Quick answer: Once a buyer crosses the legal payment deadline (maximum 45 days), three consequences begin automatically: they owe you compound interest at three times the RBI bank rate (roughly 16.5% a year when the bank rate is 5.50%), they lose the ability to claim that expense in their tax return until they actually pay you, and you earn the right to drag them before a fast-track government dispute body — without filing a regular court case. 

Consequence 1: Interest starts running — automatically

The day after the deadline passes, the buyer starts owing you interest at 3 times the RBI bank rate, compounded every month (Section 16 of the MSMED Act). For example, at an RBI bank rate of 5.50%, that works out to 16.5% per annum — higher than most personal loans. The bank rate changes from time to time, so always verify it on the date of calculation. You do not need an interest clause in your invoice; the law itself creates this liability.

Because it compounds monthly, the amount grows faster than people expect. On a delay of a year or more, the interest can become a very significant addition to the principal — and for very long delays, it can even approach the principal itself.

Consequence 2: The buyer takes a tax hit

This is the part most buyers only discovered recently. Under Section 43B(h) of the Income Tax Act (in force since April 2024), if a buyer does not pay a Micro or Small enterprise within the legal time limit, they cannot claim that purchase as a business expense in that financial year. The unpaid amount effectively gets added back to their taxable income, and they end up paying income tax (often 25–30%) on money they still owe you. To be clear, this extra tax goes to the government, not to you — its value to you is as pressure on the buyer, not as compensation.

They only get the deduction back in the year they actually pay you. In practice, this is why many companies now rush to clear MSME dues before 31 March — their own tax bill depends on it.

Consequence 3: You get access to a fast-track dispute forum

Instead of a civil court case that can run for years, you can file a complaint through the government’s online MSME dispute portal, which routes your case to the MSME Facilitation Council of your state. The Council first attempts conciliation; if that fails, the case automatically converts into arbitration — no fresh filing needed. The Council is expected to dispose of cases within 90 days.

And if the buyer wants to challenge the Council’s order in court, they must first deposit 75% of the awarded amount. Appealing is not a free delay tactic.

What should you actually do, step by step?

Start soft: a professional reminder mentioning that statutory interest is accruing. Escalate to a formal notice referring to the MSMED Act and Section 43B(h) — for many buyers, the tax angle alone gets the payment released. If that fails, file on the MSME dispute portal with your invoices, delivery proof and Udyam certificate. Most cases settle well before the final stage, because the longer the buyer waits, the more it costs them.

Frequently Asked Questions

Q. Do I have to send a legal notice before interest starts?

A. No. Interest starts running automatically once the deadline passes. A notice is useful pressure, but it is not a precondition for the interest itself.

Q. What if the buyer says they have a cash-flow problem?

A. Their financial difficulty does not pause your rights. You can still negotiate a settlement if you wish, but the interest keeps accruing in the background either way.

Q. Can I claim both interest and the tax consequence?

A. The interest is money owed to you. The tax disallowance under Section 43B(h) is a consequence the buyer suffers with the tax department — you don’t receive it, but it is powerful leverage in your favour.

Q. Is there a time limit for raising a claim?

A. Limitation rules apply to recovery claims, so do not sit on old dues indefinitely. As a working rule, act within three years of the amount becoming due, and take advice for anything older.

About the author: Advocate Praveen Siinghhal is a Delhi-based lawyer with 25+ years of experience in MSME payment recovery, commercial disputes and business legal protection. He advises MSMEs and business owners on unpaid dues, legal notices, MSME Facilitation Council claims and recovery strategy.

Disclaimer: This article is for general information only and is not legal advice. Laws, RBI bank rate, tax treatment, portal procedures and case law may change from time to time. Please verify the current position or consult a professional before acting on any specific claim.