Introduction

The Global Economy is currently growing at a slow pace. The same can be said of the Indian Economy also, which is growing at a sluggish rate. To ensure that Indian economy is back on track and to ensure that it is one of the fastest growing economies in the world, focus on development of Micro, Medium and Small Enterprises should be one of the critical areas that warrants our attention.

The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006) is one such Act that has not been made use of by the country to its full potential. With around 63.4 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output. This article contains a briefing about the important provisions of MSMED Act, 2006 and how the Act can be utilised to its fullest potential.

Key Definitions and Analysis

Enterprise

“enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called,

  • engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or
  • engaged in providing or rendering of any service or services.

Keynote is that trading enterprises are outside the purview of MSMED Act, 2006. Hence trading enterprises or concerns are not eligible to get registered as MSMEs.

Goods

‘goods’ means every kind of movable property other than actionable claims and money.

Immovable properties are outside the purview of MSMED Act, 2006. Hence a manufacturer of immovable property, real estate developers and other such concerns dealing with immovable properties are not eligible to be registered as MSMEs.

Services

The word ‘services’ has not been defined under the Act. Service, in the legal context, refers to any duty or labour performed for another person.

Hence, all the service providers are covered under MSMED Act, 2006.

Classification of  Enterprises

Enterprises are classified into two broad categories:

  1. Manufacturing/Production Enterprises
  2. Service Enterprises

The above enterprises are classified as micro or small or medium enterprises based on the investment made by them in plant and machinery. As per the provisions of Section 7 of the Act, enterprises are classified into micro or small or medium enterprises illustrated as under:

Particulars MicroSmallMedium
Manufacturing / Production enterpriseDoes not exceed ₹ 25 lakhsExceeds ₹  25 lakhs but does not exceed ₹  5 croresExceeds ₹  5 crores but does not exceed ₹ 10 crores
Service enterpriseDoes not exceed ₹ 10 lakhsExceeds ₹  10 lakhs but does not exceed ₹  2 croresExceeds ₹  2 crores but does not exceed ₹ 5 crores
Classification of enterprises as Micro, Small or Medium Enterprises

Further, the following has been provided to help in understanding the classification of enterprises at the different threshold limits:

Manufacturing / Production
enterprise
Service enterprise
Exact ₹ 25 lakhs- Micro
Exact ₹  5 crores- Small
Exact ₹ 10 crores- Medium
Exact ₹ 10 lakhs- Micro
Exact ₹  2 crores- Small
Exact ₹ 5 crores- Medium

It has to be noted that in calculating the investment in plant and machinery, the following costs shall be excluded-

  • the cost of pollution control,
  • research and development,
  • industrial safety devices and
  • such other items as may be specified, by notification,

From the above, it is evident that gross investment is considered and not the WDV or Net Value of plant and machinery which is arrived at after providing for depreciation.

Payments to MSMEDs

As per the provisions Section 15 of the Act, where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor

  • on or before the date agreed upon between him and the supplier in writing or,
  • where there is no agreement in this behalf, before the appointed day.

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed 45 days from the day of acceptance or the day of deemed acceptance. “appointed day” means the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

the day of acceptance” means;

  • the day of the actual delivery of goods or the rendering of services; or
  • where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier.
As per the provisions of the Act, the buyer who has bought or procured or received goods or services by a supplier (A person who is registered under the Act), then such buyer is duty bound to settle the supplier not later than the due date for payment as agreed between them.
Where there is no such due date of payment as agreed upon between them, then the buyer ought to settle the supplier within 15 days from the date of delivery or goods or rendering of services.
 
We need to note that the due date as agreed upon between the buyer and supplier either under an agreement or a contract is given first priority over the stipulated duration of 15 days. For example, A renders photography services to B and both of them enter into an agreement wherein it is stipulated that B would pay the amount after 30 days of receiving the services, then A cannot enforce B to make such payment within 15 days of providing such services to B.
 
Let us take another example, where C, who is registered under this Act, supplies goods to D and they both enter into an agreement wherein D would pay C after 60 days of date of acceptance of goods. In this scenario, the duration of agreement is well above the stipulated duration of 45 days as mentioned in the Act. The agreement needs to be amended so as to ensure that the maximum credit period is 45 days. Where the agreement is not amended so, then D would have to pay interest on delayed payment to C from the day immediately following the stipulated duration of 45 days till the date of payment of the said consideration.

Interest on Delayed Payment

According to Section 16, where the buyer fails to make the payment before the due date, as provided above, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.

Certain agreements/ contracts may contain a clause for payment of interest on delayed payments beyond the due date of such payment. Where none of the parties are registered under this Act, the terms and conditions contained in such agreement or contract would prevail. Where there is no clause covering interest on delayed payments beyond the due date, then there would exist no liability.
 
However, if the seller of such goods or services is registered under this Act, then irrespective of whether such agreement contains a clause covering interest on delayed payments or not, the buyer of goods is bound to pay the interest on delayed payment in accordance with the provisions of this section

Interest Payment- an inadmissible deduction

According to Section 23 of the Act, notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.

It can be seen that the Act not only provides for payment of interest on delayed payment to MSME suppliers, but also restricts the buyer of goods or services in claiming such interest as deduction under the Income Tax Act. This section overrides the Income Tax Act, 1961.
 
Even if the Income Tax Act did not expressly provide for the inadmissibility of the above interest payment, such payment ought to be disallowed while computation of Income and Income Tax of the buyer.
 
However, it has to noted that interest received on delayed payment of consideration by a MSME from its customer is a taxable supply under the CGST Act, 2017. As such, the MSME is bound to pay GST on such interest.  The time of supply relating to an addition in the value of supply by way of interest, late fee or penalty for delayed payment of any consideration is the date on which the supplier receives such addition in value.
 
There are 2 scenarios and the taxation of GST pertaining to the above issue:
Scenario 1- MSME is not registered under the CGST Act, 2017.
Entire Interest income is chargeable to income tax under the head of ‘Profits/Gains from Business/Profession’ and not under ‘Other Sources.’ This is because such interest receipt pertains to day to day business affairs of the MSME.
 
Scenario 2- MSME is registered under the CGST Act, 2017.
In this scenario, the MSME has to raise an invoice and offer to tax such interest income considering the interest income as inclusive of tax. The supplier paying such interest to a MSME is eligible to obtain input tax credit since such payment is in the course or furtherance of business.

Disclosure requirement under MSMED Act, 2006

As per the provisions of Section 22, Where any buyer is required to get his annual accounts audited under any law for the time being in force, the buyer shall furnish the following additional information in his annual statement of accounts, namely-

  • the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;
  • the amount of interest paid by the buyer in terms of section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;
  • the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act;
  • the amount of interest accrued and remaining unpaid at the end of each accounting year; and
  • the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under Section 23.

The above disclosures are in addition to the disclosures as required by an Act or a Statute.

It is to be noted that the above provisions apply only when a buyer is required to get his accounts audited under any law or statute. There may be cases where buyers would voluntarily get their books of accounts audited, audit of which is governed by no law or statute.
For example, independent audit of financial statements of a partnership firm which is not required to be audited under Income Tax Act, 1961 or Central Goods and Service Tax Act, 2017.
 
In such situations, the above disclosure is not warranted and hence such disclosure is not required.

Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019

According to this order issued by MCA, every specified company shall file a return as per MSME Form I:

  • by 31st October for the period from April to September and
  • by 30th April for the period from October to March.

Specified company means every company which gets supplies of goods or services from micro and small enterprises and whose payments to micro and small enterprise suppliers exceed 45 days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of section 9 of MSMED Act, 2006.

It is to be noted here that following buyer companies are not required to file MSME Form 1.
·         do not have any transactions with MSMEs, or
·         have made transactions with MSMEs and have made the payment to such suppliers within the said 45 days, or
·         have made transactions with medium enterprises and even if such companies have not made the said payment beyond the said duration of 45 days,
This order applies to only companies as defined in the Companies Act, 2013. Other entities are outside the purview of this order.

How to make the optimum utilisation of the Act

  1. The Act requires buyers to make disclosure of payments to MSMEDs in the annual statement of accounts (Financial Statements, Form 3CD). Enforcing this disclosure norms help the statutory and regulatory authorities in identifying the buyers who are buying from MSME suppliers. However, this does not help in the immediate realisation of cash or proceeds for the MSME suppliers.

If MSME suppliers mention on their invoices or bills the fact that such suppliers are registered under the Act, then the buyer of such goods or services who has knowledge about the provisions of the Act, would ensure that such proceeds are paid within the due date and interest is avoided.

  • As the debtor time cycle reduces, MSMEs would have good working capital and liquid assets. Such availability of working capital would benefit the enterprises in judiciously allocating their funds for the growth of their business, be it for making investments or paying liabilities, etc.
  • Tax Consultants and Professionals in practice need to encourage their clients in obtaining registration under the Act. Apart from encouraging such clients, the clients need to be made aware of the provisions of the Act so that the clients are well aware of the provisions of the Act which can help in their business dealings.
  • Disclosure norms under the Act can be amended so as to include a disclosure, as an annexure or otherwise, of Registration Numbers of suppliers registered under the Act supplier-wise, over a particular threshold amount (say ₹ 1,00,000) so that statutory authorities are aware of the parties covered under the Act in order to provide various benefits offered to MSMEs.

    In this scenario, requiring specified companies in filing of Form MSME 1 introduced vide Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019 is a much welcome disclosure obligation (covered under Disclosure requirement under MSMED Act, 2006 section).
  • Reduction in paperwork and documentation needs to be made by the Banks while opening any account  (such as current account, overdraft account). This can be streamlined wherein PAN, Incorporation documents and MSME Registration certificate are the only documents that need to be provided.
  • Most of the MSMEs approach practicing professionals seeking inputs and guidance in compliance areas, prominent ones being compliance with taxation laws, labour laws, statutory audits. However, it has to be understood that compliance areas are the routine aspects of any business which does not provided for success of the business in their entirety.

Practicing professionals are equipped with expertise in aiding the MSMEs in non-compliance areas as well, such as:

  1. Selecting the appropriate type of entity such as a company or a partnership firm or an LLP or a proprietary concern, etc which best fits the MSME’s nature and scale of operations and its business and financial requirements.
  2. Recruiting and selecting quality personnel.
  3. Best practices in Supply Chain Management
  4. Product pricing, marketing strategies and other management and operational decision making.
  5. Capital structure planning, financial management planning and drafting policies for the same.
  6. Due Diligence services.
  7. Drafting agreements and contracts with various vendors associated with MSMEs such as sale agreements, memorandum of understandings, lease and rental agreements, etc including arbitration agreement drafting.
  8. Best practices of Information Technology, Information security, SDLC and E-Governance.
  9. Management, Internal and Operational audits.
  10. Preparation of project reports for obtaining term loans or working capital loans from Banks and other Financial Institutions.
  11. Providing training to the employees and other staff belonging to MSMEs.
  12. Other important areas such as selecting the right organisational structure, hierarchy of personnel in the organisation, drafting organisational policies, assisting in implementing effective operational and management strategies.

The above list is not exhaustive. The list is meant to provide a birds-eye-view of a few non-compliance areas, optimal implementation of which is crucial to ensure that a MSME not only survives in its business environment, but also thrives and grows as an industry leader.

Article by CA. Rakshith S

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