Updated • Jan 2026

Creditors Payment, GST & MSME Compliance

Complete guide on creditors payment, MSME rules, GST 180-day rule, ITC reversal, Section 43B(h), penalties, and accounting treatment.

By EasyPeasyTax •

1. What Is a Creditor?

A creditor is a person or supplier who provides goods or services on credit. The amount payable is recorded as Trade Payables / Sundry Creditors under Current Liabilities.

2. What Is Creditor Payment?

Creditor payment is the settlement of outstanding dues through:

  • Bank Transfer (NEFT/RTGS/IMPS)
  • UPI
  • Cheque
  • Digital Wallets

3. Accounting Treatment

When goods purchased on credit:

Purchase A/c Dr.
    To Creditor A/c

When payment made:

Creditor A/c Dr.
    To Bank/Cash A/c

If discount received:

Creditor A/c Dr.
    To Bank/Cash A/c
    To Discount Received

4. GST Rules Related to Creditor Payment

Under GST law:

  • If an invoice remains unpaid for 180+ days, ITC must be reversed.
  • Interest is applicable on reversed ITC.
  • ITC can be reclaimed once payment is made.
Important: Always ensure invoices appear in GSTR-2B for valid ITC.

5. Income Tax Rules

● Section 40A(3)

Cash payment above ₹10,000 to any person in a day is disallowed.

● TDS Applicability

  • Contractor (194C)
  • Professional fees (194J)
  • Commission/Brokerage (194H)

6. MSME Payment Rules (45-Day Rule)

Under MSMED Act, you must pay MSME suppliers:

  • Within 45 days (if agreement exists)
  • Within 15 days (if no agreement)
Penalty: Interest = 3× RBI Bank Rate (compounded monthly).

Section 43B(h) – Finance Act 2023

MSME payments not made within 45 days are disallowed as expenses until actually paid.

7. Best Practices

  • Collect and verify Udyam Registration.
  • Maintain MSME vendor-wise ledger.
  • Set reminders for 45-day deadlines.
  • Reconcile payables monthly.
  • Prefer digital payments.

8. Frequently Asked Questions

1. Who is considered a creditor?

A creditor is any supplier or vendor from whom goods/services are purchased on credit.

2. What is the time limit for paying MSME suppliers?

45 days with agreement, 15 days without agreement.

3. What happens if I don’t pay an MSME within 45 days?

You must pay compound interest at 3× RBI rate and expense may be disallowed under Section 43B(h).

4. Is ITC allowed if I delay payment beyond 180 days?

No. ITC must be reversed with interest and reclaimed after payment.

5. Can I make cash payments to creditors?

Not exceeding ₹10,000 per day; else the expense is disallowed.

6. Can MSME suppliers take legal action for delay?

Yes, they can approach MSME Samadhan for recovery of dues with interest.

7. Do companies have to file MSME Return (Form I)?

Yes, if outstanding dues to MSME suppliers exceed 45 days.

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