MSME Compliance Decoded: Companies Act, MSME Act & Income-tax Act

Summary: The MSME Act, 2006 imposes important compliance obligations on buyers procuring goods or services from Micro and Small Enterprises (MSEs). Under Section 15, payment must be made within the agreed credit period, which cannot exceed 45 days from the date of acceptance or deemed acceptance. Where no written agreement exists, payment must be made within 15 days. Delay in payment attracts compound interest with monthly rests at three times the RBI Bank Rate under Section 16. Audited buyers, including companies and LLPs, must disclose outstanding principal, interest, accrued interest and related particulars in their annual financial statements under Section 22. Companies are also required to provide ageing disclosures of MSME trade payables under Schedule III of the Companies Act, 2013. Further, the proviso to Section 43B of the Income-tax Act allows deduction for payments to Micro and Small Enterprises only if they are made within the timelines prescribed under Section 15 of the MSME Act; otherwise, deduction is allowed only in the year of actual payment.

This article discusses the key compliances applicable to buyers dealing with MSMEs.

1. Liability of Buyer to Make Payment under Section 15

Section 15 of the MSME Act mandates that every buyer purchasing goods or availing services from a Micro or Small Enterprise must make payment within the prescribed time.

Where there is a written agreement between the buyer and the supplier, payment must be made within the agreed credit period. However, the agreed period cannot exceed 45 days from the date of acceptance or deemed acceptance of goods or services.

Question 1: What if there is no agreed payment period?

Answer:

Where there is no written agreement regarding the payment period, the buyer is required to make payment before the appointed day, i.e., within 15 days from the date of acceptance or deemed acceptance of the goods or services.

Meaning of Acceptance and Deemed Acceptance

Day of Acceptance

The day of acceptance means:

• The actual date of delivery of goods or rendering of services; or
• Where the buyer raises a written objection regarding the goods or services within 15 days of delivery or rendering of services, the date on which the supplier removes such objection.

Day of Deemed Acceptance

The day of deemed acceptance means the actual date of delivery of goods or rendering of services where the buyer does not raise any written objection within 15 days.

Illustration

Example 1 – No Objection Raised by Buyer (Deemed Acceptance)

• Goods delivered: 1 July 2026
• No written objection raised within 15 days
• No written agreement regarding payment terms

Result

• Day of deemed acceptance: 1 July 2026
• Fifteen-day period expires on: 16 July 2026
• Appointed day: 17 July 2026

Accordingly, under Section 15, the buyer must make payment on or before 16 July 2026. Any payment made on or after 17 July 2026 will attract interest under Section 16 of the MSME Act.

Question 2: What happens if the buyer fails to make payment within the prescribed time?

Answer:

Where the buyer fails to make payment within the time prescribed under Section 15, the buyer becomes liable to pay compound interest with monthly rests at three times the Bank Rate notified by the Reserve Bank of India, as provided under Section 16 of the MSME Act.

2. MSME Disclosures in Financial Statements

Apart from timely payment, the MSME Act also requires certain disclosures in the financial statements.

Section 22 provides that every buyer whose annual accounts are required to be audited under any law must disclose the following information in its annual financial statements:

1. The principal amount and interest remaining unpaid to MSME suppliers as at the end of the financial year.

2. The amount of interest paid under Section 16 together with payments made beyond the appointed day.

3. The amount of interest payable for delays in payment during the year.

4. The amount of interest accrued and remaining unpaid at the end of the financial year.

5. The amount of further interest remaining payable in subsequent years until such interest is actually paid, for the purposes of disallowance under Section 23.

Question 1: Are these disclosures applicable to LLPs?

Answer:

Yes, The MSME Act applies to every buyer whose annual accounts are required to be audited under any law. Therefore, LLPs are also required to make these disclosures if they are subject to audit.

Under the LLP Rules, an LLP is required to get its accounts audited where:

• Annual turnover exceeds ₹40 lakh, or
• Contribution exceeds ₹25 lakh.

Accordingly, the applicability of MSME disclosures for LLPs may be summarized as follows:

Question 2: Why do many LLPs that are not required to get their accounts audited still attach MSME disclosures while filing Form LLP-8?

Answer:

Under the earlier MCA V2 Portal, the old Form LLP-8 required an MSME disclosure statement as a mandatory attachment, irrespective of whether:

• the LLP was a buyer from an MSME,
• the LLP was required to get its accounts audited, or
• any disclosure was actually required under the MSME Act.

Although this requirement arose from the filing form and not from the statute, it gradually became an accepted professional practice. Consequently, many professionals continue to attach MSME disclosures while filing LLP-8 even where the Act does not require such disclosure.

3. Additional MSME-Related Disclosures Applicable Only to Companies

The disclosures discussed above are applicable to all audited buyers, including companies and LLPs.

However, companies are also required to comply with certain additional disclosure requirements under Schedule III of the Companies Act, 2013.

(a) Ageing of Trade Payables

Every company having outstanding trade payables as at the balance sheet date is required to present an ageing schedule of such payables.

The ageing schedule must separately disclose amounts payable to:

• MSMEs,
• Other suppliers,
• Disputed dues to MSMEs, and
• Disputed dues to other suppliers,

along with the prescribed ageing categories as required under Schedule III.

This disclosure enables stakeholders to identify delays in payments to MSMEs and promotes greater financial transparency.

4. MSME Provisions under the Income-tax Act, 1961

The Finance Act, 2023 introduced a significant amendment to the Income-tax Act, 1961 by inserting a proviso to Section 43B with effect from 1 April 2024 (Assessment Year 2024–25 onwards). The amendment aims to promote timely payments to Micro and Small Enterprises by linking the allowability of expenditure with compliance under the MSME Act.

Under the amended provisions, any sum payable by an assessee to a Micro or Small Enterprise for goods supplied or services rendered shall be allowed as a deduction only if the payment is made within the time limit prescribed under Section 15 of the MSME Act. Accordingly:

• Where there is a written agreement, payment must be made within the agreed credit period, which cannot exceed 45 days from the date of acceptance or deemed acceptance.
• Where there is no written agreement, payment must be made within 15 days from the date of acceptance or deemed acceptance.

If the payment is not made within the above prescribed period, the expenditure shall not be allowed as a deduction in the year in which the liability is incurred, even if the payment is made before the due date of filing the income tax return under Section 139(1). The deduction will instead be allowed only in the previous year in which the actual payment is made.

It is important to note that the benefit available under the first proviso to Section 43B, which generally permits deduction where payment is made up to the due date of filing the return of income, does not apply to payments covered under this provision. Consequently, businesses dealing with Micro and Small Enterprises should closely monitor payment due dates under the MSME Act, as any delay may result in disallowance of expenditure and an increase in taxable income for the relevant financial year.

Let’s understand this with the help of a illustration

Example 1: Payment made within the time prescribed under the MSME Act

• Goods purchased from a Micro Enterprise: 10 February 2026
• No written agreement regarding payment terms.
• Due date for payment under Section 15 of the MSME Act: 25 February 2026 (within 15 days from the date of acceptance).
• Actual payment made: 20 February 2026.

Result:

Since the payment was made within the period prescribed under Section 15 of the MSME Act, the entire expenditure will be allowed as a deduction while computing the taxable income for the Financial Year 2025–26.

Example 2: Payment made after the prescribed period but before the due date of filing the income tax return

• Goods purchased from a Small Enterprise: 10 February 2026.
• No written agreement regarding payment terms.
• Due date for payment under Section 15: 25 February 2026.
• Actual payment made: 30 September 2026 (before the due date of filing the income tax return under Section 139(1)).

Result:

Although the payment was made before the due date of filing the return of income, the deduction will not be allowed in Financial Year 2025–26 because the payment was not made within the time limit prescribed under Section 15 of the MSME Act. The expenditure will be allowed as a deduction only in the Financial Year 2026–27, i.e., the year in which the payment is actually made.

5. Conclusion

The MSME Act is much more than a law prescribing payment timelines. It imposes statutory obligations on buyers in respect of timely payment, interest on delayed payments, and disclosures in financial statements.

Timely compliance not only helps avoid statutory consequences but also strengthens business relationships with MSME suppliers and promotes responsible corporate governance.

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Contact: For any further guidance, professional assistance, or collaboration, please feel free to contact CS Hardik at CS.HARDIK123@GMAIL.COM or call +91-8586003121.