Our most of clients always used to ask the queries before getting enter into an agreement with MSMEs Enterprises like payments terms, consequences of delayed payments etc. So to answer all these questions, we have mentioned detailed explanation on MSMEs.
MSMEs are considered as the backbone of the Indian economy also, as we all know that government is too concerned about the development of MSMEs, small start-ups etc. in India, where finance plays a major role. It's a fact that small enterprises somewhere struggles to raise money from the market for their day-to-day working capital requirements , where the long outstanding receivable adds extra trouble to them in managing their finances. So, to safeguard the interest and to support their growth and cash flow, the government has established clear guidelines and penalties for timely payments.
Let's first understand which enterprises shall be covered under the definition of MSME:-
Micro, Small, and Medium-Sized Enterprises (MSMED) are defined by the MSMED Act 2006 update dated January 06, 2020. Where based on the values of investment in plant, machinery, or equipment (excluding land and buildings) and annual turnover (excluding export turnover), Micro, Small, and Medium-Sized Enterprises are determined.
Guidelines regarding payment to MSME Enterprises;
Here's a comprehensive breakdown of what you need to know as a buyer;
- Written Agreement: If you have a formal agreement with your MSME vendor outlining payment terms, settle their invoice within 45 days of receiving the goods or services. This timeframe offers a buffer for processing and approvals.
- No Written Agreement: In the absence of a formal agreement, the law mandates payment within 15 days of receiving the goods or services. It's crucial to acknowledge receipt promptly to avoid any misunderstanding.
Consequences of Delayed Payment:
- Interest: As per sec 16 of MSMED Act, if you fail to pay within the stipulated timeframe, you'll be liable to pay hefty compound interest on the outstanding amount. This interest rate is calculated at three times the bank rate notified by the Reserve Bank, significantly increasing your overall payment.
- Financial Reporting: As per sec 22 of MSMED Act, whenever there is delayed payments, buyer is required to disclose of the unpaid amount and accrued interest in their company's financial statements. This can negatively impact the financial health perception.
- Company Filings: All companies must include the principle amount and unpaid interest in their financial statements. Through schedule-III of the Companies Act, it mandates filing a half-yearly report (MSME Form-1) i.e April to September: On or before 31st October?October to March: On or before 30th April, with the Registrar of Companies (ROC) if you have outstanding dues to MSMEs exceeding 45 days. Missing this filing deadline attracts penalties under section 405(4) upto 3 lakhs.
- Tax Disallowance: As per Section 43B(h) read with proviso to Section 43Bthe Income Tax Act, for late payments to MSMEs (specifically Micro and Small Enterprises), the expense might be disallowed for tax purposes even if you settle the invoice before filing your income tax return. 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. This can significantly increase your tax burden.
Recommendations for Streamlined Transactions:
- Establish Written Agreements: Formalize payment terms with your MSME vendors through written agreements. This not only secures the 45-day credit period but also provides legal clarity in case of any disputes.
- Prioritize Timely Payments: Make payments within the specified timeframe (15 or 45 days) to avoid incurring penalties, interest charges, and additional reporting burdens.
- Open Communication: Maintain clear communication with your MSME vendors regarding payment timelines. This fosters trust and strengthens your business relationships.
- Explore Financing Options: If immediate payment poses a cash flow challenge, consider exploring short-term financing options to ensure timely settlements with your MSME vendors.
By adhering to these guidelines, you can ensure a smooth and compliant business relationship with MSME vendors. This not only helps them maintain healthy cash flow but also protects your company from potential legal and financial repercussions. Remember, fostering a positive payment culture benefits both parties and contributes to a thriving business ecosystem.
