Learn about the impact of delayed payments to Micro & Small Enterprises in India. Understand the legal provisions and implications for businesses.
The Micro, Small and Medium Enterprises (MSMEs) sector contributes significantly to the Indian Economy in terms of Gross Domestic Product (GDP), Exports and Employment generation. Share of MSME related product in total Exports from India is around 45%. To protect the rights of the MSME sector Micro Small and Medium Enterprise Act, 2006 was come in to force.
Protection to MSMEs under Goods and Services Tax Act, 2017
Under Central Goods and Services Tax Act,2017 (CGST Act, 2017) , Government has provided benefit to the supplier as under. This section applies to all the Registered Suppliers and not specifically for MSMEs.
Amongst other conditions, Section 16(2) of the CGST Act, 2017 – Eligibility and conditions for taking input tax credit –provides that
-where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed.
Now, Rule 37 of the Central Goods and Services Tax Rules, 2017 (CGST Rules 2017) amended by the Central Goods and Services Tax (Second Amendment) Rules 2022 contains the mechanism to effectuate the above provision.
Rule 37. Reversal of input tax credit in the case of non-payment of consideration.-
[(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply 3[whether wholly or partly,] along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay [or reverse] an amount equal to the input tax credit availed in respect of such supply [, proportionate to the amount not paid to the supplier,] along with interest payable thereon under section 50, while furnishing the return in FORM GSTR-3B for the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice:
Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16:
Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.
(2) Where the said registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the input tax credit referred to in sub-rule (1).]
(3) [****] Omitted (w.e.f. 01.10.2022) vide Notification No. 19/2022 – CT dated 28.09.2022.
(4)The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.
Now, validity of Rule 37(4) is required to be tested because it cannot override the main provision of the Act i.e. maximum time period to avail credit defined under Section 16(4) i.e. 30th November following the end of the Financial Year or furnishing of the relevant Annual Return whichever is earlier.
Above section is for the benefit of Supplier and Government at the same time. This curbs bogus purchase and bogus transfer of ITC to some extent.
Now on the same line as under GST, in Budget 2023 The Government has tried to boost the growth of Micro and Small Enterprise (Benefit available to Micro and Small Enterprise only, and not available to Medium Enterprises.) with bringing amendment in Section 43B of the Income Tax Act, 1961.
In order to promote timely payments to Micro and Small Enterprises, In Section 43B of The Act, w.e.f. 1st Day of April, 2024
(iii) After Clause (g) the following Clause shall be inserted namely
(h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006,
(iv) in the proviso, after the words “nothing contained in this section”, the brackets, words and letter “[except the provisions of clause (h)]” shall be inserted;
(v) In Explanation 4,––
(I) for clause (e), the following clause shall be substituted, namely:––
‘(e) “micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006;
(II) for clause (g), the following clause shall be substituted, namely:––
‘(g) “small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act,2006.’.
In order to promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Income Tax Act.
A new clause (h) in section 43B of the Act is included to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in MSMED Act 2006 shall be allowed as deduction only on actual payment.
However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments. Which means, the disallowance shall be attracted even if the payment is actually done by the assessee after the end of relevant financial year but before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred.
Now, question arises whether it will be permenat disallowance or what?
Answer to this lies in First line of the Section which reads as ‘Certain deductions to be only on actual payment’
Now, as provision to section 43B does not apply to this amendment , payment to Micro and Small enterprises will be available in the year of payment if paid after the available time limit under the MSMED Act, 2006.
Now Question arises what is time limit available for the payment to Micro and Small Enterprises under The MSMED Act, 2006.
Section 15 of the MSMED Act mandates payments to Micro and Small enterprises within the time as per written agreement, which cannot be more than 45 days. If there is no such written agreement , the section mandates that the payment shall be made within 15 Days. Now I further clarify that here only Micro and Small enterprises is included and not Medium.
Now, further question arises that whether whole amount including GST will be disallowed or only amount equal to value of Goods or Service procured?
Well, Section 43B reads as under.
Certain deductions to be only on actual payment.
43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of…
Here it is clearly stated that deduction otherwise allowable under this Act i.e. Value of Goods or Services without GST amount (If not taken as deduction) will only be disallowed and not whole of the amount.
Now let’s discuss What is Micro & Small Enterprises?
As per Notification dated 01/06/2020 by the Ministry of Mirco, Small and Medium Enterprises,
Criteria for classification of micro, small and medium enterprises, namely:—
(i) a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;
(ii) a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;
(iii) a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.
This notification shall come into effect from 01.07.2020In Rupees
| Micro Enterprise | Small Enteprise | |
| Investment | Up to 1 Crore | Above 1 Crore and Upto 10 Crore |
| Turnover | Up to 5 Crore | Above 5 Crore and Upto 50 Crore |
Example with different situation.
| Invoice Date | Due date as per Agreement | Due Date as per MSMED Act | Date of Actual Payment | Deduction allowed in F.Y. |
| 04-02-2024 | 20-03-2024 | 20-03-2024 | 25-03-2024 | 2023-2024 |
| 04-02-2024 | 20-03-2024 | 20-03-2024 | 07-04-2024 | 2024-2025 |
| 04-02-2024 | 07-04-2024 | 20-03-2024 | 25-03-2024 | 2023-2024 |
| 04-02-2024 | 07-04-2024 | 20-03-2024 | 02-04-2024 | 2024-2025 |
| 04-03-2024 | No Agreement | 18-03-2024 | 31-03-2024 | 2023-2024 |
| 04-03-2024 | No Agreement | 18-03-2024 | 04-04-2024 | 2024-2025 |
| 18-03-2024 | 18-04-2024 | 02-04-2024 | 07-04-2024 | 2023-2024 |
| 18-03-2024 | 18-04-2024 | 02-04-2024 | 19-04-2024 | 2024-2025 |
| 18-03-2024 | No Agreement | 02-04-2024 | 01-04-2024 | 2023-2024 |
| 18-03-2024 | No Agreement | 02-04-2024 | 05-04-2024 | 2024-2025 |
It is clear from above example that this provision will help you only in the Month of March and not for whole year.
As per Section 7 of the MSMED Act, 2006 Enterprise under Micro and Small Enterprise can be engaged in the manufacture or production of goods or it can be engaged in Services. So businesses which are exclusively engaged in trading (whether wholesale or retail) of goods are not covered here so traders will not get benefit of this section.
Confusion prevails amongst the industry that whether traders are included here or not.
Yes traders are included under the category of Micro and Small Enterprise, but that is only for the limited purpose of Priority Sector Lending and for this limited purpose only they are allowed to do registration on Udyam Registration Portal as per Notification No. RBI/2021-22/67 dated 07/07/2021 by the Reserve Bank of India.
Criteria for Classification
While deciding criteria for classification a composite criterion of Investment and Turnover shall apply. If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category but no enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover.
All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.
Method of Calculation of investment in plant and machinery or equipment.-
(1) The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous year’s filed under the Income Tax Act, 1961.
(2) In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.
(3) The expression ―plant and machinery or equipment‖ of the enterprise, shall have the same meaning as assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings).
(4) The purchase (invoice) value of a plant and machinery or equipment, whether purchased first hand or second hand, shall be taken into account excluding Goods and Services Tax (GST), on self-disclosure basis, if the enterprise is a new one without any ITR.
(5) The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Act shall be excluded from the calculation of the amount of investment in plant and machinery.
Explanation 1 to Section 7 states that,
For the removal of doubts, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.
Not this is something interesting,
Method of Calculation of turnover
Calculation of turnover.—
(1) Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise whether micro, small or medium, for the purposes of classification.
(2) Information as regards turnover and exports turnover for an enterprise shall be linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN.
(3) The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory.
Issues to Auditor & Industry
Now real pain for business as well as Auditor starts, while it is easy to keep record of identification of Micro or Small Enterprises for the companies using ERP Package, it will be very difficult and tedious task for the remaining assesses. At the same time if you are the Assessee falling under Micro/Small enterprise, you can take benefit of this section and get registered under the Act and notify the same to all of your Clients to get timely and hassle free payment. One good thing for professional is that now CA, CS, Lawyers and other Service providers can take registration under MSMED Act and get benefit of this section and get timely payment.
This section will be beneficial to you in the Month of March only, for the rest of the period the pain will be continue. Then who is real beneficiary of the above amendment, Any Guess?? Real beneficiary will be Revenue only; because of this section practice of mere book entries without actual transaction would be in control to the some extent. issue of bogus purchase will be under control to some extent.
The processes and internal controls for identification of micro/ small enterprises vendors, timely updating of change in status of micro/ small enterprises of the vendors, capturing the date of acceptance/ deemed acceptance in the ERP for determining the due date of payment assumes significance for ensuring the compliance with this proposed provision.
Though this is beneficial to Micro and Small Enterprise, at the same time it will be nightmare for the Small Business House to maintain records of all Vendors, categorize them, and maintain bill wise payment entry and to explain the revenue that we have already complied with such provision. Imagine the situation where you did not maintained records and large number of your Creditors falls under Micro and Small Enterpirse category and there was delay in payment in the month of March, there will be huge addition to your Income with no option left to you. All the Assesseee will have to obtain declaration and certificate to this effect to avoid compliance issue in future.
Indian market was notorious in making payment on time and small and medium enterprise were unheard by Big Business Houses and PSUs. This statutory protection will help them to maintain cash flow, but at the same time will have to assure that this is not used as law for harassment by revenue. There is a fear amongst business community that this section will not boost the MSME Sector but business houses will avoid buying from Micro & Small Enterprise due to this section, well time will tell us whether this fear is real or not.
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