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New MSME Notification Dated 25-Mar-2025: Delayed Payments Will Now Trigger MCA Returns, 18% Interest & Tax Disallowance

New MSME Notification Dated 25-Mar-2025: Delayed Payments Will Now Trigger MCA Returns, 18% Interest & Tax Disallowance

Effective April 1, 2025 – Companies delaying payments to MSMEs beyond 45 days will face compound interest, mandatory MCA disclosures, and no tax relief.

Introduction

In a major regulatory push to safeguard the interests of Micro and Small Enterprises (MSEs), the Ministry of Micro, Small and Medium Enterprises (MSME) issued a notification dated 25th March 2025, mandating stricter consequences for delayed payments. The new rules, effective from 1st April 2025, create a triple impact for non-compliant companies:

  1. Mandatory MCA half-yearly return for dues > 45 days
  2. Compound interest at 3x RBI bank rate (currently around 18%)
  3. No tax deduction for such interest under the Income Tax Act

This article provides an in-depth breakdown of the new compliance environment, the legal basis, financial impact, and practical steps companies can take to mitigate risks.

Legal Foundation: MSMED Act & New Notification

Notification Summary (S.O. 1376(E), Dated 25-Mar-2025)

All companies that:

  • Receive goods or services from Micro or Small Enterprises, and
  • Delay payment beyond 45 days from date of acceptance (or deemed acceptance),

Must now file a half-yearly return with the Ministry of Corporate Affairs (MCA). The return must specify:

  • Outstanding amount
  • Duration of delay
  • Reason for non-payment

This return is to be filed twice a year via MCA’s Form MSME-1:

  • April to September: File by 31st October
  • October to March: File by 30th April

Who Qualifies as an MSME?

Effective April 1, 2025, companies must classify their suppliers as MSMEs using the revised definition:

TypeInvestment in Plant & MachineryAnnual Turnover
Micro≤ ₹1 crore≤ ₹5 crore
Small≤ ₹10 crore≤ ₹50 crore

Only those vendors registered under Udyam Registration and meeting the above limits are covered.

Section 15 & 16 of MSMED Act: Interest on Delayed Payment

Section 15

Buyers must pay MSEs:

  • Within 15 days (if no agreement), or
  • Within maximum 45 days (if agreement exists)

Section 16

If payment is delayed beyond the allowed time:

  • Interest becomes automatically applicable
  • Rate = 3x RBI Bank Rate (currently ~18%)
  • Interest is compound, with monthly rests

This interest cannot be waived, even if the MSE agrees.

Example:

  • Invoice date: 1 March 2025
  • Due date (45 days): 15 April 2025
  • Paid on: 15 June 2025
  • Delay: 2 months
  • Amount: ₹10 lakh
  • Interest: ~₹30,000 (approx. 18%)

Tax Treatment under Income Tax Act: Section 43B(h)

Introduced via the Finance Act 2023, Section 43B(h) provides:

Interest paid to MSEs under MSMED Act is not allowed as business expense

This means:

  • Even if the interest is paid, it cannot be claimed as a deduction
  • It increases the company’s taxable income

This makes non-compliance twice as expensive — pay interest and pay more tax.

GST Implications

Interest paid under Section 16 is treated as a penalty or statutory obligation. As per prevailing interpretations:

  • No GST is payable on such interest
  • Input Tax Credit (ITC) cannot be claimed

Companies must book such interest under a non-GST expense ledger to avoid ITC mismatches.

Penalties for Non-Filing of MSME-1

Under the Companies Act, 2013:

  • ₹25,000 penalty on the company
  • ₹3,000 per day on defaulting officers
  • Possible MCA scrutiny and audit comments

Late or inaccurate filing can lead to compliance red flags.

How Companies Can Escape the Trap

1. Identify MSME Vendors Accurately

  • Collect Udyam Registration Certificate from all vendors
  • Update classification under new limits

2. Integrate Payment Controls

  • Configure ERP systems to flag MSE invoices > 30 days
  • Automate alerts before 45-day breach

3. Re-Negotiate Payment Terms

  • Avoid setting credit terms that violate MSMED Act
  • Keep vendor agreements compliant

4. Clear Dues on Priority

  • Include MSEs in weekly cash flow planning
  • Automate payments for MSEs within 45 days

5. File Form MSME-1 Timely

  • Keep track of dues
  • Prepare reconciliation quarterly
  • Maintain documentation of reasons for delay

6. Provision for Interest in Books

  • Estimate liability monthly
  • Book under separate expense head
  • Disallow under tax computation

Conclusion

The March 2025 Notification marks a clear signal from the Government – no more leeway in payment delays to MSMEs. With interest rates at nearly 18%, tax disallowance under Section 43B(h), and mandatory MCA disclosures, companies cannot afford to ignore this.

Proactive vendor classification, internal controls, and timely filings are your best defense.

FAQs

Q1. Is the MSME-1 return new?
No, it existed earlier, but now it’s reinforced by MSME Ministry and linked to real-time penalties.

Q2. Can interest be waived by agreement?
No. Section 16 imposes statutory liability – non-waivable.

Q3. What if MSE vendor doesn’t ask for interest?
Irrelevant. Interest is legally due once 45 days are breached.

Q4. Can we claim this interest as expense in tax return?
No. Section 43B(h) disallows it even if paid.

Q5. What about medium enterprises?
They are not covered under this compliance requirement.

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