The Micro, Small, and Medium Enterprises Development Act, 2006 came into force on 16 June 2006. It consists of six chapters which are further divided into 32 sections. This Act also provides for the formation of the National Board of Micro, Small, and Medium Enterprises. The head office of the Board is in Delhi. Section 3 of the Act defines the members of the board. Registration of micro, small, and medium enterprises is replaced with the filling of the memorandum.
This article briefly describes the Impact of Delay Payment To MSME, Interest On Delayed Payments, & Provisions of the MSME Act, 2013.
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Introduction to MSME
Micro, Small, and Medium Enterprises have been accepted as an engine of economic growth and play an important role in the development of the country as it generates more employment at low capital cost. It employs nearly 11 crore people through the operation of five crore enterprises producing a heterogenous basket of about 7000 different products. The concept is important for the promotion of industrial development in rural areas, the use of traditional or inherited skills, the use of local resources, and the mobilization of resources and exportability of products. It provides maximum opportunities for employment outside the agriculture sector as well.
Provisions of MSME Act, 2013
- Section 15 states that in no case the period agreed upon between the supplier and the buyer for payment of the invoice in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.
- Section 16 states that 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 22 states that 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 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 amount 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
- 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.
- Section 23 of the MSMED Act has specifically prohibited the assessee from claiming the deduction from the income on account of interest paid to MSME.
- Section 24 of the MSMED Act provides that sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force
Income Tax Act Provisions
Interest On Delayed Payments
- As per section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest. Therefore, once the payment of interest on delayed payment to MSME is regarded as a penal in nature then the said expenditure is otherwise not allowable under section 37 of the Income Tax Act, 1961.
- As per clause 22 of the Tax Audit requires Tax Auditor to report the amount of interest inadmissible u/s 23 of the Micro, Small and Medium Enterprises Development Act, 2006.
Delayed Payments
- Section 43B of the Act provides that deduction for certain sums specified in its clauses (a) to (g) is allowable only on actual payment. However, the Proviso to this section allows deduction on accrual basis if the specified sum is paid by due date of furnishing of the return of income. The sums covered by clauses (a) to (g) may have fallen due for payment before the close the financial year and remain unpaid at the end of the year. In respect of these sums, section 43B is not concerned whether the payments had fallen due or not before the end of the financial year.
- But so far as the sum covered by the proposed clause (h) is concerned, the payment of the principal sum due to a Micro and Small Enterprise must be made within the time limit specified in section 15 of the MSME Act so as to qualify for deduction.
- The Finance Bill states that the proviso to section 43B will not apply to such payments. But it was not necessary to state so.
- It should also be noted that if sums remaining unpaid to the Micro and Small Enterprises at the end of the year for a period of less than 15 days or 45 days, as the case may be, shall not attract section 15 of the MSME Act and therefore, will not attract the provisions of clause (h) of section 43B of the Act.
Conclusion
By enacting the Micro, Small, and Medium Enterprises Development Act, 2006, the Government of India has recently fulfilled one of the needs felt and articulated by this segment for long. This Act seeks to facilitate promotion and development and enhancing competitiveness of these enterprises. Micro, Small, and Medium Enterprises have been accepted as an engine of economic growth and play an important role in the development of the country as it generates more employment at low capital cost.
