CA Abhishek Jain 03/01/2021

• March 1, 2021
• RSTheme
• Business
• 1

Some Important Provisions from the MSMED Act:

Liability of the buyer to make payment:
The buyer shall make payment to the supplier
• On or before the date agreed upon between them in writing. The agreed date in no case can be of maximum 45 days from the date of acceptance.
• Where there is no agreement in this behalf, before the appointed day; i.e., 15 days from the date of acceptance.

Without considering or referring anything in any agreement or in any law, where the buyer fails to make payment to the supplier as mentioned above, he shall be liable to pay compound interest with monthly rests on that amount from the appointed day or as the case may be from the next day of the date agreed upon at three times of the bank rate notified by Reserve Bank of India.
The disputes in respect of any amount due (principal or interest), shall be referred to Micro and Small enterprises Facilitation Council. For this Ministry of Micro Small and Medium enterprise has set up MSME SAMADHAAN – Delayed Payment Monitoring System (https://samadhaan.msme.gov.in)

Requirement to specify unpaid amount with interest in the annual statement of accounts:

Section 22 of the MSMED Act 2006 states as follows:
Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely:—

(i) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;
(ii) the amount of interest paid by the buyer in terms of section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;
(iii) the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act;
(iv) the amount of interest accrued and remaining unpaid at the end of each accounting year; and
(v) the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23.

There are Certain Important Definitions to be understood for applicability and calculation of Interest as per Section 22.

• “Appointed day” means a day following immediately after the expiry of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
• the “day of deemed” acceptance means where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days the actual delivery of goods or rendering of services.
• The “day of acceptance” means
• the day of the actual delivery of goods or the rendering of services or
• where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from day of delivery of goods or rendering of services, the day on which the objection is removed by the supplier.
• "Supplier” means a micro or small enterprise, which has filed a memorandum with the authority referred to in section 8(1) and includes National Small Industries Corporation, Small Industries Development Corporation, any company, co-operative society, trust or a body by whatever name called under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprise.
• “Buyer” means whoever buys any goods or receives services from supplier for consideration.
Some important takeaways from the above points:

• The definition of “Supplier” only includes Micro and Small Enterprises, and not Medium Enterprises.
• The maximum period allowable to make payment available to supplier from the buyer is 45 days, irrespective of the date of payment mentioned in the agreement of payments amongst the parties.
• The disclosure as per Section 22 of the Act needs to be given in Annual Accounts of an entity, where it gets audited under “Any Law”, i.e. Companies Act, Income Tax Act, etc. It is a general practice to disclose the above in the Annual Statements of a Company, and not in the annual statements of other entities who need to get their accounts audited under Income Tax Law. Therefore, it is my view that the said disclosure needs to be given in the annual statements of accounts, where accounts are required to be audited under Income Tax Act and other Laws for the time being in force.
• The buyer shall provide for such interest under this law in the books of accounts and pay the same to the supplier even if the supplier makes no demand for the same.
• In addition to the above mentioned requirements of the MSMED Act, MCA, vide notification “Specified Companies (Furnishing of Information about payment to micro and small enterprise suppliers) Order, 2019” dated 22nd January, 2019, mandates that, all specified companies who buy goods or avail services from micro and small enterprises and whose payments to such suppliers have exceeded 45 days, shall submit a half yearly return(E Form MSME Form I) to the Ministry of Corporate Affairs stating the following-
- The outstanding amount due
- The reasons for delay

Duty of the Auditor with respect to the above mentioned takeaways:
• The buyer should make provision of interest payable to the supplier mandatorily in the annual accounts.
• It shall be the duty of the auditor to check same and also verify the disclosure as per Section 22 of the Act in the Annual Account Statements of the buyer.
• If the buyer does not make necessary adjustments in the books, the auditor shall qualify his Audit Opinion accordingly.