The Evolution of MSME Payment Rules and Their Impact on Corporate Accountability

One of the biggest challenges Micro, Small, and Medium Enterprises (MSMEs) face is chronic payment delays from larger buyers.

To address this long-standing issue, the government has progressively strengthened MSME payment rules, ensuring better protection for small businesses and enforcing stricter accountability among corporates.

This article explores how MSME payment regulations evolved over time, their growing significance, and their impact on improving transparency, cash flow, and responsible business practices.

MSME Payment Rules in India

MSME payment rules refer to a set of legal requirements that mandate timely payments to registered MSMEs by buyers. Under the MSMED Act, 2006, corporations purchasing goods or services from MSMEs must clear dues within 45 days in case there is a written agreement between the parties. In the absence of a written agreement, payments must be made within 15 days.

Failure to comply not only results in interest penalties but, from recent reforms, also impacts corporate tax filings, financial reporting, and ESG compliance metrics. These rules also incentivise MSMEs to get registered on the Udyam portal to access better protection.

Historical Background and Need for MSME Payment Regulations

Delayed payments have historically been one of the biggest obstacles to MSME survival. Despite contributing significantly to employment and GDP, MSMEs often struggled because:

• Large buyers held disproportionate negotiation power
• Payments were frequently postponed due to credit cycles
• MSMEs lacked legal capacity or resources to pursue disputes
• Cash-flow disruptions prevented growth and timely debt servicing

To address these structural issues, the government enacted the MSMED Act, 2006, which laid the foundation for payment rules, mandatory timelines, and penal interest for delayed settlements.

Key Milestones in the Evolution of MSME Payment Rules

The evolution of MSME payment obligations has been gradual but transformative. Some major milestones include:

2006 – MSMED Act Introduced

• Enforced a statutory payment window
• Introduced compound interest for delays

2017 – MSME Samadhaan & Sambandh Platforms Launched

1. Samadhaan: Enabled MSMEs to file delayed-payment complaints
2. Sambandh: Allowed government agencies to track procurement from MSMEs

2020 – Udyam Registration Introduced

• Simplified MSME registration
• Enabled PAN–GST linked digital verification
• Allowed MSMEs to easily claim protections under the MSMED Act

2023–2024 – Introduction of Section 43B(h) under the Income Tax Act

• Major reform linking corporate tax deductions to timely payments
• Encouraged responsible buyer behaviour

Together, these milestones have significantly strengthened the enforcement of MSME payment rules.

Overview of Section 43B(h) and Its Significance

Section 43B(h) is a landmark amendment that makes timely MSME payments a tax compliance requirement. Under this rule:

• Buyers can claim expenses as deductions only if MSMEs are paid within 45 days.
• Any delayed payment must be disallowed as a deduction for that financial year and added back to taxable income.

Why It Matters

• Corporates now face direct financial consequences for delaying payments.
• The rule aligns tax law with MSME protection law, making enforcement stronger.
• It promotes seriousness in meeting payment deadlines.

This provision has arguably become the most impactful reform in the history of MSME payment norms.

How Payment Rules Promote Transparency and Timely Settlements

Strengthened MSME payment rules promote transparency through:

• Clear contractual definitions of payment timelines
• Digitally trackable transactions and invoices
• Mandatory reporting of delays on government portals
• Tax disallowances that discourage operational laxity

When payment terms become transparent, disputes reduce and trust between MSMEs and corporates improves significantly.

Impact of MSME Payment Compliance on Corporate Accountability

The latest reforms have increased corporate accountability in several ways:

• Financial Discipline: Corporates must prioritise timely payments to avoid tax disallowances.
• Better Vendor Relationships: MSME suppliers experience improved trust and confidence.
• Enhanced Reputation: Compliance with MSME norms supports ESG and sustainability goals.
• Board-level Oversight: Payment delays now appear in financial audits, pushing leadership to ensure timely settlements.

How Payment Delays Affect MSME Cash Flow and Growth

For MSMEs, delayed payments can have serious consequences:

• Disrupted working capital cycles
• Difficulty repaying business or MSME loans and servicing debt on time
• Strain on essential operational expenses such as salaries, rent, and utilities
• Reduced ability to invest in technology, inventory, or business expansion

Industry Response and Challenges in Implementing Payment Rules

While most industries acknowledge the importance of payment discipline, some challenges remain:

• Large buyers may argue that strict timelines strain their internal approval cycles.
• Ambiguity around identifying the MSME status of vendors.
• Complexity in categorising expenses under Section 43B(h).
• Lack of awareness among smaller MSMEs regarding their rights.
• Integration challenges between corporate ERP systems and compliance tools.

Despite these obstacles, the industry gradually adapts due to regulatory pressure and improved digital infrastructure.

Digital Tools and Government Platforms Supporting MSME Payment Compliance

The government has introduced several digital systems to support enforcement:

• MSME Samadhaan: Online portal for MSMEs to file delayed payment complaints.
• MSME Sambandh: Tracks buyer-wise procurement from MSMEs.
• Udyam Registration Portal: Provides identity verification and payment protection eligibility.
• TReDS (Trade Receivables Discounting System): Enables faster invoice settlement and liquidity.

These platforms help businesses comply with MSME payment rules, strengthen documentation, and reduce disputes.

Conclusion

The evolution of MSME payment rules reflects India’s commitment to protecting its MSME ecosystem and ensuring financial fairness between small suppliers and large buyers.

To further stabilise working capital or support expansion plans, businesses may also consider a suitable MSME loan as a way to manage operational expenses, invest in capacity building, or fund R&D initiatives. When used prudently, these financing tools help MSMEs remain resilient and continue growing even if cash-flow pressures arise.

Ultimately, the combined impact of regulatory reform and smarter financial planning can create a more equitable and growth-friendly environment for MSMEs across the country.

*This article is for informational purposes only and should not be considered financial, tax, or legal advice.