If your company in India buys from an MSME vendor, two rules decide how quickly you have to pay: Section 15 of the MSMED Act, often called the 45-day payment rule, and Section 43B(h) of the Income-tax Act. Between them, paying a micro or small vendor late gets expensive for the buyer.
This is a practical overview in plain language, not tax advice. Confirm the details for your company with your chartered accountant.
What MSME and Udyam registration mean
MSME stands for micro, small and medium enterprises. Businesses register on the government's Udyam portal, run by the Ministry of MSME, and get a Udyam registration number. Udyam classifies each enterprise as micro, small or medium based on its investment and turnover.
The classification matters because the payment rules below protect micro and small enterprises only. Medium enterprises aren't covered.
The MSME 45-day payment rule (MSMED Act, Section 15)
When you buy goods or services from a micro or small enterprise:
- With a written agreement, you pay by the agreed date, and the agreed credit period can't be longer than 45 days.
- Without a written agreement, you pay within 15 days.
- The clock starts on the day you accept the goods or services, or are treated as having accepted them.
If you pay late, Section 16 of the Act makes you liable for compound interest at three times the bank rate notified by the Reserve Bank of India.
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Section 43B(h): the tax side
Since financial year 2023–24, Section 43B(h) of the Income-tax Act has tied your tax deduction to the same deadline. If you pay a micro or small enterprise on time, the expense is deductible as usual. If you pay late, you can only claim the deduction in the year you actually pay. Some other parts of Section 43B let you fix a late payment by paying before you file your return, but 43B(h) doesn't.
The rule depends on the supplier's Udyam status, not on your company's size. Traders are generally treated as outside it.
What this means for your vendor payments
| Situation | Deadline to pay | If you're late |
|---|---|---|
| Micro or small vendor, written agreement | Agreed date, at most 45 days | Interest at 3× the RBI bank rate, plus the 43B(h) deduction is pushed to the year you pay |
| Micro or small vendor, no written agreement | 15 days | Same as above |
| Medium enterprise | As per your contract | MSMED Act and 43B(h) rules don't apply |
In practice:
- Check each vendor's Udyam classification when you onboard them, rather than at year end.
- Keep credit terms at 45 days or less in contracts with micro and small vendors.
- Tie payments to clear milestones, so acceptance dates are obvious and easy to pay against.
How to verify a vendor's Udyam registration
- Ask the vendor for their Udyam registration number. It starts with "UDYAM".
- Go to udyamregistration.gov.in and use the option to verify the Udyam registration number.
- Check that the enterprise name matches your contract and invoices, and note whether it's classed as micro, small or medium.
Working with Ryo Forge
Ryo Forge Private Limited is MSME (Udyam) registered, and we'll share our Udyam number during onboarding. Our fixed-price projects are paid in three milestones: 30% at kickoff, 40% at the mid-point demo and 30% at launch. Each payment has a clear acceptance point.
If your team needs SAP developers, an AI agent or an internal tool, book a free call and we'll send a fixed quote within 48 hours.
