MSME 45 day payment rule: Applicability, Terms & Notification

What is the MSME 45 day payment rule?

The MSME 45 day payment rule requires that payments to Micro, Small, and Medium Enterprises (MSMEs) should be made within 45 days from acceptance of goods or services. This regulation is a major legislative action in ensuring prompt payment, which is crucial to improving the liquidity and overall financial well-being of MSMEs. By creating a definite timeline for payment, the cash flow issues of most businesses are resolved which small companies experience on a day-to-day basis.

During 2023-24, a large number of SMEs' cash flow has reduced by 69%, which has been caused by not receiving prompt payment. The 45 Days Payment Rule aims to interrupt this cycle by making sure that MSMEs are paid on time, so they can invest in their business again, innovate, and expand. On top of that, without prompt payments, MSMEs often run the risk of getting into high market debts. Without receiving timely payments, MSMEs also can easily run into a low reserve of cash flow.

Many enterprises in the MSME sector are small businesses, they have a high risk of failing to pay for their financial obligations to the vendors, staff and other workers in case they themselves don’t receive the payment in time.

Learn what is an MSME, and know its full form, importance and role in developing India’s economy.
Now let’s find out more about MSME 45 Days Payment in detail.

MSME Payment Within 45 Days: Notification and Updates

From time to time, the government issues notifications to ensure that the MSME rule is compiled by most of the stakeholders. Moreover, the MSME payment within 45 days notification ensures that the stakeholders are aware of their duties and responsibilities. The 45 Days Payment Rule is an important aspect of the MSME Development Act (MSMED), passed in 2006 to support and protect the interests of small and medium enterprises in India. The major challenge that MSMEs face is the delay in payment, which causes delays in manufacturing and the business halts. This 45 Days Payment Rule ensures that the MSMEs receive timely payments, and the business environment remains highly stable. Here are some major updates and notifications of the MSME 45 Days Payment Rule:

• MSMEs need to validate their Udyam Registration number with their business mobile number while registering for the first with the MSME Samadhan, a portal for filing complaints on non-compliance with the 45-day payment rule.
• MSMEs that have Entrepreneur's Memorandum Part II, are required to consult the Micro and Small Enterprises Facilitation Council for new registration to complain about cases of non-compliance with the law.
• All MSMEs need to have scanned PDF documents as well as invoices before filing a complaint.
• The compliance rule applies only in the case of MSMEs which are registered under the MSMED Act.

The updates help clarify compliance norms and describe the consequences of non-compliance, which may be in the form of a fine or other legal ramifications. It is important that businesses, particularly those dealing with MSMEs, remain updated with such notifications to comply with the rules and prevent any legal consequences. By staying current on the most recent information, businesses will have a greater understanding of how the MSME payment rule affects their business and accounting procedures. This being ahead of the game not only assists in remaining compliant but also maintains a good relationship with MSME vendors, which can translate into preferable terms of business and partnerships. In addition, knowing how the government feels about making timely payments can further help a business build its reputation as an ethical and responsible business partner.

MSME 45 day payment rule Applicability

The MSME 45 day payment rule applicability works for all of the large-scale businesses as well as to government-based institutions that purchase goods and services from MSMEs. The clients and stakeholders of MSMEs must be aware of their role in contributing towards the functioning of the MSMEs. However, these institutions cannot claim the benefit of the 45 Days Payment under the MSMED Act:

• Retailers
• Wholesalers
• Any business institute that is not classified as an MSME or does not fit the criteria of being recognised as an MSME
• Any business that is not registered under the MSME Development Act, 2006

Advantages of MSME 45 Days Payment Terms

Here are some of the major benefits of the 45-day payment rule that MSMEs get:

Sufficient cash flow

The MSME payment terms ensure that MSMEs have enough money to meet their daily expenditures, including settling with suppliers, workers, and other operational expenses. This enhanced cash flow diminishes financial strain, enabling owners to concentrate on strategic planning and decision-making without having to concern themselves with an ongoing shortage of cash.

Higher expansion scope

The capacity to collect payments within a specified period enables MSMEs to plan more effectively for future investment and expansion prospects. With more stable cash flows, these companies can invest in the expansion of their operations, new technologies, or new markets. This proactive strategy for expansion not only improves the competitiveness of MSMEs but also promotes job creation and economic growth in the wider community.

Creates credibility and builds relationships

The MSME 45 day payment rule promotes confidence and credibility in business transactions. When big businesses and government agencies comply with this rule, it becomes a culture of respect and responsibility in the market. This is crucial for establishing long-term relationships between MSMEs and their customers, which can translate to repeat trade and word-of-mouth referrals. Read also small business ideas to start in 2025 with lower capital investment.

Consequences of Non-Compliance with MSME Payment Rule

In case the business does not comply with the MSME 45 Days Payment Rule, it has to face certain consequences directly which may impact it negatively. Let’s focus on these consequences now:

Higher interest payment

Any business that fails to comply with the law, will have to compulsorily pay compound interest that is three times higher than the bank interest rate directly to the MSME business. This is a guideline directly issued by the Reserve Bank of India Under Section 16. The Government of India has launched a dedicated portal for addressing the issues of non-compliance with the MSME rules for payment, known as MSME Samadhan. The business owner can visit the website of MSME Samadhan, enter business Udyog Aadhar Number and register a complaint.

No deduction allowed

Another major consequence of non-compliance with the 45-day payment Rule is that companies cannot deduct their expenses from their taxable income. This is according to Section 43(B)h of the Income Tax Act, 2013. The only reason the Central Board of Revenue created this provision in the Income Tax Act is to incentivize firms to pay their MSME payments promptly.

Creates mistrust in building relationships

Delays in payments can also create frustration and mistrust, and it becomes challenging for firms to have good working relationships with their counterparts. Business losing trust can also lead to poor vendor connection, and low goodwill and hence may not survive for long.

Damage to business reputation

Legal wars can take away valuable resources from core business operations, slowing down growth and innovation. Moreover, a company's reputation can be tarnished as news of its inability to fulfil payment commitments spreads. This negative image can discourage potential clients and partners, ultimately impacting the company's financial position and market share. Overall, the penalties of violating the MSME payment rule reach beyond the financial well-being of the company to extend into its relations and image within the marketplace.

How MSME Payment Rules Impact MSMEs

MSMEs need a regular cash flow to float amidst the market debts, as many small and medium-sized businesses find it difficult to proceed without on-time payment. Here are some of the major ways the MSME 45 Days Payments Rule impacts the businesses:

Maintains higher liquidity

The 45-day rule ensures that MSMEs have sufficient liquidity, and also can cope with financial uncertainty. In addition, the capacity for maintaining liquidity allows MSMEs to invest in opportunities for growth, including adding more products, upgrading technology or even employing more personnel.

Improvement in the financial environment

Investing in growth not only makes specific companies more competitive but also improves the overall regional economic development. Through the support of a solid financial environment, the MSME payment rule induces good business ethics and instils an atmosphere of responsibility among large corporations as well as among government agencies.

Building fair business practices

Besides, such rules ensure that the business community becomes fairer by even playing fielding the MSMEs. With big firms accepting the MSME rules for payment, they cut the unevenness that has characterized buyer-seller relations in the past. This equity compels more MSMEs into the market, spurring innovation and competition within the economy.

Economic improvement

The 45 day payment rule makes sure that firm liquidity is in a better position, and hence the MSMEs can invest more for growth. MSMEs form a root structure of the Indian economy, where there are 633.9 lakh MSMEs currently operating in this nation. The 45-day rule allows these MSMEs to create a vibrant and more agile economy through sufficient cash liquidity.

Conclusion

The MSME 45 day payment rule is a critical regulation that ensures the financial well-being of small businesses. Adherence to the rule is necessary to uphold good business relationships and prevent legal complications. Financial managers and business owners need to be aware of the requirements and changes in the rules to maintain compliance.