Comply with Laws helping MSME's

MSME’s are known to be the backbone of our economy employing about 20 crore people to contribute approximately 30% of the GDP, 35% of manufacturing output and 40% of exports.

The Government wants to protect these small businesses and hence, many laws exist which directly or indirectly support MSME’s in India.

MSME – Businesses Covered and their Classification

MSME or Micro, Small & Medium Enterprises are defined by the MSMED Act, 2006.

Types of businesses covered under MSME

1. Manufacturing

2. Services

So, Trading businesses are excluded from the definition of MSME in India.

As per revised definition w.e.f. 1st July 2020, MSME’s are classified based on investment in Plant & Machinery and Turnover (excluding export turnover). The current classification is as follows.

Classification	Investment in Plant & Machinery up to	Turnover up to (excluding export turnover)
Micro	1 crore	5 crore
Small	10 crore	50 crore
Medium	50 crore	250 crore

Compliance under Various Laws in relation to MSME’s

A. MSMED Act, 2006 (section 15)

The MSMED Act, 2006 requires businesses to pay all MSME’s within 45 days of date of acceptance of goods or services by the buyer.

Failure to comply will result in:

1. Paying the vendor with interest at rate of three (3) times the bank rate.

2. Such interest expense will not be allowed as expense for calculation income tax liability of the business.

B. Income Tax Act, 1961 (section 43B(h))

The Income Tax Act, 1961 required businesses to pay Registered Micro & Small Enterprises (Medium is excluded) within the following timelines.

Particulars	Timelines
If payment timelines have been specified under an agreement between the buyer and the seller	Payment should be made within earlier of following dates: 1.      Due date specified in the agreement 2.      45 days from the date of acceptance
If payment timelines have not been specified under an agreement between the buyer and the seller	Payment should be made within 15 days from the date of acceptance

Failure to comply will result in:

1. Expense on the purchase transaction will only be allowed as expense for calculation of income tax liability of the business in the year it is paid to the vendor.

C. Companies Act, 2013

All Companies in India have to file Form MSME-1 when payment to their MSME vendors is not made within 45 days of acceptance.

Failure to comply will result in:

1. Penalty on the company and its officers of Rs. 20,000/- and in case of continuous default, further penalty of Rs. 1,000/- per day up to a maximum of Rs. 3 lakh.

What Businesses should do

A. Buyers

1. Verify MSME Registration – Ensure your vendors have Udyam Registration and maintain list of such vendors.

2. Negotiate Clear Payment Terms – Have clear payment terms in written agreements with MSME’s.

3. Maintain Proper Records – Keep accurate records of all invoices, date of acceptance, payment dates, and written agreements.

4. Monitor Payments – Regularly monitor outstanding payments to MSME’s and prioritize timely settlements to avoid penalties.

B. MSME Sellers

1. Negotiate Clear Payment Terms – Have clear payment terms in written agreements with buyers.

2. Maintain Proper Records – Keep accurate records of all invoices, date of acceptance, receipt dates, and written agreements.

3. Monitor Receipts – Regularly monitor receipts and initiate recovery proceedings under the MSMED Act, 2006 against customers not paying/paying late regularly.

Some Points to Note

1. Written Agreements can be

   1. Contracts

   2. Purchase Order (PO)

   3. Work Order (WO)

   4. Any other type of electronic/physical communication/document outlining agreement between buyer and seller

   
   

2. Date of Acceptance is the day of actual delivery of goods or the rendering of services. However, if an objection is raised by the buyer in writing within 15 days of the delivery of goods or services, the ‘day of acceptance’ would be the day on which objection is removed by the MSE