Introduction

With the introduction of the Insolvency and Bankruptcy Code and strict measures by the Reserve Bank of India (RBI) for taking stringent action against Non- Performing Asset (NPA) accounts, MSMEs have been facing two-fold pressure:

i) Delayed payments;and

ii) Threat of turning into an NPA.

The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”)provides for the provisions to deal with the problem of delayed payment, whereby any buyer who fails to make payment to MSME supplier, as per agreed terms or a maximum of 45 days, would be liable to pay interest to MSME supplier. Further, as mandated by the MSMED Act, all the states/union territories in India have constituted Micro and Small Enterprise Facilitation Council for the settlement of disputes in relation to the delayed payments. The Government of India hadalso launched SAMADHAAN portal (samadhaan.msme.gov.in) on October 30, 2017 to enable micro & small enterprises across the country to directly register their cases relating to delayed payments online on the portal.

The Ministry of Micro, Small and Medium Enterprises (“MMSME”) and the Ministry of Corporate Affairs(“MCA”) by issuing notification directed the specified companies to file return of amount due to micro and small enterprises.

The details of such notifications are given below-

Details of Notification Particulars
Notification No S.O. 5622(E) dated November 2, 2018 issued by MMSME MMSME directed all the companies, who get supplies of goods or services from micro and small enterprise suppliers and the payment to those suppliers exceeds 45 days, shall submit half yearly return to the MCA stating therein the amount of payments due to micro and small enterprises and the reason for delay
Notification dated January 22, 2019 issued by the MCA MCA directed all the specified companies to file details of outstanding dues to micro and small enterprises in MSME Form I. It requires filing of initial and half yearly return.

We have listed below someof frequently asked questions pertaining to delayed payments to MSMEs and filing of form MSME I and have attempted to answer these questions to the best of our knowledge.

What is micro, small and medium enterprise?

Section 7 of MSMED Act classifies the enterprises into micro, small and medium enterprises. In case of manufacturing sector, classification has been done on the basis of investment in plant and machinery and in case of service sector, classification has been done on the basis of investment in equipment.

Manufacturing Sector Service Sector
Investment in plant and machinery Investment in equipment
Micro Does not exceed Rs. 25 lakhs. Does not exceed Rs. 10 lakhs.
Small More than Rs. 25 lakhs but does not exceed Rs. 5 crores. More than Rs. 10 lakhs but does not exceed Rs. 2 crores.
Medium More than Rs. 5 crores but does not exceed Rs. 10 crores. More than Rs. 2 crores but does not exceed Rs. 5 crores.

The Finance Minister while delivering the economic package on May 13, 2020, announced the revised definition of MSME.

As per the revised definition –

– Investment limits have been revised upwards;

– There will be no distinction between manufacturing and service sector;

– In addition to investment criteria, turnover criteria has also been added.

Revised MSME Classification
Composite Criteria: Investment and Annual Turnover
Classification Micro Small Medium
Manufacturing & Services

Investment less than Rs. 1 crore

and

Turnover less than Rs. 5 crore.

Investment less than Rs. 10 crore

and

Turnover less than Rs.50 crore.

Investment less than Rs. 20 crore

and

Turnover less than Rs.100 crore.

 

Which companies are required to file form MSME I?

‘Specified Companies’ which satisfies the following conditions are required to file form MSME I:

1. Companies which have purchased goods or avail services from micro and small enterprises; and

2. whose payment to micro and small enterprises, exceeds 45 days from the date of acceptance or the date of deemed acceptance.

Note: – Only delayed payment made to micro and small enterprises are to be reported. Reporting of delayed payment to medium enterprises are not covered under the notification.

What is the reporting requirement?

Under the MCA order, there is a requirement to file initial return and half yearly return. Initial return was one time return required to be filed within 30 days from deployment of form MSME I.

The half yearly return is to be filed as follows-

For the half year Due date
April to September October 31
October to March April 30
What is the date of acceptance or deemed acceptance?

Day of acceptance is defined under explanation to Section 2(b) of the MSMED Act to mean as:

(a) the day of the actual delivery of goods or the rendering of services;

(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the MSME supplier.

Further, the day of deemed acceptance means where no objection is made in writing by the buyer regarding acceptance of goods or services within 15 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.

What is the maximum credit period allowed to the buyer?

Section 15 of the MSMED Act which talks about the liability of the buyer, provides that the period agreed between the parties shall not exceed 45 days from the day of acceptance or deemed acceptance of goods or services.

The maximum credit period allowed is tabled below-

S.no. Particulars Maximum credit period allowed
1. Where there is no agreement between buyer and MSME supplier. Payment of amount shall be made before appointed day.

(Appointed day is the day following immediately after expiry of 15 days from the day of acceptance or deemed acceptance of goods or services.)

2. Where the credit period agreed upon in writing is 45 days or less. Payment shall be made on or before the date agreed in writing.
3. Where the credit period agreed upon in writing is more than 45 days Payment shall be made within 45 days from the date of acceptance or deemed date of acceptance.
Whether buyer is obligated to pay interest on delayed payment to MSME supplier?

Yes, section 16 of the MSMED Act provides that in case buyer fails to make payment of amount to the MSME supplier, then the buyer shall be liable to pay compound interest with monthly rest to such supplier. This provision has an overriding effect on the agreement, if any, between the buyer and the MSME supplier.

Further, Section 17 of MSMED Act provides that for goods supplied or services rendered bythe MSME supplier, the buyer shall be liable to pay amount with interest thereon as provided under Section 16.

What is rate of interest on delayed payment and the date from which it is payable?

Section 16 of the MSMED Act provides that the buyer shall be liable to pay compound interest with monthly rest to the MSME supplier at three times the bank rate notified by the RBI.

Further, it also provides the date from which interest is payable which is as follows –

S.no. Particulars Date from which interest is payable
1. Where there is no agreement between buyer and MSME supplier.

From the appointed day

(Appointed day is day following immediately after expiry of 15 days from the day of acceptance or deemed acceptance of goods or services).

2 Where the credit period agreed upon in writing is 45 days or less. From the next date after expiry of the date as agreed upon in writing.
3. Where the credit period agreed upon in writing is more than 45 days. 45 days from the date of acceptance or deemed date of acceptance.
Whether interest paid is allowed as deduction under Income Tax Act, 1961? As per Section 23 of the MSMED Act, interest paid or payable by buyer to the MSME supplier shall not be allowed as deduction under the provisions of Income Tax Act, 1961.
Whether interest amount is also required to be reported in form MSME I? As per our view, outstanding amount includes principal as well as the interest  and accordingly required to be reported in form MSME I.
Whether payment made beyond 45 days but not outstanding as oncut-off dateis also required to be reported? As per our view, payment to micro and small enterprise though not outstanding on the cut-off date but made beyond 45 days is required to be reported in form MSME I.
What are the disclosure requirement in the annual accounts?

As per Section 22 of MSMED Act, where the buyer is required to get his annual accounts audited, he shall furnish the following information in the annual statement of accounts –

i) Principal amount and interest due thereon (to be shown separately) remaining unpaid to any supplier as at end of accounting year;

ii) Amount of interest paid by buyer under MSMED Act along with the amount of payment made to supplier beyond the appointed day during each accounting year;

iii) Amount of interest due and payable for the period of delay in making payment (which have been paid but beyond appointed day) but without adding interest specified under the Act;

iv) Amount of interest accrued and remaining unpaid at the end of each accounting year; and

v) Amount of further interest remaining due and payable even in the succeeding years, until such dates when interest dues are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure.

What is the penalty for not making requisite disclosure in financial statements? Section 27 of MSMED Act specifies penalty in case buyer fails to disclose the unpaid amount with the interest in the financial statement of the company. It provides that the buyer shall be punishable with a fine which shall not be less than Rs.10,000/-.
What is the penalty for not filing form MSME I or furnishing wrong or incomplete information in form?

Penalty for not filing form MSME I or knowingly furnishing the wrong information is provided under Section 405(4) of the Companies Act, 2013 (“Act”).

Section 405 of the Act gives the power to the Central Government wherein it can directthe companies generally or any class of company to furnish information with regard to their constitution or working. Using this power, MCA issued the order requiring specified company to file details of all outstanding dues to micro or small enterprises suppliers in MSME Form I.

As per Section 405(4) of the Act, if any company fails to comply with the order or knowingly furnishes any information or statistics which is incorrect or incomplete in any material respect, the penalty shall be as follows-

– Company shall be punishable with fine up to Rs.25,000/-; and

– Every officer in default, shall be punishable with imprisonment for a term not exceeding 6 months or with a fine not less than Rs.25,000/- but which may extend toRs.3,00,000/- or with both.

Whether form MSME I is covered under Company Fresh Start Scheme-2020 (CFSS-2020)?

The MCA vide its circular dated March 30, 2020 introduced CFSS -2020. The CFSS-2020 grants waiver of additional fees in case of late filing of form/document and provides immunity from prosecution on account of delayed filing. As per the aforesaid circular, e- form SH-7 for the purpose of increase in authorized share capital and all charge related forms have been kept outside the purview of CFSS-2020.

In continuation of abovementioned circular,MCA issued the list of 76 forms which are covered under the CFSS-2020. However, the said list do not include MSME form I. Accordingly, there is no clarity as to whether MSME form I will be covered by CFSS-2020 or not. Though no fees is applicable on filing of form MSME I, but the immunity from prosecution on account of delayed filing will only be available if the form is covered under CFSS -2020. Accordingly, the MCA should come out with a clarification on the same.

What is the dispute resolution mechanism available in regard to delayed payment? As mandated by Section 20 of the MSMED Act, all the states/union territories in India have constituted Micro and Small Enterprise Facilitation Council. Any dispute with regard to amount due can be referred to said Facilitation Council.

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Location: Delhi, New Delhi, IN
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7 Comments

  1. Pradeep Gupta says:

    What are the exception clause for not paying within 45 Days? Whether COVID-19 will be considered as an exception case since there will shortfall in collection.

  2. sumit modi says:

    we are registered under msme. we supplied material to JVVNL and the payment made by them very late. we filed case for interest claim to MSME council. i want to know that 3 times compound interest is payable till interest payment received by us or upto principal amount received.

  3. M H Shah says:

    i have come acroos many cases where the Govrnment undertakings do not lift materials for months to gather after expiry of delivery period mentined in contract ,thus Msme suffer a lot, as on one hand they are asked to accept penalty clause and on other hand goods are not lifted
    is there any law protecting MSME for this situations?

  4. hemant says:

    is interest liability triggered in case of purchase of capital goods (machinery) where pending part payment is to be made only after successful commissioning of the machine which would be later than 45 days?

    1. Dakshesh says:

      In my personal opinion if terms of engagement are defined between dealing parties or contract is made in any form mentioning payment terms so agreed by both parties then interest on part payment falling after 45 days should not attract any late payment clause under the Act.

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