Compliance for transactions done with Micro & Small Enterprises

“MSME Compliance Guide: Mastering Transactions with Micro & Small Enterprises – Key requirements and classifications for businesses.”

Compliance requirements in relation to transactions done with Micro & Small Enterprises

Revised classification applicable w.e.f. July 1, 2020 Composite Criteria (Notification No. S.O.2119(E) dated 26-06-2020):

 Calculation of Investment in Plant & Machinery:

1) Existing Enterprises – Investment value furnished in the Income Tax Return will be adopted

2) New Enterprises – On Self Declaration Basis

3) Definition of Plant & Machinery and Equipment – As per Income Tax Act

4) Purchase Value — Exclusive of GST

5) Exclusions — Cost of Pollution Control Equipment, Research & Development Equipment, Industries Safety Devices

6) Old or New Machinery — Both

Calculation of Turnover:

1) Exclusions — Export Turnover (Both goods and services)

2) Data Source — Income Tax  Returns or GST Returns

Other points:

1) Turnover & Investment of previous financial year will be considered.

2) Udyam Registration shall be updated in the portal every year.

3) Based on the Investment & Turnover the classification will be changed (Up or Down)

4) If not updated, registration will be suspended

5) Udyam Registration can also be cancelled

6) One Udyam Registration for all branches of the Enterprise.

7) One Adhar One Udaym Registration

Case Study 1: Mr.Lava & Mr.Kusa are partners in Rama & Co.  While doing Udyam Registration of Rama & Co, the Aadhaar Number of Mr.Lava is used. Later Mr. Lava started his own proprietorship business and wants to register his firm M/s. Lava & Co under Udyam Registration using his Adhar. Is it possible?

With effect from 02-07-2021 the following activities are also allowed to register in Udyam Registration Portal:

45 Wholesale and retail trade and repair of motor vehicle and motorcycles

46 Wholesale trade except of motor vehicles and motor cycles

47 Retail Trade Except of Motor Vehicles and motor cycles

Compliance requirements in relation to transactions done with Micro, Small and Mediums Enterprises under the following Acts are discussed:

A. The MSMED Act

B. The Income Tax Act

C. The Companies Act 

A) Compliances under MSMED Act: 

1) Requirement to specify unpaid amount with interest in the annual statement of accounts. (Sec 22 of MSMED Act):-

In case buyer accounts are audited under any law (Income Tax Act, Goods and Service Tax Act,  Companies Act, Society Act etc), the following information shall be furnished in the annual statement of accounts:

Micro, Small and Medium Enterprises Development Act, 2006:

Information pertaining to Micro and Small Enterprises (Medium Enterprises not included here) as required to be disclosed under the Micro, Small and Medium Enterprises  Development Act,2006 (Act) as given below has been determined to the extent such parties have been identified on the basis of information available with the enterprise and relied on by the auditors:

Case Study: Where should the above information be entered in the Tax Audit Report?

2) Liability of buyer to make payment to Micro and Small Enterprise (Medium Enterprise not included) Sec 15: Buyer of goods from Micro and Small Enterprise has to make payment within 15 days or agreed credit period which is higher but not later than 45 days. 

3) Interest on delayed payments to Micro and Small Enterprises (Medium Enterprises not included) Sec 16:

In case of delay of payment, interest has to be paid at the rate of 3 times of Bank Rate at monthly compounding. 

Date of delivery of goods/services to be taken into account and not the Invoice Date for calculating the number of days.

4) Interest paid to Micro and Small Enterprise is not allowed as Deduction from the income in the hands of the buyer Sec 23: 

Interest paid or payable by the buyer is not an allowable expenditure while calculating the income as per the Provisions of the Income Tax Act. This Section has overriding effect on all other laws.

B. Compliances under Income Tax Act:

1. Clause No.22 of Form No.3CD of Income Tax Act (44AD Audit Report):

The clause 22 is reproduced hereunder:

“22. Amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006 …………………….” 

Under this clause, amount of interest paid or payable to Micro and Small Enterprise has to be furnished. The amount furnished hereunder is a disallowance. In winman software this amount is to be entered as below:

Tax Computation – Head of Income  : Income from business or profession

Sub-Head: Add: Inadmissible expenses & income not included

Table: Other Additions (select from drop down list)

Line Item: Interest disallowance u/s23 of MSMED Act

Amount entered under the above line item is automatically taken to Form No.3CD in winman software

2. Clause No.13 of the Finance Bill 2023 proposal by amending Sec 43 of the Income Tax Act: 

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 (MSMED) Act 2006 shall be allowed as deduction only on actual payment.

(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;’; 27 of 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.’

Note: The provisions in the MSMED Act, which were referred to in the Income Tax Act’s definition, are no longer in existence. The government has issued Notification No. S.O 2119(E) dated 26-06-2020, which specifies new criteria without amending the provisions in the MSMED Act.

The reporting of disallowance information must be done in Clause 26 of Form No. 3CD in the Tax Audit Report.

3. TDS on Interest Payments to Micro and Small Enterprises: TDS u/s 194C not applicable on interest paid on delayed payments to creditors for purchase of goods. However TDS u/s 194Q is applicable.

In case interest is paid on delayed payment to creditors for availing services, it appears that TDS u/s 194C is applicable. Otherwise also TDS u/s 194C or 194H or some other provisions is applicable as it is not goods but service.

Case Study:

1) How would the proposed amendment to Section 43B impact the relevant parties?

2) Under GST Act, ITC is to be reversed when the payment to creditors are not made within 180 days.

3) The time limit for payment of dues under the erstwhile Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 was 120 days.

2) Mr. Raavan of Ongole entered into agreement with Mr. Satya of Surat for purchase of cloth at 90 days credit period and Interest is payable at the rate of 9% after the end of the credit period. Date of Tax Invoice 01-02-2023 amount is Rs.10,5,000/- including GST of 5%. The goods are received by Mr. Ravan on 10-02-2023. If Mr. Raavan does not pay amount by 31^st March 2023, then what are the disclosures to be made by Mr. Raavan and his auditor Mr. Hanuman?

C. Compliances under Companies Act:

On January 22, 2019, the Ministry of Corporate Affairs (MCA) released a notification mandating that certain companies with outstanding dues to Micro and Small Enterprises (MSMEs) must submit the details of all such dues in Form MSME-1 to the Registrar of Companies (ROC).

This form is to be filed half-yearly once only when there are over dues to MSMEs.

Think Points:

(A) Whether the compliances are applicable in the following situations:

1) Buyer is a Micro/Small Enterprise?

2) Seller is a Micro enterprise but not obtained Udyam Registration.

3) Seller obtained Udyam Registration but not forwarded or intimated his Udyam Registration Certificate to the Buyer.

B) Whether classification of an enterprise available publicly? (Udyam Registration Website or Income Tax Website or any other website)

Other Points to be noted:

In case of following transactions there are no special compliances under MSMED Act/Income Tax Act as on date:

1) Sale to MSMEs

2) Loans taken or advanced to MSMEs