Customer not paying our small business: the 45-day rule and interest

You shipped the goods. You finished the work. You sent the invoice. Then the customer went quiet.

Now it is month three, and you are paying your own staff and suppliers out of pocket.

If you are a micro or small enterprise, you are not just a creditor with a pending invoice. The Micro, Small and Medium Enterprises Development Act, 2006 (the "MSMED Act") caps the payment period your customer can agree at forty-five days, gives you interest on late money, and a special forum to claim it. This article walks through what the law says.

First: does the rule apply to you?

The payment rule protects a "supplier". The Act defines "supplier" as a micro or small enterprise that has filed a memorandum with the authority referred to in s.8(1) of the Act. The definition also includes bodies such as the National Small Industries Corporation (s.2(n), MSMED Act, 2006). So the first test is whether you are registered as a micro or small enterprise. The Act calls the registration a "memorandum". Check how your own registration certificate shows your category before you send any notice.

The Act says a person who sets up a micro or small enterprise "may, at his discretion" file the memorandum (s.8(1), MSMED Act, 2006). The supplier protection is tied to that choice. If you are not registered, talk to a CA first.

The other side is the "buyer": whoever buys goods or receives services from a supplier for consideration (s.2(d), MSMED Act, 2006). A company, a partnership or a shop all qualify.

What you can still do today

Three things are open to you now: insist on the statutory deadline, claim interest the contract cannot reduce, and take the dispute to the Micro and Small Enterprises Facilitation Council. Each is explained below.

The deadline clock: how the 45 days work

The clock does not start on the invoice date. It starts on the "day of acceptance" or the "day of deemed acceptance" of your goods or services.

Day of acceptance. This is the day your goods were actually delivered or your services rendered. If the buyer objected in writing within fifteen days of delivery, it is the day you removed that objection (s.2(b), Explanation (i), MSMED Act, 2006).

Day of deemed acceptance. If the buyer made no written objection within fifteen days of delivery or of the service, the day of deemed acceptance is the day of actual delivery or of rendering the service (s.2(b), Explanation (ii), MSMED Act, 2006).

So silence helps you: with no written objection in fifteen days, the clock runs from the delivery day. A written objection moves the start date, so keep the buyer's complaint and your reply that removed it.

Now the payment deadline itself. The buyer must pay on or before the date agreed in writing, or, if there is no written agreement, before the "appointed day" (s.15, MSMED Act, 2006). The appointed day is the day immediately after fifteen days have passed from the day of acceptance or deemed acceptance (s.2(b), MSMED Act, 2006).

So, with no written agreement, your buyer must pay within fifteen days. With a written agreement, the agreed period applies, but it has a ceiling: "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" (proviso to s.15, MSMED Act, 2006).

That ceiling is the 45-day rule. A purchase order that says "payment in 90 days" does not change it.

Note the word "written". Where there is no written agreement, the fifteen-day appointed day applies.

The interest your buyer owes

If the buyer misses the deadline, s.16 applies. The buyer must pay "compound interest with monthly rests" on the unpaid amount at "three times of the bank rate notified by the Reserve Bank" (s.16, MSMED Act, 2006).

Break that into plain words.

• Compound with monthly rests. Interest is added to the dues every month, and the next month's interest is charged on the larger figure.
• Three times the bank rate. The rate is a multiple of the RBI's notified bank rate. The bank rate changes, and its current figure is not in the Act. Check the current bank rate on the RBI website for the months you are claiming.
• From when. Interest runs from the appointed day. If there was a written agreement, it runs from the day immediately following the agreed date (s.16, MSMED Act, 2006).
• Notwithstanding the contract. The section applies "notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force" (s.16, MSMED Act, 2006). So a clause saying "no interest on late payment" or "interest at 12% a year" does not cut this down. The Act also says that ss.15 to 23 override anything inconsistent in any other law (s.24, MSMED Act, 2006).

Section 17 ties it together: for goods supplied or services rendered, the buyer is liable to pay the amount with interest as provided under s.16 (s.17, MSMED Act, 2006).

Why the buyer's own books and tax will care

The law puts pressure on the buyer in other places too.

The buyer's accounts must show the dues. A buyer whose annual accounts are required to be audited must give extra information in its annual statement of accounts. This includes the principal and interest remaining unpaid to any supplier at the end of each accounting year, shown separately (s.22, MSMED Act, 2006).

The interest is not a tax deduction for the buyer. Interest payable or paid by a buyer under the Act is not allowed as a deduction when computing income under the Income-tax Act, 1961 (s.23, MSMED Act, 2006).

The principal may be disallowed too. Under the Income-tax Act, 1961, Finance Act, 2023 inserted a new clause (h) in s.43B: it covers "any sum payable by the assessee to a micro or small enterprise beyond the time-limit specified in section 15" of the MSMED Act (s.43B(h), Income-tax Act, 1961, as inserted by the Finance Act, 2023). Section 43B lets such sums be deducted only when actually paid. The time limit it points to is the one in s.15: the agreed written period (never more than forty-five days) or, with no written agreement, the appointed day. The same rule appears in the Income-tax Act, 2025, which applies from 1 April 2026: sums payable to a micro or small enterprise beyond the s.15 time limit are covered by s.37(2)(g), and the extra time to pay by the return due date does not apply to this clause (s.37(2)(g) and s.37(3), Income-tax Act, 2025). In plain words: a buyer who pays you late can lose its deduction for that cost for the year. That is a strong reason for a business customer to settle with you.

Whether this applies to a particular buyer depends on its facts. It is a lever, not a promise.

Step by step: how to recover the money

Step 1: Build the file. Collect the purchase order or contract, delivery proof (challan, lorry receipt, signed acknowledgement or completion email), your invoice, and every message about payment. Note any written objection from the buyer and the date you resolved it. These fix the day of acceptance.

Step 2: Work out the dates. Find the day of acceptance or deemed acceptance. Then find the due date: the date in the written agreement, capped at forty-five days, or the appointed day if there is no written agreement. Interest starts from the appointed day or the day after the agreed date (s.16, MSMED Act, 2006).

Step 3: Send a written demand. State the invoice amount, the due date, and that you claim interest under s.16 of the MSMED Act, 2006. Ask for payment of both. Keep it short, factual and dated, and send it by a method that leaves proof.

Step 4: Refer the dispute to the Facilitation Council. Any party to a dispute may refer an amount due under s.17 to the Micro and Small Enterprises Facilitation Council (s.18(1), MSMED Act, 2006). State governments set up these Councils by notification (s.20, MSMED Act, 2006). The Council has jurisdiction over a dispute between a supplier located in its area and a buyer located anywhere in India (s.18(4), MSMED Act, 2006). So you file where you are, even if the buyer is in another state. Check your State government's website for the Council that covers you and its filing format.

Step 5: Conciliation first. On a reference, the Council either conducts conciliation itself or sends the matter to an institution or centre offering alternate dispute resolution. Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 apply as if the conciliation were under Part III of that Act (s.18(2), MSMED Act, 2006).

Step 6: Arbitration if conciliation fails. If conciliation ends without a settlement, the Council either takes up the dispute for arbitration itself or refers it to an institution or centre for arbitration. The Arbitration and Conciliation Act, 1996 then applies as if there were an arbitration agreement under s.7 of that Act (s.18(3), MSMED Act, 2006). You do not need an arbitration clause in your contract.

Step 7: Expect a time limit on the Council. Every reference must be decided within ninety days of the date it is made (s.18(5), MSMED Act, 2006).

Step 8: Expect a challenge. If the buyer challenges the award, a court cannot even hear the application unless the buyer (the appellant, not being a supplier) has deposited seventy-five per cent of the amount of the decree, award or order with the court (s.19, MSMED Act, 2006). The court may order a reasonable part of that deposit to be paid to you while the challenge is pending (proviso to s.19, MSMED Act, 2006).

What not to do

• Do not accept long terms and hope. A written period over forty-five days is capped by the Act (proviso to s.15, MSMED Act, 2006). Push back on long terms at the contract stage anyway.
• Do not let a written objection sit. Reply in writing and record the date; it can fix the day of acceptance (s.2(b), MSMED Act, 2006).
• Do not waive interest in a casual message. Decide on any waiver deliberately, in writing, as part of a settlement.
• Do not ignore the registration question. The "supplier" definition turns on the memorandum (s.2(n), MSMED Act, 2006).
• Do not guess the interest. Compound interest with monthly rests (s.16, MSMED Act, 2006) is easy to under-calculate. Show your working.

What to do now

This article does not state a time limit for filing a reference. Ask a CA or a lawyer how long you have, and do not wait.

Have a CA review your facts before you act or file.

FAQs

Q1. My customer's purchase order says 60 days. Is that valid?
A written agreement cannot exceed forty-five days from the day of acceptance or deemed acceptance (proviso to s.15, MSMED Act, 2006).

Q2. We never signed anything. When is payment due?
Before the "appointed day" (s.15, MSMED Act, 2006): the day after fifteen days from the day of acceptance or deemed acceptance (s.2(b), MSMED Act, 2006).

Q3. What interest rate can I claim?
Three times the bank rate notified by the Reserve Bank, compounded with monthly rests (s.16, MSMED Act, 2006). The bank rate changes, so check the figure for the period you are claiming on the RBI website before you calculate.

Q4. Can the buyer's contract take away my interest?
No. Section 16 applies notwithstanding any agreement between the buyer and the supplier (s.16, MSMED Act, 2006), and ss.15 to 23 override inconsistent provisions of other laws (s.24, MSMED Act, 2006).

Q5. Do I need a lawyer to approach the Facilitation Council?
The Act provides for a reference by "any party to a dispute" (s.18(1), MSMED Act, 2006). It does not say a lawyer is required. Check your State Council's own rules.

Q6. Does a late payment hurt the buyer's taxes?
It can. A sum payable to a micro or small enterprise beyond the s.15 time limit falls under s.43B(h) of the Income-tax Act, 1961 and s.37(2)(g) of the Income-tax Act, 2025, so the buyer's deduction waits for actual payment. Interest under the MSMED Act is not deductible at all (s.23, MSMED Act, 2006).

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• Startup India (DPIIT) recognition rejected — what to fix and reapply
• Starting a Section 8 company and getting 12A/80G: the steps in order