launched an Online Dispute Resolution (ODR) portal on 27 June 2025, intended to offer a faster, lower-cost route for delayed-payment disputes. As at June 2026 the memo notes that the case law on the enforceability and appellate review of ODR awards, as against traditional MSEFC awards, is still developing.

Practical Takeaways

• The 45-day ceiling in Section 15 is statutory and cannot be extended by contract; a purchase agreement should adopt the timeline or stay silent and let the default apply.
• Compound interest at three times the RBI bank rate, compounded monthly, is mandatory on delayed payment and cannot be reduced by agreement; treat it as a real cost of missing the deadline.
• A supplier may take a payment dispute to the MSEFC under Section 18 even where the contract contains an arbitration clause; the statutory forum overrides the agreement.
• Verify a supplier's Udyam registration and retain the registration number; unregistered enterprises are outside the payment protections.
• Buyers should segregate MSME vendor payments to meet the Section 22 and Form MSME-1 disclosure obligations and to manage the Section 43B(h) tax exposure - interest is never deductible, and the principal is deductible only on actual payment.
• The 2025 threshold increase brings more vendors within MSME protection; a periodic vendor audit is prudent to catch newly qualifying suppliers.

Key Authorities

1. Micro, Small and Medium Enterprises Development Act, 2006 (Act No. 27 of 2006), Sections 15, 16, 17, 18, 19, 22 and 23 - the payment mandate, compound-interest liability, facilitation-council mechanism, disclosure duties and non-deductibility of interest. Source
2. Union of India v. M/s Ekta Telecommunications Systems (Supreme Court, 16 August 2023) - Chapter V of the MSMED Act overrides the Arbitration and Conciliation Act; the MSEFC may be invoked despite an arbitration agreement; Section 16 interest is a non-waivable statutory liability. Source
3. M/s Bridge and Roof Company (India) v. State of Orissa (Orissa High Court, 9 January 2026) - composite works contracts fall outside the Section 18 MSEFC mechanism and proceed under the ordinary Arbitration Act. Source
4. Section 43B(h), Income-tax Act, 1961 (inserted by the Finance Act 2023) - a sum payable to a micro or small enterprise beyond the Section 15 limit is deductible only in the year of actual payment.
5. Ministry of MSME, notification dated 21 March 2025 (effective 1 April 2025) - revised composite investment-and-turnover classification thresholds for micro, small and medium enterprises.

This analysis reflects the law as at June 2026. It is published for general information and does not constitute legal advice.