MSMEs (Micro Small and Medium Enterprises) contribute towards the success of the entire economy. Their Annual contribution is close to 35% to India’s GDP, therefore the government always tries to incentivize them. Regulating the Credit Period is an important incentive for MICRO and SMALL Enterprises, which is governed by MSMED Act, 2006. The regulated credit period of 45 days for all purchases made from MICRO and SMALL units has casted big responsibility on the Companies.
1. Can any Entity be called an MSME?
No, only the entity that has obtained Udyam Registration (online self-declaration based registration – www.udyamregistration.gov.in) is said to be MSME. Further, the Enterprise has been divided into 3 categories called as Micro, Small and Medium.
| Turnover* | Investment (Net block)# | |
| Micro | Less than 5 Cr | Less than 1 Cr |
| Small | Less than 50 Cr | Less than 10 Cr |
| Medium | Less than 250 Cr | Less than 50 Cr |
*Export turnover shall not be considered as part of turnover
# Investment in plant and machinery or equipment
MSME entities are governed by the provisions of MSMED Act 2006.
The most important sections of MSMED Act are as follows –
Sec 2(n) “Supplier“: means a Micro or Small Enterprise, which has filed Udyam Registration.
Sec 15: Liability of buyer to make payment:—Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefore on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.
Sec 16: Date from which and rate at which interest is payable: —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.
CREDIT PERIOD ADVANTAGE: Sec 15 states that buyer shall make payment to MSEs (Only MICRO and SMALL Enterprises) who have Udyam Registration within 45 DAYS of acceptance/ deemed acceptance. While sec 16 states that if buyer fails to make payment to the registered entity within 45 days, he is liable to pay interest at thrice the bank rate as notified by the RBI.
Applicability table for Credit period advantage
| Entities eligible for interest under MSMED Act | |||
| TYPE OF ENTITY | NATURE OF BUSINESS | ||
| MANUFACTURING | SERVICE | TRADING | |
| MICRO | YES | YES | NO |
| SMALL | YES | YES | NO |
| MEDIUM | NO | NO | NO |
Only Manufacturing and services units which are either classified as either MICRO or SMALL need to be paid within 45 days. This means trading units and medium units need not be paid within a period of 45 days and their credit period continues to be as is agreed by both the parties mutually and MSMED Act is not applicable to them.
2. How to manage Compliance under the Companies Act 2013:
(a) Check whether the Company is a Specified Company
What is a Specified Company? As per MCA Notification S.O. 368(E) dated 22.01.2019, https://www.mca.gov.in/Ministry/pdf/MSMESpecifiedCompanies_22012019.pdf, Specified Companies are those companies who receive the supply of goods or services from MSEs (micro or small Enterprises) and the credit period for payment against these supplies exceeds 45 days from the date of acceptance or deemed acceptance of the goods or services (i.e. delivery of goods or services).
(b) Filing of MSME-1
Every Specified company must file MSME-1 return. The MSME-1 is a half-yearly return that needs to be filed regarding outstanding payments to the MSE. The companies need not file a ‘Nil MSME-1 return’ when the company is not a specified company.
(c) Disclosure in NOTES TO ACCOUNTS
Every specified company has to provide interest at three times the bank rate specified by RBI. Following particulars shall be disclosed in Notes to Accounts.
| S.No. | Particulars | Principal (Amt in Rs.) | Interest (Amt in Rs.) |
| 1 | Interest & Principal paid beyond the due date (during the year) | ||
| 2 | Interest & Principle O/s (Year-end O/s) | ||
| 3 | Interest due for principal paid beyond due date (out of 2 above, but relating to 1 above) | ||
| 4 | Balance interest accrued for principle unpaid ( 2 – 3) | ||
| 5 | Status of interest up to reporting date (As on the date of signing of the balance sheet) |
Changes in Bank rate in FY 2022-23: Reference bank rate as changed by RBI
| Date of change in Bank rate | Bank Rate | Interest rate as per MSMED Act |
| 08/04/2022 | 4.25% | 12.75% |
| 04/05/2022 | 4.65% | 13.95% |
| 08/06/2022 | 5.15% | 15.45% |
| 05/08/2022 | 5.65% | 16.95% |
| 30/09/2022 | 6.15% | 18.45% |
| 07/12/2022 | 6.50% | 19.50% |
| 08/02/2023 | 6.75% | 20.25% |
(d) Tips for Accountants to Meet Compliance under MSMED Act :
| 1. | Review the process followed to identify MSE suppliers – through e-mails, letters, during the vendor creation process etc. & whether such policy is followed consistently | |
| 2. | Check whether yearly correspondence is sent to suppliers regarding the declaration of MSE status. If yes, maintain a list along with the documentation/proofs | |
| 3. | Review how many suppliers have responded to the correspondence sent and given MSME (Udyam) Registration Certificate | |
| 4. | Check if suppliers have printed their Udyam number on Purchase Bills? If yes, whether all such suppliers have been duly classified as MSE Suppliers | |
| 5. | Based on the above verification, segregate the entire supplier list into MSE and non-MSE suppliers | |
| 6. | Tabulation and verification of outstanding dues and delayed dues to Micro & Small Enterprises | |
| 7. | Calculation of interest due on delayed payments and interest provision entries | |
| 8. | Check whether any claim/legal notice is received from any of the suppliers – classify such suppliers as disputed. |
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