All about MSME disclosure requirements in Financial Statements

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 (the Act) and notified the same vide Gazette Notification dated June 16, 2006. With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the services sector in the definition of Micro, Small & Medium enterprises, apart from extending the scope to medium enterprises.

Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 strengthens provisions relating to delayed payments to MSME’s by specifying a maximum credit period and higher penal interest if delayed beyond that period. If there is a delay in payment, companies will have to mention the reason for such delay in the statement of accounts. In this regards, Let us understand the current provisions relating to delayed payments to the MSME suppliers.

I.Statutory provisions

1.Some important definitions

Section 2(b) “appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

Explanation.—For the purposes of this clause,—

(i) “the day of acceptance” means,—

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

(b) 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;

(ii) “the day of deemed acceptance” means, 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;

 2(d) “buyer” means whoever buys any goods or receives any services from a supplier for consideration;

2(e) “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;

2(n) “supplier” means a micro or small enterprise, which has filed a memorandum with the authority referred to in clause (a) of sub-section (1) of section 8, and includes, –

– the National Small Industries Corporation, being a company, registered under the Companies Act, 1956;

– the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956;

– any company, cooperative society, society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises;

 2.MSME classification 

Section 7 of Act provides for the following classification in respect of industries engaged in production or manufacture of goods or rendering service enterprises:

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification  No. S.O.1722 (E) dated October 5, 2006.

 In terms of Ministry of MSME, GoI, Office Memorandum (OM) F. No. 12(4)/2017-SME dated March 8, 2017, it is clarified that for ascertaining the investment in plant and machinery for classification of an enterprise as Micro, Small and Medium, the following documents could be relied upon:

(i) A copy of the invoice of the purchase of plant and machinery; or

(ii) Gross block for investment in plant and machinery as shown in the audited accounts; or

(iii) A certificate issued by a Chartered Accountant regarding purchase price of plant and machinery.

Further, the Ministry has clarified that for the investment in plant and machinery for the purpose of classification of an enterprise as Micro, Small or Medium, the purchase value of the plant and machinery is to be reckoned and not the book value (purchase value minus depreciation)

 3.Delayed payment provisions

 Section 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 16. Date from which and rate at which interest is payable.-

Where any buyer fails to make payment of the amount to the supplier, as required under section 15, 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.

Section 17.Recovery of amount of due

 For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under section 16.

Section 18(1). Reference to Micro and Small Enterprises Facilitation Council

Notwithstanding anything contained in any other law for time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council

4. MSME disclosure requirements in Annual statement of accounts

 Section 22. Requirement to specify unpaid amount with interest in the annual statement of accounts.-

Where any buyer is required to get his annual accounts audited under any law for the time being in force, such 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 amounts 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 dis allowance as a deductible expenditure under section 23.

5. Dis-allowance under Income Tax Act, 1961

 Section 23. Interest not to be allowed as deduction from income .-

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.

6. MSMED Act, 2006 is Overriding effect

 Section 24. Overriding effect.-

The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

7. Half yearly reporting requirements under Companies Act, 2013

 MCA vide notification “Specified Companies (Furnishing of Information about payment to micro and small enterprise suppliers) Order, 2019”  dated 22nd January 2019, mandates that, all specified companies who buy goods or avail services from micro and small enterprises and whose payments to such suppliers have exceeded 45 days shall submit a half yearly return(eform MSME Form I) to the ministry of corporate affairs (MCA) stating the following:-

1. the outstanding amount due and
2. the reasons for delay;

II.Summary of above provisions

1.The buyer shall make payment to the supplier within time stipulated from the date of delivery of goods or receipt of services, if no objections are made with 15 days from such a date.  In the event of any objections being made, then the number of days gets extended by the number of days taken to remove the objection.

2.The maximum stipulated time allowed under the act is 45 days only, though enterprises has 60/90/120 days etc., credit periods agreed with suppliers.

3.Any delay beyond such days would result in a levy of interest at the rates stated in the Act. (Monthly Compound interest at 3 times of the bank rate notified by the RBI)

4.The definition clearly states that, the supplier includes “micro and small” enterprises only. Hence, the provisions on interest payment and disclosure requirements do not apply to the “medium” enterprises.

5.For companies in addition to the disclosures mentioned in the schedule III of the Companies Act, 2013, the following disclosures to be given in the notes to the financial statements of company.

6.The Interest paid on delayed payment under section 16 of the act, to be disallowed while calculating income of the assessee and the same to be reported in clause 22 of part B in Form 3CD of Tax audit report.

7.The Act has overriding effect over the other laws.

Disclaimer:

All Readers are advised to refer relevant provision of law before applying or accepting any of the point mentioned above or not. Author accepts no responsibility whatsoever and will not be liable for any losses, claims or damages which may arise because of the contents of this write up.

The author is Chartered Accountant in Practice and reached at [email protected]