Using the MSMED Act when a client delays your bill

A contractor registered as a micro or small enterprise has a statutory tool that most never use: the Micro, Small and Medium Enterprises Development Act, 2006. It sets a limit on how long a buyer may take to pay, and it makes late payment expensive for the buyer. Knowing how it works changes the tone of a payment follow-up, even if you never file a case.

The 45-day limit

Section 15 of the Act requires a buyer to pay a micro or small enterprise supplier on or before the date agreed in writing. That agreed period cannot exceed 45 days from the day of acceptance, or deemed acceptance, of the goods or services. Where there is no written agreement on the period, the Act sets a shorter default.

For a contractor, acceptance usually turns on the client's check of the work billed. The Act has its own definitions of acceptance and deemed acceptance, including what happens when the buyer raises an objection in writing. Read them with your adviser against your own bill and certification dates.

Interest on delayed payment

Section 16 makes the buyer liable to pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India, from the date payment fell due. This applies notwithstanding anything in the contract, so a contract clause that says no interest is payable does not remove it.

Three times the bank rate, compounded monthly, is a high rate next to a working capital loan. That is the point of the provision: it is cheaper for the buyer to pay on time.

A worked interest computation

A certified amount of ₹10,00,000 was accepted on 1 August, so payment fell due by 15 September at the latest. It is still unpaid on 15 December, three months later. Take a bank rate of 6.50% for the computation; use the rate the Reserve Bank notified for your period. Three times 6.50% is 19.50% a year, or 1.625% a month with monthly rests.

Interest for the three months is ₹49,546.48. Simple interest at the same 19.50% would be ₹48,750, so compounding adds ₹796.48 over a quarter, and the gap widens every month the bill stays unpaid. The MSME interest calculator runs this computation for any amount, dates and bank rate.

Who is covered

• Micro and small enterprises only. Medium enterprises are registered under the same Act but do not get the delayed payment protection.
• Registration matters. Keep your Udyam registration current, and keep the certificate on file with each work order.
• The buyer can be any client. Private developers, PSUs and government bodies are all buyers under the Act.
• Facts matter. Whether the protection applies to a particular contract, and from when, can depend on your registration date and the contract's terms. Take legal advice before you file.

Using it without filing a case

Most contractors will not take a major client to the Facilitation Council over one bill. The Act still helps. A payment reminder that states the acceptance date, the due date under the Act and the interest accrued so far is a different letter from one that asks for an update. Accounts teams prioritise payments that carry a cost.

Private buyers have had a further reason to pay on time. Under section 43B(h) of the Income-tax Act, 1961, from financial year 2023-24, a buyer could deduct a payment due to a micro or small enterprise only when it was paid within the MSMED Act limit. Ask your CA how this carries into the Income-tax Act, 2025 before you mention it in a letter.

When you do file

Delayed payment cases go to the Micro and Small Enterprises Facilitation Council of your state. MSME Samadhaan is the government portal for filing them online. The Council first attempts conciliation and, if that fails, takes up the dispute itself or refers it for arbitration.

1. Collect the work order, the bills, the certification or acceptance record and the payment record for each bill.
2. Compute principal and interest bill by bill, with the due date of each.
3. Send the client a written demand with the computation, and keep proof of delivery.
4. File on MSME Samadhaan with the documents, if the demand is not met.

What your records need to show

Every MSMED claim rests on dates: when the work was accepted, when payment was due, when payment was made, and how much was paid each time. Contractors lose strong claims because they cannot prove acceptance dates, or because part payments were never matched to bills. Keep, for every bill, the certification date, the certified amount, each payment received against it, and any objection the client raised with the date it was resolved.

Mistakes that weaken a claim

• Interest worked out as simple interest, or at a contract rate that is lower than the Act's rate.
• Part payments never matched to specific bills, which hides how long each bill was outstanding.
• Udyam registration lapsed or updated after the work order, with no record of the dates.
• Demands sent by phone or chat with no written letter on file.

How Tatha Vastu tracks it

For Udyam-registered contractors, the client bill room records the certification date of every bill and shows days outstanding against the MSMED Act limit. Payments are matched to bills as they arrive, and the interest computation is generated at three times the bank rate you enter. Tatha Vastu keeps the record; whether and how to claim stays your decision, with your adviser.