Timely Payments to Micro and Small Enterprises

BACKGROUND OF THE MSME ACT, 2006

The Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) provides for the
registration of micro, small and medium enterprises (MSME) based on the specified criteria. It thereafter
provides for a host of measures for the promotion, development and enhancement of the competitiveness of
micro, small and medium enterprises. It also casts various obligations on entities dealing with such MSME
enterprises. This article explains the extent of obligations cast on entities dealing with such MSME
enterprises and the consequences of non-compliance with such obligations.

MEANING OF ENTERPRISE AND APPLICABILITY OF MSME ACT

Section 7 of the MSME Act provides the criteria based on which an enterprise is classified as either a micro-
enterprise, small enterprise, or medium enterprise. However, before venturing into the specific criteria for
classifying an enterprise into micro, small or medium, it may be important to look at the definition of
enterprise as provided u/s 2(e) of the Act. The said definition is significant and reproduced below for ready
reference:

enterprise means an industrial undertaking or a business concern or any other establishment, by whatever
name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry
specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or
engaged in providing or rendering of any service or services.

On a perusal of the above definition, it is very clear that only establishments engaged in the manufacture of
specified goods or rendering any service can be considered an enterprise. Therefore, traders and works
contractors are not covered under this definition, and the provisions of the MSME Act do not apply to such
traders and works contractors. In fact, in its FAQ dated 24th October 2016, the Ministry of MSME has
clarified vide answer to Q. No. 18 that the policy is meant only for procurement of goods produced or
services rendered by MSEs, and traders are excluded from the Policy.

Further, various Court rulings have held that works contractors are not covered under the MSME Act, 2006.
Useful reference may be made to the decisions in the cases of Rahul Singh vs. Union of India C 42491 of
2016 (Allahabad High Court), Shreegee Enterprises vs. Union of India 2015 SCC Online Del 13169
(Delhi High Court), Samvit Buildcare Pvt Ltd vs. Ministry of Civil Aviation C/SCA/1094/2018 (Gujarat
High Court) and Sterling and Wilson Pvt Ltd. vs. Union of India WP - L1261/2017 (Bombay High Court).

CLASSIFICATION OF ENTERPRISES
Section 7 of the MSME Act provides for the criteria based on which enterprises can be classified either as
micro-enterprise, small enterprise, or medium enterprise. The following table summarizes the latest criteria
concerning the classification of enterprises as micro, small or medium enterprises:

Classification Investment Criteria in Plant, Turnover Criteria do not

Machinery and Equipment do not exceed
exceed

Micro Rs.1 Crore Rs. 5 Crore

Small Rs. 10 Crore Rs. 50 Crore

Medium Rs. 50 Crore Rs. 250 Crore

Further, Section 8 provides for the registration of such enterprises with the MSME and the issuance of a
registration certificate. At the time of registration, it is important to mention the specific NIC Codes under
which the enterprise intends to supply the goods or the services. The privileges under the law are available
only to enterprises which are so registered and bear a Udyog Registration Certificate with the specific NIC
Codes listed therein.
OBLIGATIONS CAST ON ENTITIES DEALING WITH VARIOUS VENDORS
Section 15 of the MSME Act casts specific obligations on the buyer to make payments to specified suppliers
within the prescribed timelines. The provisions are reproduced below for ready reference.

Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment
therefor 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
45 days from the day of acceptance or the day of deemed acceptance.

It may be noted that Section 15 uses the word supplier and not enterprise. Therefore, it may be important to
understand the definition of the supplier as provided under section 2(n) of the Act and the same is
reproduced below:

supplier means a micro or small enterprise, which has filed a memorandum with the authority referred to in
sub-section (1) of section 8, and includes (not reproduced as very specific)

On a perusal of the above definition, it is evident that the term supplier only covers micro or small
enterprises. The MSME Act actually has three classifications micro , small and medium. While medium-
scale enterprises are eligible for various concessions and incentives provided under Chapter IV of the
MSME Act, they are not included in the scope of suppliers for Section 15 compliances. Therefore, medium-
scale enterprises are not eligible to enjoy the privilege of priority payment under section 15 of the Act.

CONSEQUENCES OF DELAY IN PAYMENT

The Finance Bill 2023 as proposed an amendment in Section 43B to promote timely payments to Micro and
Small Enterprises. Section 43B of the Income Tax Act provides for certain deductions to be allowed only on
actual payment. This amendment will be applicable for FY 2023-24.

What is Proposed Amendment?

It is proposed to insert a new clause (h) in section 43B of the Income Tax Act. The exact text is as under:

After clause (g), the following clause shall be inserted, namely:

“(h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section
15 of the Micro, Small and Medium Enterprises Development Act, 2006”

Provided that nothing contained in this section except the provisions of clause (h) shall apply in relation to
any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing
the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability
to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee
along with such return.

What is the Impact?

Section 15 of the MSMED Act mandates payments to micro and small enterprises withing the time as per the
written agreement, which cannot be more than 45 days. If there is no such written agreement, the section
mandates that the payment shall be made within 15 days. Thus, the proposed amendment to section 43B of
the Act will allow the payment as deduction only on payment basis. It can be allowed on accrual basis only if
the payment is within the time mandated under section 15 of the MSMED Act. It is important to note that
parties only covered in 43B are Micro and Small and not Medium.
Practical Examples:
S.No. Bill Date Payment Due Due Date of Actual Date of Deducted allowed
Date as per Payment as per Payment in which FY
Agreement MSMED Act
1 01/02/2024 17/03/2024 17/03/2024 30/03/2024 2023-24
2 01/02/2024 17/03/2024 17/03/2024 02/04/2024 2024-25
3 01/02/2024 02/04/2024 *17/03/2024 30/03/2024 2023-24
4 01/02/2024 02/04/2024 *17/03/2024 02/04/2024 2024-25
5 01/03/2024 No Agreement 15/03/2024 30/03/2024 2023-24
6 01/03/2024 No Agreement 15/03/2024 02/04/2024 2024-25
7 17/02/2024 02/04/2024 02/04/2024 01/04/2024 2023-24
8 17/02/2024 02/04/2024 02/04/2024 05/04/2024 2024-25
9 17/02/2024 17/04/2024 *02/04/2024 01/04/2024 2023-24
10 17/02/2024 17/04/2024 *02/04/2024 05/04/2024 2024-25
11 18/03/2024 No Agreement 02/04/2024 01/04/2024 2023-24
12 18/03/2024 No Agreement 02/04/2024 05/04/2024 2024-25
*The Agreement for due date of payment is for 60 days but maximum time allowed is 45 days only as per
MSME Act.