There was a signed agreement. Both sides had negotiated it in good faith. It clearly stated 60-day payment terms. And none of that mattered for the last fifteen of those sixty days — because the law had already decided, before either party ever signed anything, exactly how far a written agreement with a micro or small enterprise was legally allowed to stretch.
A mid-sized manufacturer sourcing raw material from several small, Udyam-registered weaving units had, some years earlier, negotiated what it considered a fair, mutually agreed 60-day credit period with each supplier — longer than the suppliers might have preferred, but shorter than the manufacturer's own cash conversion cycle really needed, and both sides had signed formal written agreements reflecting those terms.
The Assumption That Felt Completely Reasonable
When a large seasonal purchase of raw material came due for payment, the manufacturer paid on day 58 — comfortably within the 60-day window both parties had explicitly agreed to in writing. From the manufacturer's perspective, this was textbook compliant behaviour: a written contract, honoured on its own terms, paid before the agreed deadline.
Where the Assumption Ran Into the Actual Law
During the year-end tax review, the company's auditors flagged the payment as a problem — not because it was late by the contract's own terms, but because Section 15 of the MSMED Act, 2006 caps any agreed written payment period with a micro or small enterprise at 45 days, as an absolute ceiling, regardless of what both parties negotiate and sign. A 60-day term isn't a valid extension of the statutory default; the portion of the agreement beyond 45 days is simply void for this specific purpose. Paid on day 58, the transaction had, in the law's eyes, actually been paid 13 days beyond its real, legally recognised deadline — even though it was 2 days ahead of what both parties had explicitly agreed to on paper.
What That Actually Cost
Under Section 37(2)(g) of the Income-tax Act, 2025 — the direct successor to the earlier Section 43B(h) — because the payment crossed the true 45-day deadline and the year-end 31 March cutoff had already passed with it still technically overdue by that measure, the entire purchase value was disallowed as a deduction for that financial year and added back to taxable income. On a purchase running into several tens of lakhs of rupees, at the company's effective tax rate, this created an unplanned tax outflow the finance team had never modelled — the deduction would eventually be available again, but only in a later year, once the disallowance rule's own timing requirements were satisfied, creating a genuine, if temporary, cash flow gap in the meantime.
How the Business Actually Fixed Its Process Going Forward
The correction here wasn't a one-time fix — it was a systemic change to how the company handled every future MSME vendor agreement. Every existing written agreement with a verified micro or small enterprise supplier was reviewed and amended to reflect a genuine 45-day maximum, removing the false comfort of a longer negotiated term that offered no actual legal protection. The company's accounts payable system was reconfigured to flag any MSE-vendor payable approaching day 40, rather than tracking against whatever term the underlying contract stated, ensuring the internal warning system matched the real statutory deadline rather than a contractually agreed but legally unenforceable one.
The Lesson for Any Business With MSME Suppliers
This is a genuinely common trap, and the reason it's common is that it's entirely counter-intuitive — most people assume a signed, mutually agreed contract term is, by definition, the deadline that matters. For payments to verified micro or small enterprises specifically, that assumption is wrong, and it's wrong in a way that costs real money precisely because it feels so reasonable. If your business has any written agreements with MSME-registered suppliers specifying payment terms beyond 45 days, those terms offer no protection against Section 37(2)(g) disallowance for the excess period — treating 45 days as the genuine, non-negotiable ceiling, regardless of what any contract says, is the only way to actually manage this risk correctly.