Consequences on delayed Payments to MSME Vendors effective 1st April 2024

30 Jan, 2024

Introduction.

To promote timely payments to Micro and Small enterprises, the Finance Bill, 2023, proposes to include payments made to such enterprises within the ambit of section 43B of the Act. Accordingly, new clause (h) in section 43B of the Act is inserted, that any sum payable by the assessee to a Micro or Small enterprise (exclduing Medium enterprises) beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act") shall be allowed as deduction only on actual payment.

Further, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments-means if such payments are not made by due date as specified in section 15 of the MSMED Act, then such expenses will be disallowed even through such payments are made before filing of income tax return.

This amendment will take effect from 1st April 2024 and will accordingly apply to the assessment year 2025-26 and subsequent assessment years. It means the proposed amendment will apply to payments falling due on or after 1st April, 2024 and not to the unpaid amounts brought forward from past years on 1st April, 2024.

Classification of MSME Enterprises.

The classification of Micro, Small and Medium Enterprises is defined under the MSMED Act 2006 amendment dated 01/06/2020. The Micro, Small and Medium Enterprises is based on the Investment in Plant, Machinery or Equipment values (excluding land and building) and Annual Turnover (excluding export turnover).

Size of the Enterprise	Investment and Annual Turnover
Micro	Investment is less than Rs. 1 Crore andTunrover is less than Rs.5 Crore
Small	Investment is less than Rs. 10 Crore andTunrover is less than Rs.50 Crore
Medium	Investment is less than Rs. 50 Crore andTunrover is less than Rs. 250 Crore

What are the guidelines to pay a MSME Enterprise?

With the enactment of the MSMED, Act 2006, for the goods and services supplied by the MSME units, payments have to be made by the buyers as under.

The buyer is to make payment on or before the date agreed on between him and the supplier in writing (The agreement between seller and buyer shall not exceed more than 45 days) or
In case of no agreement, before the appointed day (Within 15 days of the receipt of goods/service)

In simple term time limit for payments to MSME Vendor is as follows

Where written agreement entered with the supplier- Time period agreed or 45 days from the date of receipt of goods/service, whichever is less
Where written agreement not entered with the supplier- Within 15 days of the receipt of goods/service

What are the consequences in case of delayed payments to MSME Enterprises?

MSMED Act-As per Section 16 of the MSMED Act, where any buyer fails to make payment of the amount to the MSME Supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the MSME supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the MSME 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.
Reporting in Financials- As per Section 22 of the MSMED Act, whereever the buyer is required to get his books of account audited, there is a need to disclose additional information with regard to principal amount and the interest thereon remain unpaid to any MSME supplier as at the end of each accounting year.
Companies Act-All Companies need to disclose the unpaid interest and principal amount as mentioned above in the financial statements. Also, companies need to disclose age wise outstanding amounts payable to MSME suppliers as prescribed in Schedule-III of companies Act in their financial statements. Further companies need to file MSME Form-1, a semi-annual return with ROC within following time limit.
- Time Limit for Filing MSME Form-1
  - April to September: On or before 31st October
  - October to March: On or before 30th April
  - If the company does not have any MSME supplier or if no payment was outstanding beyond 45 days to MSME Supplier, then the company is not required to file MSME Form-1.
- Non-Compliance with filing MSME Form-1 with ROC- As per Section 405(4), the company and every company that is in default shall be liable to a penalty of Rs. 25,000 and in case of continuing failure, a further penalty of Rs. 1,000 per day after the first day during which such failure continues, subject to a maximum of Rs. 3,00,000.
Income Tax Act-
- Micro and Small Enterprises-As per Section 43B(h) read with proviso to Section 43B of Income Tax Act, such expenses will be disallowed even through such payments are made before filing of income tax return, while computing taxable income. Further, penal interest paid, or provision provided in delayed payment to MSME Vendors is disallowed under Section 37 of the Income Tax Act and Section 23 of the MSMED Act while computing taxable income.
- Medium Enterprises-penal interest paid, or provision provided for on delayed payment to MSME Vendors is disallowed under Section 37 of the Income Tax Act and Section 23 of the MSMED Act while computing taxable income.

Compliance Suggestion- Any organisation who has MSME supplier, would first need to have written agreement with regard to credit period, so that they can avail 45 days credit period while making payments to the respective MSME Suppliers. Further, organizations need to make sure payments to MSME vendor are made before due timeline (45/15 days) so that penal interest and disallowance of principal and penal interest can be avoided. Also, the hardship of filing MSME Form-1 can be avoided if MSME Vendors are paid within the timeline specified (45 days).DISCLAIMER: The views expressed are strictly of Bizprout Corporate Solutions Pvt Ltd. (Company) The contents of this article are solely for informational purpose and for the reader’s personal non-commercial use. It does not constitute professional advice or recommendation of the Company. Company and its affiliates do not accept any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon. Further, no portion of our article or newsletter should be used for any purpose(s) unless authorized in writing and we reserve a legal right for any infringement on usage of our article or newsletter without prior permission.

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