Beware of impact for delayed payment to MSMEs and its impact in Income Tax, GST and other laws

Arjuna (Fictional Character): Krishna, there have been a lot of talks around about the new provision that the government has proposed to bring for boosting the MSME Sector. What is an MSME and who is responsible for its development of the same?

Krishna (Fictional Character): Arjuna, MSME refers to Micro, Small and Medium Enterprises. Such classification of small-scale enterprises assists the government in the formulation and implementation of varied policies for the development of the MSME Sector. The Union Ministry of Micro, Small and Medium Enterprises has been entrusted with developing the MSMEs and formulating new policies in this regard.

Arjuna (Fictional Character): Krishna, which new provision has the government proposed to bring for the MSME Sector?

Krishna (Fictional Character): Arjuna, Section 43B of the Income Tax Act specifies the cases where deduction of expenses is only allowed when actual payment to the supplier has been made. The government has proposed to add a new clause to this section which will allow deductions of payment to MSME only if payment is made within the timeline specified in the Micro, Small and Medium Enterprises Development (MSMED) Act. According to Section 15 of the MSMED Act payments to micro and small enterprises shall be made within the time as per the written agreement, which cannot be more than 45 days. However, if there is no specific agreement for payment then the payment to the MSME shall be made within 15 days. The insertion of this new clause will ensure timely receipt of income by the MSME and would help them better manage their finance. Also, proviso to the 43B which states payment can be made till the filing of an income tax return does not apply to this provision.

Arjuna (FictionalCharacter): Krishna, is there any similar provision in GST law for the protection of MSME enterprises?

Krishna (Fictional Character): Arjuna, there is no specific provision for MSME as per the second proviso to Section 16 of the CGST Act, if the recipient fails to make payment to the supplier within 180 days from the date of issue of invoice, the recipient is required to reverse ITC claimed and pay the amount with applicable interest, on payment bases we can reclaim the ITC reversed.

Arjuna (FictionalCharacter): Krishna, what are the Companies Act-related compliances about transactions with MSME?

Krishna (Fictional Character): Arjuna, the companies act does provide for any disallowance of any expense or deduction for delayed payment to MSME vendors. However, the companies act does require disclosure of the aging schedule of outstanding payments towards MSMEs in the financial statements.

Arjuna (Fictional Character): Krishna, what is the eligibility for a business enterprise to be classified as MSME?

Krishna (Fictional Character): Arjuna, the turnover and total investment in plant and machinery of an enterprise determine its eligibility for classification as an MSME Enterprise.

1. For classification as a Micro Enterprise, the total turnover of an enterprise shall be below Rs. 5 Crore and its total investment in Plant and Machinery shall not exceed Rs. 1 Crore.
2. For classification as a Small Enterprise, the total turnover of an enterprise shall be below Rs. 50 Crore and its total investment in Plant and Machinery shall not exceed Rs. 10 Crore.
3. For classification as a Medium Enterprise, the total turnover of an enterprise shall be below Rs. 250 Crore and its total investment in Plant and Machinery shall not exceed Rs. 50 Crore.

Arjuna (Fictional Character): Krishna, whether every entity will be considered as MSME. How can one avail benefits of MSME?

Krishna (Fictional Character): Arjuna, no not every entity fulfilling the turnover limit would be classified as MSME and can claim the benefit of the new amendment. The turnover and investment limits are mere eligibility criteria for registration as an MSME. All the entities falling under the turnover and investment limits who wish to be classified as an MSME would be required to obtain registration on the Udyam Registration portal. The official website for registration is udyamregistration.gov.in. On registration, the enterprise would be allocated an "Udyam Registration Number" and would also be issued an e-certificate of registration.

Even traders and service providers can register themselves as MSMEs.

Arjuna (Fictional Character): Krishna, what should one learn from this?

Krishna (Fictional Character): Arjuna, the government has time and time again brought various new schemes and incentives for the development of small-scale enterprises throughout the country. This time too, the government has tried to boost the MSME sector by bringing in provisions that will ensure the timely receipt of income by small-scale entities. This provision will also have to be checked by tax professionals during tax audits, and they need to obtain a vendor-wise list of vendors who are classified as MSMEs and check whether agreements have been made for determining the period of payment. Overall, this is a big boost to small and medium enterprises which will help them manage their finances.