What Is The MSME 45 Days Payment Rule?

Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in driving economic growth, fostering innovation, and creating jobs. The Indian government is putting in place a number of supporting mechanisms for the MSME sector in the country, and one which is of significant importance is the MSME 45 Days Payment Rule. This measure provides timely payments for small businesses, thereby protecting the financial well-being of the small firm, providing for seamless business activity. In this comprehensive article, we will articulate the meaning, significance, legal structure, penalties, and advantages of the MSME 45 days payment rule.

What Is The MSME 45 Days Payment Rule?

The 45-days payment rule for MSMEs is a legal requirement under the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006. The regulation requires that buyers of goods or services from MSMEs pay the MSME supplier within 45 days from the date of accepting or deemed acceptance of goods/services as per the payment regulations. If the buyers do not comply, they will be liable to pay interest on any outstanding unpaid amount at THREE times the bank rate of the RBI.

The regulation was meant to address one of the significant issues faced by the MSME sector: buried in delayed payment. Cash flow is the lifeblood of small businesses. If a choked cash flow stops a business from reinvesting, paying wages, or covering basic operating costs, it won’t just affect the small business; all of the downstream and upstream economies will be affected.

What Is The Time Limit To Make A Payment?

The time limit is subject to agreement between the buyer and seller. If there is a written contract, then the buyer must pay either within the date specified or in 45 days from the purchase date, whichever comes first. If there is no agreement between the buyer and the MSME seller, the buyer must pay within 15 days.

An example would be that a small ceramics business sells to a large retail chain. In the industry, it is common that retail chains settle their invoices with small businesses, typically at about 90 to 120 days out.

According to laws enacted starting December 1, 2022, the retail chain must settle its debt to the ceramics business by no later than 45 days from the date of an invoice.

If the ceramics business invoiced the retail chain on April 10, 2024, the retail chain must pay the invoice on or before May 25, 2024.

If the retail chain pays the ceramics business past May 25, it will incur tax liability on the overdue amount in the current financial year as it will likely increase costs as a business.

What Is An MSME?

MSME stands for Micro, Small, and Medium Enterprises, and it consists of two overarching divisions. One of the divisions is manufacturing, which manufactures products for every industry. The other division is the service enterprise, which is involved in the supply of services. Based on the income of each enterprise, they are classified as follows:

Type of enterprise	Investment	Turnover
Micro	1 crore	5 crore
Small	10 crore	50 crore
Medium	50 crore	250 crore

When Is The MSME 45-Days Payment Rule Under Section 43b(H) Applicable?

The new MSME payment rules under Section 43B(h) start from April 1, 2024. It also covers when a business is purchasing goods or services from another business (that is registered under the MSMED Act, 2006). Importantly, the buyer does not need to be registered under the MSMED Act, 2006, for this to be applicable.

Penalty for Non-Compliance With The New MSME Payment Rule 43b(H)

If a buyer does not pay an MSME promptly, the buyer will pay compound interest of three times the bank rate, and the interest will normally begin on the agreed payment date or the day following the 15-days period. The key point to be aware of is that the businesses cannot take the interest as an expense for Income Tax Act (ITA) of 1961 purposes.

Advantages Of The 45-Days Payment Rule For MSMEs

The following are the major benefits of the 45-days payment rule for MSMEs:

• Assured Cash Flow: MSMEs receive their payments on time, allowing them to carry on their daily operations without stress.
• Less Dependence on Credit: With prompt payments, small enterprises do not need to maintain debts in the form of loans, overdrafts, etc., saving on borrowing costs associated with interest payments.
• Improved Financial Stability: Incomes now have a predictable ratio, is very beneficial to planning their finances, as sourcing the funds to meet the financial obligations associated to wages, raw materials, and overheads can now be much better managed.
• Encouraged Growth & Expansion: With timely payments, MSMEs can reinvest available profits into adding to their operations, purchasing equipment, or even developing new markets.
• Legal Recourse: In the event of a lapse on payments, MSMEs can reclaim interest at 3 times the RBI bank rate, giving MSMEs a much stronger bargaining position.
• Enhanced trust & confidence: MSMEs feel secure dealing with larger corporations  ,knowing that they are protected by related legislation.
• Enhanced trust within the ecosystem: Happier payments will result in healthier business relationships with MSMEs dealing with their buyers.

How Do Large Companies Benefit From The New MSME 45-Days Payment Rule?

Large companies enjoy several advantages from following the MSME 45-days payment policy, even if it may seem like an additional burden. Here’s how:

• Improved Supply Chain: Timely payments enhance MSME cash flow, resulting in better, more consistent, and reliable supply. The potential for disruption to its business processes is lessened.
• Improved Reputation: Compliance demonstrates the responsibility of the company to ensure ethical business practices. This enhances the corporation’s image and strengthens the relationship with MSMEs, investors, and government authorities.
• Regulatory Compliance & Tenders: Many recent government tenders now stipulate evidence of MSME payment compliance. Timely payments mean the large company can make, and not be restricted from making, tender applications or at least respond positively.
• Avoiding Interest & Instant Legal Action: Non-compliance with the MSME payment law attracts heavy interest (three times the RBI’s bank interest rate) and the possibility of legal action via the MSEFC. Timely payments mean a company can avoid the negative consequences of payable penalties and litigation.
• Stronger Business Relations: Paying MSMEs before the 45-days period ives them confidence, loyalty, and trust. Timely payments enable both parties to pursue a long-term relationship that is highly beneficial during periods of demand gain or supply chain disruptions.
• Easier Audits & Reporting: Large firms must report amounts owed to MSMEs in their financial disclosures. Therefore, compliance enables easier to see reporting and audits.

How Can Udyamita Help Stay Compliant With The 45-days MSME Payment Rule?

Udyamita, the government’s initiative to support entrepreneurship, actively supports both MSMEs and buyers to comply with the 45-days MSME payment rule in the following ways:

• Easy Udyam Registration: Udyamita facilitates a hassle-free MSME registration on the Udyam portal. This helps guarantee that companies are properly registered and recognized, and in accordance with the 45-days payment rule.
• Awareness and training: Udyamita, through workshops (and other forms of training), helplines, and digital support keeps MSMEs and their buyers aware of their legal obligations, rights, and penalties associated with msme delayed payments.
• Compliance support: Udyamita helps MSMEs establish compliance documentation (invoicing, purchase orders, etc) so that delayed payments are documentable, and interest can be asserted, if required.
• Dispute resolution guidance: Udyamita helps MSMEs establish an account on the MSME Samadhaan Portal, if payment is delayed, so that the grievance can be lodged for efficient enforcement, in the delay of payment, as promulgated through the MSME Act.
• Promotes Buyer Awareness: Udyamita provides buyer awareness and informs large buyers and corporations, of their obligation to pay MSMEs in 45 days, reducing non-compliance.