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Interest on delayed payment to MSEs
[Updated as on June 08, 2022]
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Section 15 of the MSME Act 2006 provides that where any supplier supplies any goods or render any services to any buyer, the buyer shall make payment thereof on or before the date agreed upon between him and the supplier in writing.
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In case of no agreement in writing, the payment should be made before the appointed date.
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The appointed date for this purpose is the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier. For instance, A has delivered goods to B on 8th Mar, appointed day for the purpose is 24th March i.e the day after the fifteenth day from the date of receipt of the goods.
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Day of acceptance of goods or services is the day of the actual delivery of the goods or rendering of services. However in case any objection is made in writing by the buyer regarding acceptance of any goods or services within 15 days from the date of delivery of goods or rendering of services, the day on which objection is removed by the supplier is construed as the "day of acceptance" of goods or services. In the above example suppose B has raised objections regarding acceptability of the goods on March 13 but on March 18 B withdrew his objection and accepted the goods following clarification from A. Here March 18 will be construed as the day of acceptance of the goods.
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Where no objection is raised by the buyer in writing regarding acceptance of any goods or services within 15 days from the date of delivery of goods or rendering of services, the day of the actual delivery of the goods or rendering of services shall be construed as the “day of deemed acceptance”.
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The due date of payment agreed upon in writing by the buyer and the supplier shall in no case exceeds 45 days from day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
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If default is made by the buyer to make payment before date calculated as above, the buyer is liable to pay compound interest with monthly rest to the supplier on that amount outstanding (Section 16).
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The interest amount so calculated shall be paid along with the amount due to the vendor as required under Section 17.
Period and rate of interest
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Interest is to be calculated from the date following the due date agreed upon or in case no due date is specified in writing, from the appointed date till the date on which payment is made.
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Interest is to be paid at three times the bank rate notified by the RBI.
History of revision in Bank rate as notified by RBI
Click the table to download in excel format
Illustration:
ABC Ltd has sold goods worth Rs.250000 which was received by XYZ Ltd on 06th March 2019. As per the agreement between them, XYZ Ltd enjoys a credit period of 60 days. XYZ Ltd made the payment on May 20, 2019. Whether XYZ Ltd was liable to pay any interest? If so, from which date?
The due date agreed upon between the parties is 60 days which exceeds the limit of 45 days as laid down in Section 15 of the act. Hence the due date shall be reckoned as 45 days which is on April 20, 2019. Hence XYZ Ltd shall pay interest from April 21, 2019.
Suppose in the above example if no due date was agreed upon between the parties, from which date interest is to be calculated?
In case of no agreement between the parties on the due date, the payment shall be made before the appointed date. The appointed date is for this purpose is the day following immediately after the expiry of the period of 15 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 appointed day is therefore 22nd March 2019. XYZ Ltd shall be liable to pay interest from the appointed date i.e March 22, 2019.
The interest amount to be paid on May 20, 2019 as per the applicable bank rate notified by RBI shall be as under:
Disputed cases
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Any dispute arising between the supplier and the buyer with regard to the amount payable and the calculation of interest amount due shall be referred to the Micro and Small Enterprises Facilitation Council (Section 18).
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Ministry of MSME has enabled MSME Samadhaan Portal for filing online application by the supplier MSE unit against the buyer of goods/services before the concerned MSEFC of his/her State/UT. These will be viewed by MSEFC Council for their actions and will be also visible to Concerned Central Ministries, Departments, CPSEs, State Government, etc for pro-active actions.
Disclosure in Accounts by the buyer
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A buyer who is required to get his annual accounts audited under any law, such buyer shall disclose the following additional information in his annual statement of accounts as per section 22 of the act:
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the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier at the end of each accounting year;
[The principle amount and the interest due thereon remaining unpaid to suppliers as at the end of the accounting year are to be shown here separately]
2. the amount of interest paid by the buyer in terms of section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;
[Total payments made to suppliers which are beyond the appointed date and total interest payments as per Section 16 of MSMED Act 2006 made during each accounting year are to be shown here]
3. the amount of interest due and payable for the period of delay in making payment (which has been paid but beyond the appointed day during the year) but without adding the interest specified under the Micro, Small and Medium Enterprises Development Act, 2006;
[The amount of interest paid to MSME suppliers for delayed payments other than as per sec 16 of MSMED Act 2006]
4. the amount of interest accrued and remaining unpaid at the end of each accounting year; and
[interest amount accrued and remaining unpaid in respect of the current accounting year]
5. the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues above are actually paid to the small enterprise, for the purpose of disallowance of a deductible expenditure under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006.
[Amount of interest due and payable in respect of earlier years are to be shown here until such interest as above are actually paid to the small enterprise for the purpose of disallowance as per Section 23 of the Act]
For the purpose of this Act, Section 2(n) defines “supplier” as a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes,—
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the National Small Industries Corporation, being a company, registered under the Companies Act, 1956 (1 of 1956);
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the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956 (1 of 1956);
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any company, co-operative society, trust or a body, by whatever name called, registered or constituted 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 enterprises;
“micro enterprise” means an enterprise classified as follows:
(a) in the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act,1951 (65 of 1951), an enterprise where the investment in plant and machinery does not exceed twenty-five lakh rupees;
(b) in the case of the enterprises engaged in providing or rendering of services, an enterprise, where the investment in equipment does not exceed ten lakh rupees;
“small enterprise” means an enterprise classified as follows:
(a) in the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act,1951 (65 of 1951), an enterprise, where the investment in plant and machinery is more than twenty-five lakh rupees but does not exceed five crore rupees;
(b) in the case of the enterprises engaged in providing or rendering of services, as an enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees;
Ministry of Micro, Small and Medium enterprises vide notification No. S.O. 1702(E) dated 1st June, 2020, has revised the criteria for classification of micro, small and medium enterprises as under:
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a micro enterprise- Enterprise with investment in Plant and Machinery or Equipment not exceeding one crore rupees and turnover not exceeding five crore rupees;
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a small enterprise- Enterprise with investment in Plant and Machinery or Equipment not exceeding ten crore rupees and turnover not exceeding fifty crore rupees;
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a medium enterprise- Enterprises with investment in Plant and Machinery or Equipment not exceeding fifty crore rupees and turnover not exceeding two hundred and fifty crore rupees.
This notification shall come into effect from 01.07.2020
Interest not an allowable expenditure
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As per Section 23 of the MSME Act 2006, the amount of interest payable or paid by any buyer under the act shall not be allowed as a deduction in computation of income under the Income Tax Act, 1961, notwithstanding anything contained in that Act.
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The provisions from Section 15 to 23 of the MSME Act 2006 shall have overriding effect notwithstanding anything inconsistent contained in any other laws for the time being in force.