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"Understanding the Ripple Effects of Delayed Payments to MSMEs: A Deep Dive into Income Tax, GST, and Other Relevant Laws"

Beware of delayed payments to MSMEs and their impact on Income Tax, GST and other laws!!

There have been a lot of talks these days about the new provision brought by the government to boost the MSME sector. Today let us know in detail below article what is MSME and who is responsible for its development.

MSME stands for Micro, Small and Medium Enterprises. Such categorization of small-scale enterprises helps the government in formulating and implementing various policies for the development of the MSME sector. The Union Ministry of Micro, Small and Medium Enterprises has been entrusted with the responsibility of developing MSMEs and formulating new policies in this regard.

What new provision has the government proposed to introduce for the MSME sector?

Section 43B of the Income Tax Act allows the deduction of expenses only on actual payment to the supplier. The government has proposed to add a new clause in this section which will allow the deduction of payments to MSMEs only if the payments are made within the limits specified in the Micro, Small and Medium Enterprises Development (MSMED) Act. As per Section 15 of the MSMED Act payment to Micro and Small Enterprises shall be made within the time frame as per the written agreement, which shall not exceed 45 days. However, if there is no specific agreement for payment, the MSME has to make the payment within 15 days. The inclusion of this new clause will ensure the timely receipt of income by MSMEs and help them manage their finances. Also, the provision of section 43B which states that payment can be made till the filing of an income tax return does not apply.

Is there any such provision in GST Act to protect MSME industries?

There is no specific provision for MSMEs 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 the invoice, the recipient must reverse the ITC. Claimed and pay the amount with applicable interest, we can claim back the ITC on a payment basis.

What are the Company Act-related compliances in relation to transactions with MSMEs?

The Companies Act provides for allowing or deducting any charges for late payment to MSME vendors. However, the Companies Act requires MSMEs to disclose the ageing schedule of outstanding payments in their financial statements.

Is the business enterprise eligible to be classified as MSME?

Turnover and total investment in the plant and machinery of an enterprise determine its eligibility for classification as an MSME enterprise.

1. To be classified as a micro-enterprise the total turnover of the enterprise should be below Rs.5 crores. and its total investment in plant and machinery should not exceed Rs.1 crore.

2. Total turnover of the enterprise should be below Rs.50 crores for classification as a small-scale enterprise. And its total investment in plant and machinery is Rs. Should not exceed 10 crores.

3. To be classified as a medium enterprise the total turnover of the enterprise should be below Rs.250 crores. And its total investment in plant and machinery is Rs. Should not exceed 50 crores.

Whether each entity will be treated as an MSME or not. How can MSMEs benefit?

Not every organization meeting the turnover limit will be classified as an MSME and can claim the benefit of the new amendment. Turnover and investment limits are the only eligibility criteria for registration as MSME. All organizations falling within the turnover and investment limits that want to be classified as MSMEs are required to register on the Udyam registration portal. The official website for registration is udyamregistration.gov.in. Upon registration, an "Enterprise Registration Number" will be allotted to the enterprise and an e-certificate of registration will also be issued.

Traders and service providers can also register themselves as MSMEs.

What should be learned from this?

The government has introduced various new schemes and incentives from time to time for the development of small-scale industries across the country. This time too, the government has tried to boost the MSME sector by bringing in provisions to guarantee timely income to micro-enterprises. This provision has to be checked by tax professionals during tax audits and they have to get a vendor-wise list of vendors classified as MSME and check if agreements have been made to fix the payment period. Overall, this is a big boost to small and medium enterprises that will help them manage their finances.

Regards

Santosh Patil

ICA & MBA

Founder

@AllianceTaxExperts

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