Indian SMEs lose ₹2–4 lakhs annually to payment delays from larger buyers—yet most never claim the 18% per annum interest they're entitled to under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
The machinery exists: the Micro and Small Enterprises Facilitation Council (MSEFC) at district level, standardised claim forms, and a legal framework that shifts the burden of proof to the buyer. Most SME owners either don't know the mechanism exists, misfile claims (losing them entirely), or build contracts that waive their own rights. This article walks through diagnosis, claim mechanics, contract design, and the real cost of inaction.
Advisory
Section 16 of the MSMED Act mandates 18% per annum simple interest on invoiced amounts not paid within 30 days (or the agreed payment term, whichever is later). Interest accrues from day 31 onwards. Many SME owners calculate this wrong: they apply 18% to the outstanding amount every month, creating compound-like exposure figures, when the law requires simple interest. Example: ₹10 lakh invoice, 60-day non-payment. Interest = ₹10,00,000 × 18% × 30/365 = ₹14,795 (not ₹30,000). The buyer's exposure is capped at the contract value, but interest continues to accrue monthly until payment. The second error: SMEs often fail to document the invoice date, goods receipt, and payment due date—so when filing an MSEFC claim, they cannot prove accrual. Result: claim rejected, interest forfeited.
The Micro and Small Enterprises Facilitation Council operates at district/state level under Section 18 of the MSMED Act. A claim must be filed in writing (no strict form mandated, but most councils provide a template) within 3 years of the due date—after which it becomes statute-barred. The council then calls the buyer for a hearing; if the buyer fails to appear or deny liability, the council can issue a non-binding recommendation for payment (not a decree). This is critical: MSEFC judgement is advisory, not enforceable by attachment. If the buyer ignores the recommendation, the SME must file suit in the District Court under Section 17 (which grants MSME cases fast-track status and bars set-off). Common filing errors: missing invoice copies, no proof of delivery, no documentation of payment demand, no clear calculation of interest accrual. These cause councils to recommend smaller amounts or dismiss entirely.
Many supply agreements drafted by larger buyers contain clauses that waive the 18% interest, impose unreasonable payment terms (90+ days), or permit set-off against defects (even unproven ones). Section 15 of the MSMED Act states that any agreement reducing the buyer's liability for delayed payment is void—yet SMEs routinely sign such contracts. Example: a clause stating 'Payment within 60 days, no interest chargeable' is unenforceable, but the SME who signed it often won't claim the interest because they believe the contract term binds them. Second trap: clauses permitting the buyer to deduct amounts 'in dispute' or pending quality certification—this creates a perpetual hold window. Best-practice contract language: 'Payment due within [30] days of invoice. If not paid by day 31, 18% per annum simple interest accrues automatically from day 31 onwards, as per the MSMED Act,
Frequently asked questions
Under Section 16 of the MSMED Act, 2006, buyers must pay 18% per annum simple interest on invoiced amounts not paid within 30 days or the agreed payment term, whichever is later.
File a written claim with the Micro and Small Enterprises Facilitation Council at your district/state level, providing invoice date, goods receipt proof, and payment due date within the required timeline to avoid rejection.
Use simple interest formula: (Invoice Amount × 18% × Days Overdue/365). Do not compound monthly—calculate interest only on the principal amount from day 31 onwards until payment is received.