Micro, Small and Medium Enterprises Development Act, 2006-“Implications for Annual Financial Statements”

The Micro, Small and Medium Enterprises Development Act, 2006 (“the Act”) has been notified and has received the assent of the President on 16th June 2006. Subsequently, notifications defining the authorities under the Act and for classifying various categories i.e. micro, small or medium have been made on September 29 and 30, 2006 respectively.

One of the primary objective of the Act is to make provisions for ensuring timely and smooth flow of credit to SME’s and minimize sickness amongst them.

The Act strengthens provisions relating to delayed payments to SME’s by specifying a maximum credit period and higher penal interest if delayed beyond that period. Further, Section 32 of the Act repeals the provisions of “Interest on Delayed payments to Small Scale and Ancillary Industrial Undertakings Act, 1993” that was applicable to some of the enterprises covered under this Act.

The Act requires certain additional information to be furnished in the Annual Accounts of enterprises, which are subjected to an audit under any law for the time being in force and who are buyers of goods or services from micro or small enterprises.

It is important to note that such disclosures are in addition to those required to be made under Schedule VI in respect of the total outstanding to small scale industrial undertaking and the names of such undertakings together with interest outstanding for more than 30 days.

Central Government has notified October 2, 2006, as the date on which the provisions of this Act come into force. Consequently, the disclosures required to be made under this Act, are to be made in respect of Annual Financial Statements for all periods ending on or after October 2, 2006.

It is important to evaluate whether requirements of Act have an impact on the true and fair view of the financial statements when considered as a whole.

The following paragraphs briefly describe the applicable provisions and the disclosure requirements to be made in Annual Financial Statements, with an intention to disseminate the requirements to applicable companies and outline our responsibilities. The views expressed on the reporting requirements are those of the firm.

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;

From above the definition of ‘supplier’, it appears that “medium” enterprise is not covered and it can be construed that the provisions on interest payment/provision and disclosure requirements under this Act do not apply to “medium” enterprises.

Various State Governments have notified that ‘Authority’ for the purposes of Section 8(1)(a) to be the General Manager of District Industries Centres in their States, with whom the micro and small suppliers, as defined above, need to file their particulars for being covered under the provisions of this Act.

Organizations established by State Governments, such as Small Industries Associations, Coir Industrial Cooperative Societies, small scale industrial cooperative societies etc., i.e. establishments that assist in selling of products of its members, would also fall within the definition of a ‘supplier’ under clause (iii) above.

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.

In this regard, “Appointed Day” has been defined to mean as “the day following immediately after the expiry of the period of fifteen days from the day of acceptance or deemed acceptance of goods or services by a buyer.”

Day of acceptance refers to day of the actual delivery of goods or the rendering of services, in case no objections are received within 15 days thereof. If objections are made, then the date of removal of the objections would be considered as the day of acceptance. Further, if no objections are made within the 15 days, the date of delivery or rendering of services shall be “deemed day of acceptance”

From the above, a maximum period that is allowed under the Act for payment to be made is 45 days 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. Any delay beyond such days would result in a levy of interest at the rates stated in the Act.

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.

The charging provisions of the Act are contained in this Section. The applicable bank rate as notified by RBI on the appointed day should be applied for computing the interest payment / provision.

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 disallowance as a deductible expenditure under section 23.

Please see paragraph below on ‘Disclosures Required under Act’ for a brief elaboration on above.

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.

These provisions are similar to those contained in the repealed “Interest on Delayed payments to Small Scale and Ancillary Industrial Undertakings Act, 1993″.

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.

From the above, it seems that the disclosure requirements of this Act’ are in addition to disclosure required to be made under Schedule VI of the Companies Act, 1956 and those prescribed by any other authorities such as SEBI, IRDA etc.
Section 7 of Act provides for the following classification in respect of industries engaged in production or manufacture of goods or rendering service enterprises:

Class Manufacturing Enterprises – Investment in Plant & Machinery Services Enterprises – Investment in Equipment
Micro Less than Rs. 25 lacs Less than Rs. 10 lacs
Small Greater than Rs. 25 lacs but upto Rs. 5 Cr. Greater than Rs. 10 lacs but upto Rs. 2 Cr
Medium Greater than Rs. 5 Cr. but upto 10 Cr. Greater than Rs. 2 Cr. but upto Rs. 5 Cr.

 The above investment excludes investment in certain plant and machinery or equipment such as pollution control, research and development, industrial safety devices, gas producer plants, extra transformers, etc., and certain other items of expenditure such as installation costs, technical know-how fees and bank charges and services charges paid to National or S
tate Small Industries Corporation etc., (Notification no. 1722(E) dated 5-10-2006) .

Sections 15 & 16 require that a buyer shall make payment within 45 days (or less, if agreed upon) from the date of acceptance of supply of goods or of services rendered by a supplier. If payment is not made within this stipulated period, interest (compounded at monthly rests) at three times the bank rate notified by RBI shall have to be paid / provided for.

The disclosure requirements in Section 22 requires any buyer, whose annual accounts audited under any law for the time being in force, to furnish the following additional information in his annual statement of accounts:

tem No. Disclosures required under the Micro, Small & Medium Development Act, 2006
I Delayed payments due as at the end of each accounting year on account of Principal – Rs. XXX and Interest due thereon – Rs. XXX
II Total interest paid on all delayed payments during the year under the provisions of the Act – Rs. XXX
III Interest due on principal amounts paid beyond the due date during the year but without the interest amounts under this Act – Rs, XXX
IV Interest accrued but not due– Rs, XXX (Represents interest accrued as at the end of the year but not due as interest is computed at monthly rests from the due date)
V Total Interest Due but not paid – Rs. XXX (Represents all interest amounts remaining due together with that from prior year(s) until such date when the interest was actually paid to the small enterprises. Mainly to ascertain the amount of interest disallowable for income tax purposes)

Under Section 23 of the Act, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall be disallowed as a deduction while computing the taxable income under the Income-tax Act, 1961

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  1. Sumit says:

    Kindly advice;
    If a sub vendor of a contractor during awarding of a contract / agreement was not enlisted with MSME and after the end of the terms of the contract/ agreement; the same sub vendor enlisted as MSME and subsequently intimated his contractor that now the company ( Sub- vendor) is enlisted member of MSME.
    However, the contractor has not cleared all the dues of sub- vendor because of service deficiency of the contract tenure.
    Since after the end of contract sub-vendor is enlisted with MSME then what would be the consequences and liability of contractor?
    • That sub-vendor would be treated as MSME?
    • Contractor is liable to treat the sub vendor as MSME although during the contract period sub vendor was not enlisted with MSME.
    Please advise it is urgent to know.
    Warm Regards,


    Dear Tax experts,

    Please clarify “weather the interest amount received by the SME supplier will suffer tax again?”.

    If yes how?
    If no please quote corresponding section or provision of I.T Act 1961.

  3. santosh agrawal says:

    i had supplied materiail worth rs 8 lacs to a unit of state govt. undertaking in 1992 on 30 days payment term. payment was not recived even after their repeated assurances.later on we were informed that co.gone in liqidation and submit claim to the liquidator.we filed our claim with interest to liquidator in 2007.after that only last week we were informed by the liquidator that you were to file claim upto 1.3.06 and for this delay get relief from high court. please advise legal status of my claim and action to be taken.thanks

  4. Nilesh udernani says:

    Dear Sir,
    Please help me clear my doubt!
    Is it mandatory or discretionary to file the Memorandum, to avail the benefits of the Act. Also, after a contract has been executed, can the Small Industry avail benefits of this Act, without filing the memorandum before such execution of contract?
    I Hope i am making my self clear, basically is the date of filing memorandum of any importance?

  5. rakshak vohra says:

    sir … if a buyer receives defective material & conveys & conveys to the MSME supplier after a month. The payment of the bill is stopped till the material is replaced. The payment is then made after the receipt of the defective material. Will that period count for the interest on the payments made ? Plz help .. Thanks

  6. GOPAL GAUD says:

    Dear All Genius Sir

    Kindly guide us wae have supplied material to large scale industries (Our Buyer) and we had received the cheque against the same but buyer dishonor the cheque . can run case under 138 as well as MSMED Act2006 as per section 16 for recovery of payment, sir plase guide at an earlist

    waiting for your reply

  7. Ramesh Mishra says:

    Kinkly specify the law of limitation under the MSME Act under the civil & MED
    Division which mostly labours oriented works.

    ThanX And regards.

    Ramesh Mishra

  8. prasanna darade says:

    Services were provided in 2010 and the supplier was registered in the year 2010 under the micro industries act, whether the claim is maintainable with the Council
    thanking you,
    Prasanna Darade

  9. T. C. Bhandari says:

    Once the principal amount is paid, the council presumes that further interest is stopped on the accrued interest though not paid. Whether we can claim the further interest on the accrued interest till it is actually paid. please clarify soon on our e mail

  10. T. C. Bhandari says:

    Interest on delayed payments under the MSMED ACT, 2006. ONCE PRINCIPAL AMOUNT IS PAID AND INTEREST IS NOT PAID, Whether interest is applicable on the accrued interest as per msmed act. The MSME Facilatation Council is not considering further interest on accrued interest and award is given considering the interest upto the date of payment of principal amt. is paid though the accrued interest is not paid and no further interest is awarded thoug the interest amount is nod paid. please advice the remedy.

  11. Badrinath Srinivasan says:

    To the various queries as to the applicability of the Limitation Act to MSMED proceedings, the answer is yes. Pl. see para 40 of the decision of the AP High Court in Cable Corporation of India v AP micro & Small Enterprises Facilitation Council (07.12.2012)

  12. Saurabh Dugar says:

    Will a consultant be required to give an undertaking under the MSMED Act, 2006 to a company to whom they have provided consultancy service ?

  13. Mohd. Quasim Ali says:

    Dear Sirs,
    Kindly specify whether The Law Of Limitation is applicable while claiming interest on delayed payments to MSME Units under MSME Development Act 2006, if the principle amount paid long back and the SSI Units received Principle amount without any protest.
    Thanking You,

  14. vasu says:

    Please clarify whether the limitation act is applicable to the interest on delayed payments act 1993 and MSMED act 2006. and also clarify whether the MSMED act 2006 is retrospective or prospective in operation. pl clarify the above with citations if any.

    thanking you,


  15. Anuj says:

    i have got the letter from the company who wants to know my company is mico, small or medium, they want the confirmation by post…

    what to do if i do not send this letter they will assume i am not any company..

    what is this conformation letter, i dont know…

    pls. guide..

    Anuj kumar

  16. CA bijal gandhi says:

    Please clarify the following.
    If a person is holding more than 50% share holding in two or more enterprise and one of the Enterprise applying for Small scale unit.Will the investments in other enterprise be considered for the purpose of calculating the total investment for applicant enterprise?
    thanking you,

  17. Ahmed K I says:

    Kindly specify whether The Law Of Limitation is applicable while claiming interest as per the Interest on delayed payments to MSME Units under Interest Act 1993 as well as MSMED Act 2006.
    Your response is kindly requested.

    Kind Regards

    Ahmed K I

  18. APURVA says:

    Dear Sirs,
    Kindly specify whether The Law Of Limitation is applicable while claiming interest on delayed payments to MSME Units under MSME Development Act 2006.
    Thanking You,
    Apurva Patel

  19. Anil Bajaj says:

    Dear Sir,
    Ours is an service based firm and We seek your guidance regarding registration Authority of M.S.M.E.D Act 2006.

    Kindly update the document process involved.

    Thanx and Regards,

    Anil Bajaj.

  20. Anonymous says:

    Kindly specify the interest amount to be disclosed in the section 22(iii), which is the interest other than the interest specified under the Act.

    Thanking You

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