The Micro, Small and Medium Enterprises Development Act, 2006 does something unusual in Indian commercial law: it writes the consequences of delayed payment directly into statute and puts them beyond the reach of the contract. Section 15 obliges a buyer to pay a micro or small enterprise supplier on or before the agreed date — which can never exceed forty-five days from acceptance of the goods or services — and Section 16 makes the defaulting buyer liable for compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. Section 17 stitches the two together into a recoverable amount, and Section 24 gives the scheme overriding effect. For suppliers, this is leverage; for buyers, an accruing hazard many discover only inside a Facilitation Council reference. This explainer walks through the machinery.
The statutory chain: Sections 15, 16, 17
Two reinforcements complete the design. Section 23 disallows the interest as a business deduction in the buyer's income-tax computation, ensuring the penalty is not blunted through the tax system. Section 24 gives Sections 15 to 23 overriding effect over anything inconsistent in any other law — the provision that defeats contractual devices designed to dilute the scheme.
The acceptance machinery
The forty-five-day clock is anchored in the concept of the "day of acceptance". The scheme, in substance: the day of acceptance is the day of actual delivery — unless the buyer records a written objection to the goods or services within fifteen days of delivery, in which case acceptance occurs when the supplier removes the objection. The consequences are practical and immediate:
Buyers who intend to dispute quality must object in writing, within the window, with specifics. Silence followed by a late-blooming quality defence leaves the statutory clock running throughout.
Suppliers should document delivery meticulously — challans, acknowledgments, e-invoices — because the entire interest computation hangs on the delivery and acceptance dates.
Both sides should treat the payment ledger as a limitation and interest map: part payments, their dates and their appropriation change the arithmetic materially.
What buyers cannot do — and what they can
The Act's non-obstante architecture defeats the standard contractual escape routes: extended credit periods beyond forty-five days, clauses waiving interest, and interest rates pegged below the statutory formula are all ineffective against a covered supplier. What buyers can legitimately do is manage the underlying exposure — verify a counterparty's Udyam status at onboarding, structure genuine acceptance and inspection protocols inside the fifteen-day window, resolve disputes through the Section 18 conciliation stage before interest balloons, and negotiate settlements that address principal and interest transparently rather than through disguised waivers extracted as a condition of payment.
Interaction with the wider recovery toolkit
The Sections 15–17 entitlement is the substantive core that the procedural mechanisms carry. A supplier may take the composite claim to the Facilitation Council under Section 18, whose award — after conciliation fails and arbitration concludes — is challengeable only against the 75% pre-deposit under Section 19. The same debt may support other proceedings on their own terms, and the statutory interest regime frames settlement negotiations in all of them: a buyer's realistic downside is rarely the invoice value alone, but the invoice compounded monthly at three times the bank rate, undeducted for tax. That arithmetic, more than any other feature of the Act, is what brings buyers to the table.
Coverage questions — enterprise classification, registration timing relative to the supply, and whether a transaction qualifies — have their own substantial case law and can decide everything. This explainer describes the statutory scheme in general terms and is not advice on any specific claim.
Frequently Asked Questions
Can the contract provide a credit period longer than 45 days?
No. Section 15 permits the parties to agree on a payment date, but caps any agreed period at forty-five days from the day of acceptance (or deemed acceptance). A ninety-day credit clause in a purchase order does not displace the statutory ceiling for a supplier covered by the Act.
How is the statutory interest computed?
Under Section 16, from the appointed day or the agreed date, the buyer pays compound interest with monthly rests at three times the bank rate notified by the RBI. The rate and the compounding are statutory; a Facilitation Council award applying them is not open to attack merely for severity.
Is the interest tax-deductible for the buyer?
No. Section 23 of the MSMED Act provides that interest payable or paid under the Act is not allowed as a deduction in computing the buyer's taxable income. The delay therefore costs the buyer twice — once in interest, once in tax treatment.
What if the buyer disputes the goods or services?
Section 15 works with the acceptance framework: where the buyer objects in writing within fifteen days of delivery, the clock runs from the day the objection is removed. Genuine quality disputes are adjudicated in the Section 18 mechanism, but manufactured objections raised after silence rarely impress Facilitation Councils.