MSME Form 1 represents a crucial legal requirement for entities engaging with Micro, Small, and Medium Enterprises (MSMEs) in India, established under the MSMED Act and overseen by the Ministry of Corporate Affairs (MCA). This mandate aims to protect the interests of MSMEs and cultivate a robust business environment by ensuring that companies adhere to timely payment schedules. Adherence to this regulation mitigates legal threats and reinforces the financial trustworthiness and image of a company among its trading partners.
This compliance measure was instituted under the provisions of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, and further detailed by notifications from the Ministry of Corporate Affairs (MCA). The primary aim of this regulation is to promote timely and efficient payment practices and to ensure greater transparency in the dealings with MSMEs.
Under the MSMED Act, companies must file the MSME Form 1 if they receive goods or services from an MSME and the payment is not made within 45 days from the date of acceptance or the date of deemed acceptance of the goods or services. This form serves as a half-yearly return that specified companies must file with the Registrar of Companies (RoC).
Understanding MSME;
The criteria for defining MSMEs can vary from country to country. In India, the definition was updated in 2020 under the Atmanirbhar Bharat Abhiyan (Self-reliant India Scheme). The revised definitions combine investment and annual turnover criteria, and are as follows:
- Micro Enterprises: Businesses with an investment in plant and machinery or equipment of not more than INR 1 crore and an annual turnover of not more than INR 5 crore.
- Small Enterprises: Businesses with an investment in plant and machinery or equipment of not more than INR 10 crore and an annual turnover of not more than INR 50 crore.
- Medium Enterprises: Businesses with an investment in plant and machinery or equipment of not more than INR 50 crore and an annual turnover of not more than INR 250 crore.
Identifying MSME Vendors;
Companies are required to assess whether their suppliers fall under the MSME category. This typically involves evaluating the suppliers’ annual turnover and investment in plant and machinery or equipment, by the criteria outlined in the MSMED Act as detailed above.
Using the MSME Portal, individuals can confirm an MSME’s registration status and classify the enterprise (Micro, Small, or Medium) by utilizing the registration number supplied by the supplier: https://udyamregistration.gov.in/Udyam_Verify.aspx
The 45 Day Buzzer;
Section 16 of the MSME Act addresses the repercussions of delayed payments to MSME suppliers. According to this provision, if a buyer fails to make payment to an MSME within 45 days of accepting or deeming acceptance of goods or services (provided a due date is established in writing between the buyer and the supplier), the buyer is obligated to pay interest to the MSME. This interest rate is set at three times the bank rate notified by the Reserve Bank of India.
The interest rate may vary based on notifications from the Reserve Bank of India, with updates reflected on the MSME Samadhaan portal. Interest accrues monthly and is compounded accordingly. It’s important to note that the interest rate specified in this section of the MSMED Act holds precedence over any agreements between the buyer and the supplier.
Disclosure of Overdue Payments;
The MSME-1 form is used to report any payments to MSME suppliers that remain unsettled past the designated 45-day period. The aim of this mandate is to foster transparency in financial transactions between larger companies and MSMEs, and to encourage the timely settlement of invoices to support the financial stability of these smaller businesses.
The companies are required to submit half-yearly returns to detail their transactions with MSME suppliers
- 31st October for the period from April to September and
- 30th April for the period from October to March
Tax Implications and Reporting;
The recent addition of clause (h) to Section 43B explicitly addresses any amounts due by the assessee to a micro or small enterprise. This amendment was made to reinforce the requirement of punctual payments to such businesses as mandated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Specifically, this clause deals with payments that exceed the time limits prescribed under Section 15 of the MSMED Act. Under this new clause, such payments are recognized for tax deductions only when they are actually paid.
The revision stresses the importance of adhering to the payment deadlines prescribed in the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006, for optimal utilization of tax deductions.
Furthermore, the tax auditor shall be required to report unpaid dues to micro and small enterprises in Form 3CD of the Tax Audit Report. The assessee shall be required to add back to its total income the disallowance reported in Form 3CD of its Tax Audit Report. Accordingly, such assesse will be required to file its Income Tax Return (ITR), failing which the income-tax department shall add back the disallowance and recompute tax liability while processing the ITR.
Penalties for Non-Compliance;
Failure to file MSME-1 by the designated companies will result in penalties under Section 405(4) of the Companies Act, 2013. According to this section, any company that does not submit the required MSME-1 form will face a fine of Rs.20,000. Additionally, if the non-compliance persists, the company and any officer responsible will incur a daily penalty of Rs.1,000 for each day the violation continues, with the total penalty not exceeding Rs.3 lakh.
The Outcome;
The implementation of MSME Form 1 underscores the government’s commitment to supporting the economic welfare of Micro, Small, and Medium Enterprises (MSMEs) in India. By mandating timely payment disclosures and adherence to payment protocols, this regulation protects MSMEs and promotes fairness and accountability in corporate transactions. The semi-annual filing requirement ensures ongoing oversight of larger companies, preserving the financial health of smaller businesses.
This initiative enhances MSME cash flow, critical for their growth and operational efficiency, and imposes strict penalties for late payments, encouraging better business relations between large companies and MSMEs. Additionally, the transparency and accountability promoted by this initiative boost MSMEs’ confidence in business dealings, protecting them from potential exploitation.
Ultimately, MSME Form 1 is part of a broader government strategy to strengthen the business ecosystem and empower the MSME sector, vital to the Indian economy. By fostering prompt payment practices, the initiative not only supports the immediate financial needs of MSMEs but also contributes to their long-term sustainability and growth, enhancing the overall economic landscape.
Navigating the complexities of MSME regulations can be daunting, but with a partner like Accovet, your business is well-equipped to stay compliant and effective. Our expertise in compliance and financial advisement ensures that your company not only fulfills its legal obligations but also enhances its engagements with MSMEs. Partnering with us contributes to a resilient economic ecosystem, fostering sustainable growth and development.
