Payment to MSMEs – An Overview

MSME Registered Enterprises are favoured by the Indian Government by various means , provisions and benefits for them. MSMEs massively contribute for the employment in Indian economy. These units are backbone of our economy.

To know who are eligible to be MSMEs and how to get register as MSME. Click on the link here https://taxacumen.in/?p=916

One of the benefits MSMEs get from the Government is the provisions and rules made for the payment to be made to MSMEs. Any transaction which is being done with MSME needs to be done timely to ensure proper legal compliances.

Payment to MSMEs need to be done as per agreed date (contract terms and conditions) or within 45 days, if there is an written agreement to avoid interest to be paid along with principal amount as per the Section 15 of the Micro, Small, Medium Enterprises Development Act, 2006. And in case of no written agreement, Payment must be done within 15 days from the acceptance of goods/services.

Also, In the Budget 2023 – 2024, the Finance Minister proposed an amendment to Section 43B of the Income Tax Act, 1961, to include payment made to MSMEs. It affects the big businesses who delay the payment to be made to MSMEs. Now, Deduction will be allowed to those for the expenses on accrual basis, only if payment made timely with the prescribed timelimit specified in MSMED Act.

Also, the Companies registered with Registrar of Companies (ROC) who have any outstanding dues to be paid to MSMEs suppliers, must file the “MSME FORM 1” for the half year starting from October, 2024 to March, 2025. The Due date to file the said form is 30 April 2025. And for the period starting from April to September, the MSME FORM 1 must be filed on or before 30th October.

The Buyer is required to pay compound interest, three times the RBI Bank Rate, on the principal amount, calculated monthly from the agreed payment date or 15 days after the acceptance of goods/services. The said Interest is not deductible (Disallowed) as an expense under the Income Tax Act, 1961.

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About Author – Deepa Kaintura

I am a lawyer by profession. I am a legal consultant in TaxAcumen providing services to corporates about GST, Income Tax, ROC Compliances, etc. My love for finance and law encouraged me to write and share the knowledge with the readers here.