Micro, Small and Medium Enterprises Development Act, 2006.
"Implications for Annual Financial Statements"
The Micro, Small and Medium Enterprises Development Act, 2006 ("the Act")has been notified and has received the assent of the President on 16th June 2006. Subsequently, notifications defining the authorities under the Act and for classifying various categories i.e. micro, small or medium have been made on September 29 and 30, 2006 respectively.
One of the primary objective of the Act is to make provisions for ensuring timely and smooth flow of credit to SME's and minimize sickness amongst them.
The Act strengthens provisions relating to delayed payments to SME's by specifying a maximum credit period and higher penal interest if delayed beyond that period. Further, Section 32 of the Act repeals the provisions of “Interest on Delayed payments to Small Scale and Ancillary Industrial Undertakings Act, 1993” that was applicable to some of the enterprises covered under this Act.
The Act requires certain additional information to be furnished in the Annual Accounts of enterprises, which are subjected to an audit under any law for the time being in force and who are buyers of goods or services from micro or small enterprises.
It is important to note that such disclosures are in addition to those required to be made under Schedule VI in respect of the total outstanding to small scale industrial undertaking and the names of such undertakings together with interest outstanding for more than 30 days.
Central Government has notified October 2, 2006, as the date on which the provisions of this Act come into force. Consequently, the disclosures required to be made under this Act, are to be made in respect of Annual Financial Statements for all periods ending on or after October 2, 2006.
It is important to evaluate whether requirements of Act have an impact on the true and fair view of the financial statements when considered as a whole.
The following paragraphs briefly describe the applicable provisions and the disclosure requirements to be made in Annual Financial Statements, with an intention to disseminate the requirements to applicable companies and outline our responsibilities. The views expressed on the reporting requirements are those of the firm.
2(d) “buyer” means whoever buys any goods or receives any services from a supplier for consideration;
2(e) “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 or engaged in providing or rendering of any service or services;
2(n) “supplier” means a micro or small enterprise, which has filed a memorandum with the authorityreferred to in clause (a) of sub-section (1) of section 8, and includes, –
the National Small Industries Corporation, being a company, registered under the Companies Act, 1956;
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;
any company, cooperative society, 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;
From above the definition of 'supplier', it appears that "medium" enterprise is not covered and it can be construed that the provisions on interest payment/provision and disclosure requirements under this Act do not apply to "medium" enterprises.
Various State Governments have notified that 'Authority' for the purposes of Section 8(1)(a) to be the General Manager of District Industries Centres in their States, with whom the micro and small suppliers, as defined above, need to file their particulars for being covered under the provisions of this Act.
Organizations established by State Governments, such as Small Industries Associations, Coir Industrial Cooperative Societies, small scale industrial cooperative societies etc., i.e. establishments that assist in selling of products of its members, would also fall within the definition of a 'supplier' under clause (iii) above.
Section 15. Liability of buyer to make payment.- 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 forty-five days from the day of acceptance or the day of deemed acceptance.
In this regard, "Appointed Day" has been defined to mean as "the day following immediately after the expiry of the period of fifteen days from the day of acceptance or deemed acceptance of goods or services by a buyer."
Day of acceptance refers to day of the actual delivery of goods or the rendering of services, in case no objections are received within 15 days thereof. If objections are made, then the date of removal of the objections would be considered as the day of acceptance. Further, if no objections are made within the 15 days, the date of delivery or rendering of services shall be "deemed day of acceptance"
From the above, a maximum period that is allowed under the Act for payment to be made is 45 days from the date of delivery of goods or receipt of services, if no objections are made with 15 days from such a date. In the event of any objections being made, then the number of days gets extended by the number of days taken to remove the objection. Any delay beyond such days would result in a levy of interest at the rates stated in the Act.
Section 16. Date from which and rate at which interest is payable.- Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.
The charging provisions of the Act are contained in this Section. The applicable bank rate as notified by RBI on the appointed day should be applied for computing the interest payment / provision.
Section 22. Requirement to specify unpaid amount with interest in the annual statement of accounts.- 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:—
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;
the amount of interest paid by the buyer in terms of section 16, along with the amounts of the payment made to the supplier beyond the appointed day during each accounting year;
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;
the amount of interest accrued and remaining unpaid at the end of each accounting year; and
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.
Please see paragraph below on 'Disclosures Required under Act' for a brief elaboration on above.
Section 23. Interest not to be allowed as deduction from income.- Notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.
These provisions are similar to those contained in the repealed “Interest on Delayed payments to Small Scale and Ancillary Industrial Undertakings Act, 1993".
Section 24. Overriding effect.- The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
From the above, in the absence of a specific clarification from ICAI or other regulators, it seems that the disclosure requirements of this Act' are in addition to disclosure required to be made under Schedule VI of the Companies Act, 1956 and those prescribed by any other authorities such as SEBI, IRDA etc.
Section 7 of Act provides for the following classification in respect of industries engaged in production or manufacture of goods or rendering service enterprises:
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Class
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Manufacturing Enterprises - Investment in Plant & Machinery
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Services Enterprises - Investment in Equipment
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Micro
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Less than Rs. 25 lacs
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Less than Rs. 10 lacs
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Small
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Greater than Rs. 25 lacs but upto Rs. 5 Cr.
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Greater than Rs. 10 lacs but upto Rs. 2 Cr
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Medium
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Greater than Rs. 5 Cr. but upto 10 Cr.
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Greater than Rs. 2 Cr. but upto Rs. 5 Cr.
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The above investment excludes investment in certain plant and machinery or equipment such as pollution control, research and development, industrial safety devices, gas producer plants, extra transformers, etc., and certain other items of expenditure such as installation costs, technical know-how fees and bank charges and services charges paid to National or State Small Industries Corporation etc., (Notification no. 1722(E) dated 5-10-2006) .
Sections 15 & 16 require that a buyer shall make payment within 45 days (or less, if agreed upon) from the date of acceptance of supply of goods or of services rendered by a supplier. If payment is not made within this stipulated period, interest (compounded at monthly rests) at three times the bank rate notified by RBI shall have to be paid / provided for.
The disclosure requirements in Section 22 requires any buyer, whose annual accounts audited under any law for the time being in force, to furnish the following additional information in his annual statement of accounts:
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Item No.
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Disclosures required under the Micro, Small & Medium Development Act, 2006
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I
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Delayed payments due as at the end of each accounting year on account of Principal - Rs. XXX and Interest due thereon - Rs. XXX
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II
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Total interest paid on all delayed payments during the year under the provisions of the Act - Rs. XXX
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III
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Interest due on principal amounts paid beyond the due date during the year but without the interest amounts under this Act - Rs, XXX
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IV
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Interest accrued but not due– Rs, XXX (Represents interest accrued as at the end of the year but not due as interest is computed at monthly rests from the due date)
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V
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Total Interest Due but not paid - Rs. XXX (Represents all interest amounts remaining due together with that from prior year(s) until such date when the interest was actually paid to the small enterprises. Mainly to ascertain the amount of interest disallowable for income tax purposes)
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Under Section 23 of the Act, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall be disallowed as a deduction while computing the taxable income under the Income-tax Act, 1961
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