“Explore MSME compliances and implications under the Income Tax Act. Learn about the advantages of MSME registration, revised definitions, and compliance steps. Ensure timely payments to MSME units to avoid interest penalties. Stay informed about the latest changes in the MSME sector for a thriving business.”
MSME Enterprises are the backbone of the economy of a growing country like India. When these enterprises or units thrive, the nation’s economy as a whole develops and thrives. These businesses are also referred to as SSIs or small-scale industries. The Successive Governments have laid a lot of emphasis on the development of Micro, Small and Medium Enterprises of India and MSMED Act, 2006 was a step in this direction. The MSMED Act enables registrations for manufacturing units and units engaged as service providers. The Registration under this act is voluntary. However, the government has offered various sops due to which registration as MSME Unit has become attractive. Advantages include easy access to loans, preference in tenders and bidding, low electricity tariffs, etc.
The incentive by Government to MSME Units has resulted in some compliances for the units consuming goods or utilizing services of MSME Units. Certain important aspects need to be looked into especially if one is receiving goods and services from such units.
First, we need to know what exactly is a Micro, Small or Medium Enterprise. After 14 years since the MSME Development Act came into existence in 2006, a revision in MSME definition was announced in the Atmnirbhar Bharat package on 13th May, 2020. As per this announcement, the definition of Micro manufacturing and services units was increased to Rs. 1 Crore of investment and Rs. 5 Crore of turnover. The limit of small unit was increased to Rs. 10 Crore of investment and Rs 50 Crore of turnover. Similarly, the limit of medium unit was increased to Rs. 20 Crore of investment and Rs. 100 Crore of turnover. The Government of India on 01.06.2020 decided for further upward revision of the MSME Definition. For medium Enterprises, now it will be Rs. 50 Crore of investment and Rs. 250 Crore of turnover. The Government has also done away with different threshold limits for manufacturing and service units. Now the limits are same for all types of units.
Another point to be noted is that Trading Units were not covered under the MSMED Act, 2006 but from 02nd July, 2021 wholesalers and retailers are also eligible for registration as MSME Units and can now avail the benefits of MSME Act.
For the purpose of eligibility under the Act we need to consider following points :
1. Investment limit, the investment in Plant and Machinery and Equipment as per previous year Income Tax Return are to be considered.
2. In case of new enterprise, where no ITR is available, the Investment will be on self-declaration.
3. Information as regard turnover or export turnover are to be linked to Income Tax Act or GSTN.
4. Turnover Limit, Export sale is to be excluded.
5. The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration.
Apart from giving various incentives, the Government while formulating the MSMED Act, 2006 also considered that the amount receivable by such units should be realized promptly so that these units do not face any shortage of capital. With this view a provision was made in Section 15 of the Act which reads as under :-
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.
The Act makes it mandatory for the buyer to settle the account within the agreed period and if no period has been agreed upon then on the 16th day of acceptance of goods or services. In any case, this period cannot exceed 45 days from the date of acceptance.
The Act further prescribes stringent levy of Interest if amount is not paid with in 45 days. Section 16 reads as under :-
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.
As per Section 16, the buyer of goods or recipient of services shall be liable to pay compound interest with monthly rests, from the 16th day or agreed date, at the rate of 3 times the bank rate notified by RBI. As on 31.03.2023, the bank rate notified by RBI is 6.5% which means that interest @19.5% shall be payable if payment is not made with in 45 days of acceptance of goods or services.
23. Interest not to be allowed as deduction from income.—Notwithstanding anything contained in the Income-tax Act, 1961 (43 of 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.
Section 23 of MSMED Act 2006, stipulates that any interest on late payment to MSME Units shall not be allowed as deduction from the income.
Section 20 of MSMED Act 2006, mandates all States and Union Territories to constitute Micro and Small Enterprise Facilitation Council. Any dispute regarding the amount due to be paid should be referred to this Facilitation Council.
Every Company, both Private as well as Public Limited Company, has to file a Form MSME 1 with Registrar of Companies every half year giving details of delayed payments made to micro and small Units. The forms are to be filed by 31st October for the period April to September and by 30th April for the period October to March.
Section 43B of The Income Tax Act, 1961 has been amended by Finance Act, 2023 to provide that payments made to Micro or Small Units shall now be deductible in the year of payment. This amendment is applicable for FY 2023-24 onwards. After the amendment, an analysis of Amount Payable (Sundry Creditors) shall have to be done and all amounts that are due for more than 45 days, as on 31st March, expenses against such outstanding shall be disallowed or added back to the Profit as per Profit & Loss account. Interest would also be payable on such amount. The amount added back shall be allowed as deduction in the financial year in which the payment is finally made to the MSME Unit.
STEPS TO COMPLY WITH MSME ACT AND INCOME TAX ACT
1. Send an email or letter to all the suppliers, engaged in manufacture of goods and provision of services, asking them to intimate their Udhyam Registration number.
2. Update the same in the records.
3. Mention on all invoices the due date of payment. Care should be taken that the due date should not be more than 45 days from the date of receipt of goods/services.
4. Take steps to clear all outstanding within the stipulated time.
5. Carry out an analysis at year end to see that all payments due are paid before year end.
6. Calculate the amount of interest payable on delayed payments during the year and remit the same.
One needs to be extra cautious while dealing with MSME Units as any delayed payment can result in outflow in the form of high interest.
Author Bio
