Analysis of Transactions with MSMEs

Analysis of Transactions with MSMEs under MSME Act, 2006, Income Tax Act, 1961 and Companies Act, 2013

MSME Act, 2006

1. Meaning of MSME:-

• Applicable to Sector: -

Manufacturing Enterprises, Wholesale, Retail Traders and Enterprises rendering Services.

• Classification of enterprise under section 7 of MSME Act, 2006:-

1. Where any supplier (Micro and Small Enterprise) supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon provided that in no case the period agreed upon shall exceed Forty-Five days from the day of acceptance or the day of deemed acceptance (Section 15).
2. Where any buyer fails to make payment of the amount to the supplier as per section 15, the buyer shall be liable to pay compound interest with monthly rests to the supplier on that amount from the date immediately following the date agreed upon or 45 days whichever is earlier, at three times of the bank rate notified by the Reserve Bank (Section 16).
3. 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 (Section 22):-

• 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; 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.

1. Where a buyer contravenes the provisions of section 22, he shall be punishable with fine which shall not be less than rupees ten thousand (Section 27 of MSME Act).
2. The amount of interest payable or paid by any buyer in accordance with section 16 of MSME Act will be disallowed in computation of Income under Income Tax Act, 1961 (Section 23 of MSME Act).

Income Tax Act, 1961

1. Interest on delayed payment of Income Tax to be disallowed under section 37 of Income Tax Act, 1961.
2. The same to be disclosed under clause 22 of Form 3CD in Tax Audit.
3. The expense to be paid to MSME will be allowed only when the payment is made to them [Section 43B (h)]. Means if the expense is booked in F.Y. 2023-24 and payment is made in F.Y. 2024-25, the same expense will be allowed as deduction in F.Y. 2023-24. Proviso to Section 43B will not be applicable to clause (h) i.e. if payment is made after end of the relevant previous year but before filing of income tax return such amount would not be allowed as deduction in the relevant previous year & would be allowed as deduction in the previous in which it is paid.

Companies Act, 2013

1. All specified companies who buy goods or avail services from micro and small enterprises and whose payments to such suppliers have exceeded the due dates prescribed under MSME Act, shall submit a half yearly return (E-form MSME Form I) to the ministry of corporate affairs (MCA) under section 405(1) stating the following:-

• The outstanding amount due and
• The reasons for delay

1. Due Date for filing MSME -1 :-

• From April to September       –  31st October
• From October to March          –  30th April

1. If any company fails to comply with an order made under sub-section (1) of section 405 or knowingly furnishes any information or statistics which is incorrect or incomplete in any material respect:-

• Company shall be punishable with fine which may extend to twenty-five thousand rupees 
• And every officer of the company who is in default, shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to three lakh rupees, or with both.