Introduction: Micro, Small, and Medium Enterprises (MSMEs) are the backbone of the Indian economy, contributing significantly to the Gross Value Added (GVA) and exports. Governed by the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006, these enterprises play a crucial role in promoting economic growth and employment. This act aims to facilitate the promotion, development, and competitiveness of MSMEs. By analyzing the share of MSME manufacturing GVA in all India Manufacturing GVA and their percentage share of exports, it becomes evident how integral these enterprises are to the country’s economic fabric. This article will delve into the importance of MSMEs, highlighting their contributions and the legislative measures in place to support their development and ensure fair practices in transactions.
Importance of MSME:
|
Year |
Share of MSME manufacturing GVA in all India Manufacturing GVA | % share of Export of MSME related products in All India Export | ||
| 2019-20 | 40.67 | % | 49.77 | % |
| 2020-21 | 40.30 | % | 49.35 | % |
| 2021-22 | 40.83 | % | 45.03 | % |
MSME governs by:
The Micro Small and Medium Enterprises Development Act 2006 – Known as MSMED
Law made with objective “to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises.
Important definitions under MSMED
1. Enterprise means an undertaking engaged in the
> Manufacture or production of goods 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.
2. Appointed day means the day following immediately after the expiry of the period of fifteen days from
> Day of acceptance
√ Day of the actual delivery of goods or the rendering of services;
√ 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
> Day of deemed acceptance of any goods or any services by a buyer from a supplier
Where no 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 of the actual delivery of goods or the rendering of services
Examples of appointed day
> Rutvik has purchased and received goods from an MSE Supplier on March 1, 2024. – day of acceptance shall be 1st March 2024 and appointed day shall be 15 days from the date of receipt of goods i.e. March 15, 2024.
> Suppose, after verification of goods, he has raised a dispute with the MSE Supplier on March 5, 2024 (i.e. within 15 days), stating that certain goods are defective. The dispute gets resolved between the parties on March 30, 2024.
Since dispute has been raised within 15 days from the date of receipt of goods, the payment now needs to be made within 15 days from the date on which the dispute is resolved. Here dispute resolves on 30th march 2024, so, to claim the deduction, the payment needs to be made to the MSE supplier by April 13, 2024
> Suppose, after verification of goods, he has raised a dispute with the MSE Supplier on March 20, 2024 (i.e. after 15 days), stating that certain goods are defective. The dispute gets resolved between the parties on March 30, 2024.
Due date for payment was 15 days from the date of receipt of goods i.e. March 15, 2024 – because dispute is not raised within specified time limit.
3. Criteria for MSME Category
|
Enterprise type |
Investment in Plant and machinery limit | Turnover Limit |
| Micro | Upto 1 Cr | Upto 5 Cr |
| Small | 1 to 10 Cr | 5 to 50 Cr |
Both the criteria i.e value of investment and turnover are to be consider cumulatively for classification purpose.
If any enterprise crosses any upper threshold of any one criteria, then it will be upgraded to next level.
However, such enterprise will be demoted only when both the criteria applicable for its category are not fulfilled.
Section 15 of MSMED
15. Liability of buyer to make payment.
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 forty-five days from the day of acceptance or the day of deemed acceptance.
Section 43B of the Income Tax Act, 1961
There are certain payments which allowed only on payment basis like PF contribution of employer share, GST, Leave encashment, Bonus etc.
This disallowance is added in this section as clause h.
1. Applies to whom:
> Disallowance applies to buyer of goods/ services
> All persons i.e. Individual, proprietary firm, partnership, LLP, company, Trust
> Having Income from Business or professional
> Not opting for presumptive taxation
2. Not applies:
> Disallowance not applies to seller of goods/ services
> When seller is not registered under MSME
> When seller is registered as trader under MSME
> Buyer having Income salary, house property, capital gain, other sources i.e. other than business head income
> Buyer opting for presumptive taxation
3. Applies from when
Applicable for the transactions executed in Financial Year 2023-24 and onwards.
No disallowance in opening balances of creditors as on 31.3.2023, continued to remain outstanding as on 31.3.2024 i.e. Accounts payable without any new bills during FY 23-24.
4. For disallowance, the seller of goods/ services shall be from which category of the MSMED:
Only two categories i.e. Registered Micro and Small
If seller falls under medium category, disallowance do not apply.
In case seller has registered in the mid-year, the transaction after registration shall be disallowance.
5. In case the payment is made beyond the time permitted under MSMED Act but within the same financial year
There will not be any disallowance since the payment is made in same financial year in which expense is incurred and not outstanding as at the end of the year.
The provisions of section 43B(h) applies to those amounts which have remained outstanding at the end of the financial year.
6. In case the payment is made beyond the time permitted under MSMED Act after the end of financial year but before due date of furnishing of return of income
Unless an amount is paid within the dates specified in section 15 of MSMED Act, amount should not be allowed as deduction in tax return of FY 2023- 24.
In this case, payment is made in FY 2024 -25, the deduction should be allowed in FY 2024-25.
7. Whether this disallowance applies to retention money? Yes. This disallowance applies to all unpaid amounts in any form.
8. Amount of disallowance – Including GST or excluding GST Audit fee bill is 50,000 plus GST 9,000 = total payable 59,000 Disallowance is 59,000
9. If the buyer has issued a cheque but the MSE Supplier has not encashed it before the appointed date –
If cheque cleared after appointed date:
The buyer has made the payment within the time limit specified.
He should obtain receipt from the seller.
Then even if seller has deposited cheque late in his bank account, then no disallowance to buyer.
If cheque dishonoured or rejected:
Amount will be disallowed.
10. Application to provisions made:
Client has made provision for audit fees of Rs. 1,00,000/- during FY 2023 – 24.
Audit completed on 31.08.2024 – i.e. date of completion of service.
Payment is made in FY 24-25 – before appointed date – Not disallowance
Payment is made in FY 24-25 – After appointed date – The amount shall be subject to disallowance in FY 23-24
ICAI Guidance is awaiting.
11. Disallowance application to capital expenditure – Not applied since only depreciation is claimed as expenses.
12. Complex relationship – Both debtor and creditor relationship between buyer and an MSME supplier – Use FIFO basis to determine the net liability which should be paid before appointed date.
13. To Do for buyer
> Mention your MSME registration number on your invoices. > Obtain MSME registration numbers of vendors.
> Check the status of all the MSME Enterprises as on date, whether it is a micro, small or medium enterprise irrespective of its status mentioned in the MSME vendor certificate. – Link https://udyamregistration.gov.in/
> Once the status of the supplier is determined as a Micro or Small enterprise, identify outstanding dues as well as status of delivery of goods / rendering of services and ensure payment is made before year end.
> At year end, outstanding MSE creditors need to be identified from whom the goods / services were received in the last 15 Days / 45 Days to ensure that their payment shall be made within specified time in next year.
> Proper drafting in agreement with MSE covering factors such as Payment terms, notification of delivery of goods/ services would play crucial role in determining due date under MSMED Act and consequent impact of provisions on disallowance.
Examples
|
Delivery |
Due date of payment as per agreement |
Dispute raised on |
Dispute resolved on |
Appointed date as per MSMED |
Payment date |
Remarks |
| 25/03/24 | 05/04/24 | NIL | NIL | 05/04/24 | 05/04/24 | No disallowance. Amount is paid within agreed date i.e. 05.04.2024 |
| 25/03/24 | 05/04/24 | NIL | NIL | 05/04/24 | 06/04/24 | Disallowed in FY 23-24.
Amount is after agreed date. Allow deduction in FY 24-25 |
| 25/03/24 | 05/06/24 | NIL | NIL | 08/05/24 | 04/06/24 | Disallowed in FY 23-24.
Payment term exceeds time limit of 45 days. Maximum time is 45 days. Payment made 45 days. Allow deduction in FY 24-25 |
| 25/03/24 | No agreement | NIL | NIL | 08/04/24 | 09/04/24 | Disallowed in FY 23-24.
No payment terms. Maximum time is 15 days. Payment made after 15 days. Allow deduction in FY 24-25 |
| 25/03/24 | No agreement | 30/03/24 | 30/04/24 | 14/05/24 | 14/05/24 | Objection raised within 15 days.
Due date shall be 15 days from resolution Since amount paid within due date, No disallowance. |
| 25/03/24 | No agreement | 10/04/24 | 30/04/24 | 08/04/24 | 09/04/24 | Objection raised after 15 days.
Due date shall be 15 days from acceptance of goods. Since amount paid after due date, Disallowance in 23- |
Conclusion: The significance of MSMEs in the Indian economy cannot be overstated, with their substantial contributions to manufacturing GVA and exports underscoring their role as a critical driver of economic development. The MSMED Act of 2006, along with various criteria and provisions outlined for MSMEs, including the appointment day and the criteria for MSME categorization, has laid a solid foundation for the promotion and development of these enterprises. Additionally, the integration of the Income Tax Act, 1961, specifically Section 43B, further ensures the timely and fair treatment of MSME transactions, highlighting the government’s commitment to supporting this sector. Through legislative measures and continued support, MSMEs are poised to maintain their vital role in India’s economic landscape, promoting innovation, employment, and sustainable development.
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