The MSMED Act, 2006 was introduced by the Government of India to support the growth of MSMEs by addressing key issues faced by businesses, particularly payment delays. The Act mandates that buyers (including government bodies and large corporations) pay MSMEs within a stipulated period, usually 45 days from the date of acceptance of goods or services.
If the payment is delayed, the MSME is entitled to receive interest on the outstanding amount. The MSMED Act defines the interest rate that can be charged and outlines the process for claiming this interest.
Interest on Delayed Payments
The MSMED Act stipulates that in case of delayed payments, MSMEs can charge interest at 3 times the bank rate prevailing on the date of default. This interest is calculated from the date the payment was due until the date it is actually received.
Payment Terms
Under the MSMED Act, the maximum time period for payment should not exceed 45 days from the date of acceptance or deemed acceptance of goods or services.
Bill of Exchange
In case the buyer does not pay within the agreed-upon time, the MSME can issue a notice of default and seek legal recourse.
The MSMED Act provides critical protections for MSMEs, especially in the event of delayed payments. By understanding how to calculate interest on delayed payments, MSMEs can ensure they are properly compensated for late payments. Here are a few reasons why MSMEs should be familiar with the Act:
Set Clear Payment Terms
Ensure that payment terms are clearly outlined in your contract, including the due date and the interest rate on delayed payments.
Send Payment Reminders
Before charging interest, send polite reminders to the buyer regarding the overdue payment.
Follow Up Professionally
If the payment is delayed, follow up with professional communication, and if needed, escalate the matter according to the MSMED Act.
Negotiate Payment Terms
If necessary, negotiate payment terms with your buyers to avoid delayed payments in the future.
Q1. What is the interest rate on delayed payments under the MSMED Act?
The interest rate is 3 times the bank rate as prescribed by the Reserve Bank of India (RBI).
Q2. What should I do if a customer doesn't pay on time?
According to the MSMED Act, you can charge interest on the overdue amount, and you may also seek legal recourse if payments are delayed.
Q3. Can I negotiate payment terms under the MSMED Act?
Yes, payment terms can be negotiated, but once agreed upon, the buyer must adhere to those terms as per the Act.