Non-Disclosure of dues payable to MSMEs in Financial Statements

Navdisha Sehgal

11 Jul, 2023

The MSMED (Micro, Small, and Medium Enterprises Development) Act, 2006 (hereinafter referred to as MSMED Act) was enacted on 16^th June 2006, by the notification in official Gazette by the Government of India. The MSMED Act reinforces the provisions relating to delayed payments to MSME by specifying a maximum credit period and higher penal interest in further delay. The companies will have to mention the reason for delayed payments in the statement of accounts. To understand the MSME and delayed payments concept better, let us know the current provisions relating to Non-Disclosure of dues payable to MSMEs in Financial Statements.

What is the MSME classification?

According to Section 7 of the MSMED Act, the industries engaged in the production or manufacture of goods or rendering service enterprises must be classified into the following:

• The investment is plant & machinery must be the original cost, excluding the cost of land and building and the items specified by the Ministry of Small Scale Industries. (As per the notification on 5^th October 2006).
• The following documents are to be relied upon while determining the classification of an enterprise:
  1. Copy of invoice of purchase of plant & machinery,
  2. Gross block for investment as shown in the audited books,
  3. Certificate issued by CA regarding the purchase of plant & machinery.
• Lastly, the Ministry has to clarify that the investment is for the classification of an enterprise; the purchase value only has to be considered (i.e., the purchase value minus the depreciation).

What are the provisions related to delayed payments?

The following provisions deal with the delayed payment in the MSMED Act:

• Section 15: Liability of buyer to make payment

The buyer is liable to make the payment on the appointed day as agreed upon. The payment terms are agreed in writing or not; it must not exceed 45 days from the date of acceptance or deemed acceptance.

• Section 16: Date & rate at which interest is applicable

Suppose the buyer fails to pay, as mentioned in Section 15, within the stipulated date. In that case, the buyer will be liable to pay compound interest with monthly rests to the supplier on the amount due on the appointed day or from the date agreed upon, at 3 times the bank rate prescribed by RBI.

• Section 17: Recovery of the due amount

The buyer has to pay the amount with interest for the services rendered & goods supplied.

• Section 18 (1): Reference to Micro & Small Enterprises Facilitation Council

Nevertheless, in case of any dispute between the supplier and the buyer concerning the payment of principal or interest amount, the reference is made to the MSEFC (Micro and Small Enterprises Facilitation Council)¹ constituted by the state governments.

Apart from the provisions under the MSMED Act, 2006, the Government has launched an online monitoring system named the ‘MSME Samadhaan’ to deal with the delayed payable to MSMEs. It helps in filing an application under the MSEFC easily. The MSME having a valid UAM (Udyog Aadhar Memorandum) can make an application via the online monitoring system. The MSEFC, after an application is made, must examine the case and issue directions to the buyer to pay the amount due to the supplier.

What are the disclosure requirements in the annual statement of accounts?

The buyers, who rendered services and bought goods from the MSMEs, must get their annual accounts audited as stated under Section 22 of the MSMED Act, 2006.

It also makes it mandatory for the buyer to disclose the following information in its annual statement of accounts in relation to MSMEs:

• The unpaid amount and interest due to the supplier till the appointed date;
• The interest paid by the buyer due to delayed payments;
• The principal amount & the interest due after the appointed date for the period of delay;
• The interest amount accrued & is unpaid at the end of each year;
• Amount of further interests; and
• The remaining due & the interest payable to MSMEs in the succeeding years until the interest is paid to the MSMEs.

The Ministry of MSME has the power conferred to it under section 9 of the MSMED Act, 2006, directed all companies who:

• gets supplies of goods & services from the MSME and;
• who has delayed the payment and it exceeded 45 days from the date of acceptance or deemed acceptance;

To file half yearly returns with the MCA stating the amount and the reason for the said delay.

Furthermore, Section 405 of the Companies Act, 2013 states that specific companies need to furnish the MCA’s requirements, as mentioned earlier.

Conclusion

The MSMED Act, 2006 requires the buyer to pay the amount and interest due to the supplier from whom the buyer rendered services and goods within a stipulated time prescribed in the Act. Thereafter, the continuous delay will result in the interest applicable thereon. The buyer has to disclose the delayed payable to MSMEs in the financial statements, as it is mandatory as per Section 22 of the Act.

Read our article:Features of MSME SAMADHAAN: Who can apply?

1. https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_Welcome.aspx