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Tackling the Menace of Delayed Payments to MSMEs by Companies

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Tackling the Menace of Delayed Payments to MSMEs by Companies

Tackling the Menace of Delayed Payments to MSMEs 

The MSMED (Micro, Small, and Medium Enterprises Development) Act, 2006 (hereinafter mentioned as MSMED Act) was enacted on 16th June 2006, by the notification in official Gazette by the Govt. of India. The MSMED Act reinforced the provisions related to delayed payments to MSME by specifying a maximum credit payment period and better penal interest. To tackle the issue of delayed payments, the businesses were now needed to mention the rationale for delayed payments to MSMEs in their statement of accounts. In this blog, we will study all the norms of the new act and also understand the Samadhan portal launched by the government to assist MSMEs.

Categories of MSME

As per Section 7 of the MSMED Act, the industries engaged with the production or manufacturing of products and rendering service to enterprises have been classified into the following categories:

Categories Service Sector Manufacturing Sector
  As per Investment in equipment As per Investment in plant & machinery
Micro-Enterprise The investment cannot exceed Rs. 10 lakhs The investment cannot exceed Rs. 25 lakhs
Small Enterprise The investment must be between Rs. 10 lakhs to Rs. 2 crores The investment must be between Rs. 25 lakhs to Rs. 5 crores
Medium Enterprise The investment must be between Rs. 2 crores to Rs. 5 crores The investment must be between Rs. 5 crores to Rs. 10 crores

As per the notification on 5th October 2006, the investment in plant & machinery is the first cost, excluding the value of land/building and the items specified by the Ministry of Small Scale Industries. The following documents are evaluated to determine the type of enterprise:

  • Copy of invoice for the purchase of plant and machinery,
  • The gross block for investment as shown in the audit sheets,
  • Certificate issued by a CA concerning the acquisition of plant & machinery.

The Ministry also clarified that if the investment is for the classification of an enterprise, only the net acquisition value should be considered (i.e., the acquisition value – the depreciation). let us understand in brief about the Samadhan Portal before we move on to the norms related to delayed payments. 

MSME Samadhan Portal

The Ministry of MSME has taken the initiative to come up with a web application for the supplier MSME units. With this, they can lodge complaints against the clients of their products and services.  The app will be in the monitoring of the Micro and Small Enterprises Facilitation Council for redressal of complaints. It will be visible to Concerned Central Ministries, Dept., CPSEs, etc. for proactive actions. Any Micro or small enterprise having a valid Udyog Aadhaar can lodge a complaint on the portal against the customer or purchaser of the goods/services.

Features of MSME Samadhan

  • As Per Section 16 of the MSME Act, the customer is liable to pay the interest to the supplier at a rate that’s 3 times the discounted rate as notified by RBI. This interest will be paid if the payment isn’t made to the supplier by the customer within 45 days of the acceptance of the rendered goods/services.
  • Each government is required to release a notification stating:
    1. The authority for filing Entrepreneur Memorandum;
    2. The constitution of Micro and Small Enterprise Facilitation Council (MSEFC).
    3. The governing rules of MSEFC.
  • All states/Union Territories have notified the authority for filing the Entrepreneurs Memorandum. In total 33 states and Union Territories (except Arunachal Pradesh, Manipur, and Assam) have notified rules for MSEFC, and all 36 states/Union Territories have constituted MSEFC as per the provisions laid down under the MSMED Act of 2006.
  • Every case registered with the MSEFC is going to be disbursed within 90 days from the date of submission of complaints as per the provisions laid down by the Act.
  • In the case where an appellant (not being the supplier) wishes to file an appeal, it won’t be considered for review by Micro and little Enterprise Facilitation Council unless the appellant (not being the supplier) has deposited the 75% of the owed amount with it.

Filing Complaints on MSME Samadhan Portal:

  • An entrepreneur files the application of complaint to their respective council of state, and within 15 days, the council will take necessary action on the application.
  • Online notice shall be dispatched to both complainant and respondent through an e-mail.
  • The complainant will have the choice of Mutual settlement where both companies can mutually settle the dispute before converting it into a case.
  • The council can approve the complaint and convert it into a case if no resolution is agreed upon by mutual settlement.
  • The council may also reject the complainant’s application if it doesn’t find it substantial after review.
  • In case the complaint is converted into a case, an SMS and e-mail are sent to the complainant and respondent.
  • If received an offline application, the council can update the case details on the online portal.
  • The case hearing dates are going to be updated by the council.
  • The application or the case status are often viewed using a UAM number/case number given to the complainant.

Norms Related to Delayed Payments

The following provisions were brought concerning the delayed payment to MSME:

Section 15: Liability of a buyer to make payment

The buyer is susceptible to make the payment on the scheduled day as decided. The payment terms must be agreed in writing and they must not exceed 45 days from the date of acceptance or deemed acceptance.

Section 16: Date & Rate of interest 

Suppose the debtor fails to pay within the stipulated date as agreed in the terms of payment. In such a scenario, the customers are going to be responsible to pay interest monthly to the supplier. the interest will be accrued on the quantity due on the scheduled day of payment or from the date prescribed. The interest rate is 3 times the discount rate prescribed by the RBI.

Section 17: Recovery of the Dues

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

Section 18 (1): Regarding MSEFC

If there arises any dispute between the supplier and the buyer concerning the payment of principal or interest amount, a complaint can be made to MSEFC (Micro and little Enterprises Facilitation Council) constituted by the states governments by online or offline mode.

Things to be Disclosed in the Final Account Statement by Buyers

  • The buyers who availed services and purchased goods from the MSMEs must get their annual accounts audited as per Section 22 of the MSMED Act, 2006.
  • The unpaid amount and interest rates to be paid to the supplier from the scheduled date;
  • The interest paid by the company for delayed payments;
  • The principal amount with the interest due after the last date for the delay;
  • The interest accrued & unpaid amount should be mentioned at the top of every year’s financial statement;
  • Net Amount of interests; and
  • The remaining due payable to MSME.

The Ministry of MSME has directed buyers under section 9 of the MSMED Act, 2006:

  • If the buyer has delayed the payment and it exceeded 45 days from the last date of acceptance or deemed acceptance then they have to;
  • File half-yearly returns with the MCA stating the quantity and reason for the delay.

Documents Required to file the Complaint of Delayed Payment

The following documents are required to be filed with the complaint of delayed payment:

  • Scanned PDF documents of service orders of respondent and invoices generated against those orders.
  • The size of the PDF document shouldn’t exceed 1 MB.
  • A maximum of three service orders with three invoices can be uploaded.

How MSEFC Helps Suppliers?

As per the provisions, a customer is liable to pay interest monthly to the supplier if the due date is over. The said interest rates will be 3 times the Bank rate as specified by the RBI.  the interest rate should be paid if the last date is exceeded by 45 days, however, the interest accrued will be calculated from the last date of payment as agreed in the terms of payment. 

Micro and Small Enterprise Facilitation Council (MSEFC) must be established by state governments and union territories for settlement of disputes on complaints received on delayed payments as per section 20 and 21 of the MSME Act. MSEFC of a state will examine the complaint filed by the MSE unit and, then issue directions to the customer unit for payment of the due amount with interests per the provisions of the MSME Act.

The complaint to MSEFC can be made in both online and offline mode. The online complaint should be made via the MSME Samadhan Portal of the Government. the Offline complaint can be made directly by sending the complaint application with copies of documents to the state MSEFC office.

Thus MSEFC is the implementing and regulatory authority for the provisions of the MSME Act. The council is chaired by a director of industries who is assisted by one or more officers/representatives from associations of Micro or Small industries.

To Summarize.

The MSMED Act, 2006 requires the customer or buyer of goods to pay the quantity and interest to the supplier from whom he rendered services. the payment must be made within a stipulated time prescribed within the terms of payment decided between the two parties. Thereafter, any delay will lead to interest being applicable from the decided last date to finalise the payout. The customer must disclose the delayed payables to MSMEs in its annual financial statements as per Section 22 of the MSME Act. We also learned about how a supplier can make complaints against a customer for non-payment of his dues with the Samadhan Portal. Suppliers can contact any legal firm in case they need any advice regarding the recovery of money or the MSME Act.

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