By Legum Pacific Editorial ·
Suppose a small supplier delivers goods to a shop or a contractor provides services to a company. Payment was promised in writing, but the buyer delays payment beyond the agreed date. The supplier wants to know what the Act provides about interest and how disputes are handled.
What does the law say?
The Act says a buyer shall make payment on or before the date agreed in writing between the buyer and the supplier. If there is no written agreement on the date, the buyer must pay before the appointed day.
The period agreed in writing shall not exceed forty-five days from the day of acceptance or the day of deemed acceptance.
If the buyer fails to make payment as required under the Act, the buyer shall be liable to pay compound interest with monthly rests to the supplier on that amount. The interest runs from the appointed day or, where there was an agreed date, from the date immediately following the agreed date. The rate of interest is three times the bank rate notified by the Reserve Bank.
Section 17 states that for any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest as provided under section 16.
How are disputes resolved under the Act?
Any party to a dispute with regard to any amount due under the Act may make a reference to the Micro and Small Enterprises Facilitation Council (the Council).
On receiving a reference, the Council shall either itself conduct conciliation in the matter or seek the assistance of an institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre. The provisions of the Arbitration and Conciliation Act, 1996 that deal with conciliation (sections 65 to 81) shall apply to such a dispute as if conciliation was initiated under that Act.
If conciliation is not successful and stands terminated without settlement, the Council shall either itself take the dispute for arbitration or refer it to an institution or centre providing alternate dispute resolution services for arbitration. The Arbitration and Conciliation Act shall then apply to the dispute as if the arbitration were in pursuance of an arbitration agreement referred to in that Act.
The Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as arbitrator or conciliator in a dispute between a supplier located within its jurisdiction and a buyer located anywhere in India.
Every reference made under this provision shall be decided within a period of ninety days from the date of making the reference.
What does the law say about setting aside awards or orders?
The Act provides that no application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with the court seventy-five per cent of the amount in terms of the decree, award or other order in the manner directed by such court.
The Act further states that, pending disposal of an application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as the court considers reasonable under the circumstances of the case, subject to such conditions as the court deems necessary to impose.
What must buyers record in audited accounts, and how is interest treated for tax?
Where a buyer is required to get annual accounts audited under any law, the buyer shall furnish additional information in the annual statement of accounts. This information includes:
- the principal amount and the interest due thereon (shown separately) remaining unpaid to any supplier at the end of each accounting year;
- the amount of interest paid by the buyer in terms of section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;
- the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act;
- the amount of interest accrued and remaining unpaid at the end of each accounting year; and
- the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23.
Section 23 states that, notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, be allowed as deduction.
Penalties, courts and officials under the Act
The Act provides penalties for certain contraventions. Whoever intentionally contravenes or attempts to contravene or abets the contravention of subsection (1) of section 8 or subsection (2) of section 26 shall be punishable:
- on first conviction, with fine which may extend to rupees one thousand; and
- on second or subsequent conviction, with fine which shall not be less than rupees one thousand but may extend to rupees ten thousand.
Where a buyer contravenes the provisions of section 22 (the requirement to furnish specified information in audited accounts), the buyer shall be punishable with fine which shall not be less than rupees ten thousand.
No court inferior to that of a Metropolitan Magistrate or a Magistrate of the first class shall try any offence punishable under the Act. The Central Government or the State Government may appoint officers and other employees for the purposes of this Act and may require persons to furnish information in the prescribed form.
Key points
- Buyers must pay on the written date or before the appointed day; written terms cannot exceed 45 days from acceptance.
- Late payment attracts compound interest with monthly rests at three times the bank rate notified by the Reserve Bank, from the appointed day or the day after the agreed date.
- Any party can refer a dispute to the State Micro and Small Enterprises Facilitation Council; conciliation and arbitration provisions of the Arbitration and Conciliation Act apply.
- The Council must decide references within 90 days.
- A court will not entertain an application to set aside a Council decree, award or order unless the appellant (not being a supplier) has deposited 75% of the amount in terms of that decree, award or order, in the manner directed by the court; the court may direct payment of a reasonable part of that deposit to the supplier while the application is pending.
- Buyers required to have audited accounts must disclose unpaid principal and interest details; interest payable or paid under the MSMED Act shall not be allowed as a deduction for computing income under the Income-tax Act, 1961.
Laws referred to
- The Micro, Small and Medium Enterprises Development Act, 2006: Sections 15 to 29 (as in the provided official text)
Official sources
This guide explains what the law itself says. Court rulings interpreting these provisions can also affect how they apply in a particular case. It states the position under the official texts listed above, as at 18 October 2026.