As per Section 16 of the MSMED Act, if a buyer fails to make payment of amount to the supplier, then the buyer shall be liable to pay compound interest with monthly rest to such supplier. This provision has an overriding effect on the agreement, if any, between the buyer and the MSME supplier.
Rate of Interest – 3 Times of the bank rate (*Current Bank Rate 4.25% p.a)
*Note – History of revision in Bank Rate by RBI (From 2013)
|SI No||Effective date||Bank Rate*||SI No||Effective date||Bank Rate*|
*Source – RBI Circulars
** Illustration of calculation of interest is attached as note at the end.
Supplier – Supplier means a micro or small enterprises (Note – Medium Enterprise not covered)
Now let us discuss the Implications of the above provision under various laws –
From BUYER’s point of view –
- MSME Act 2006
- Sec 22 – MSME Disclosure in Financial Statement
|Particulars||Year Ended 31 -Mar-20||Year Ended 31-Mar-19|
|The amounts remaining unpaid to micro and small suppliers as at the end of the year|
|The amount of interest paid by the buyer in terms of section 16 of the Micro Small and Medium Enterprises Development Act, 2006, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;|
|The amounts of the interest due and payable for the period of delay in making the payment (which has been paid but beyond the appointed day during each accounting year) but without adding the interest specified under the Micro, Small and Medium Enterprises Development Act, 2006;|
|The amount of interest accrued and remaining unpaid at the end of each accounting year;|
|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 of the Micro Small and Medium Enterprises Development Act, 2006|
- Sec 23 – Interest Disallowed under Income tax Act, 1961(MAT and Normal Tax )
- Companies Act 2013
MSME Return – MCA vide notification “Specified Companies (Furnishing of Information about payment to micro and small enterprise suppliers) Order, 2019” dated 22nd January 2019, mandates that, all specified companies who buy goods or avail services from micro and small enterprises and whose payments to such suppliers have exceeded the due dates prescribed under MSME Act, shall submit a half yearly return(E-form MSME Form I) to the ministry of corporate affairs (MCA) stating the following:-
- The outstanding amount due and
- The reasons for delay;
Due Date for filing MSME -1 :
From April to September – 31st October
From October to March – 30th April
- Income Tax Act, 1961
- TDS under Sec 194 A – Interest other than Interest on Securities Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force
Explanation – For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
- Alternate View –
- Interest on Delay Payment to be considered as payment for purchase consideration – The interest payable by the purchaser for delay in payment of purchase consideration of goods, will partake the nature and character of purchase consideration in the hands of the purchaser. This view is supported by the judgement of Bombay High Court, in the case of CIT Vs Vidyut Corporation  324 ITR 221 (Bom). Further, no tax is deductible at source under Chapter XVII-B of the Act, in respect of payment by way of purchase consideration of goods on the part of the purchaser thereof. Therefore, no tax will be deductible at source, in respect of the aforesaid interest payable by the purchaser for delay in payment of purchase consideration of goods.
- So if the interest is payable against services then TDS is to be payable as per the respective provisions in Chapter XVII-B.
Points to Consider –
- Non Payment of Interest – It was provided that, interest is to be paid by the buyer. However there are no penal provisions for non-payment of interest (Interest on interest will be charged –monthly compounding) and there is no time limit for payment of such interest. It was observed that Companies are providing interest and making it due for 3 years and then writing off (As per Limitation Act, 1963), as the buyer has not claimed the interest amount. This treatment would result in Litigation on non-compliance of Sec 16 & 17 of MSME Act and is not advisable.
- Non Deduction of TDS – Entry passed through expense payable or provision for expenses, for the purpose of this section is deemed to be credited to BUYER and TDS is to be deducted on such provision for expense. One cannot argue that this is a provision amount and receiver is un-identifiable as there are specific provision for calculation of interest (buyer wise). So TDS is to be deducted and paid to the account of the receiver irrespective of claim from buyer. So it can be concluded that- If provision for interest is created, TDS is to be deducted and paid to the parties account.
- Penal Provisions for Non Deductions of TDS –
- Disallowance of Expense (Sec 40a(ia) of Income Tax Act,1961)- This provision has no effect as the total interest is anyways disallowed as per MSME Act, 2006.
- Disclosure in Tax Audit – Tax Auditor shall report the non-compliance in Form 3CD.
- Penalty under Sec 201(1) read with Sec 271( c) – Deemed Default under Sec 201(1) and penalty to the extent of tax payable under Sec 271© .
- From SUPPLIER’s point of view –
- MSMED Act 2006
- No specific requirement or Disclosure required for presentation or intimation of Interest received or receivable.
- Can file an online compliant against the buyer for non payment of consideration through MSME E SAMADHAN portal.
- Income Tax Act, 1961
- Interest is considered as Income under the Head IFOS as per Sec 56 in year of accrual. So BUYER has to add to total income and pay tax on such income.(Provided the buyer has the notice of such provision created by supplier- Year End Balance Confirmation and 26AS (If interest is above 5000 ) can be taken as a base for verification )
- CGST Act 2017 –
- Sec 15 – As per the provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the value of supply shall include “interest or late fee or penalty for delayed payment of any consideration for any supply”. Accordingly, the penal interest would be taxable, irrespective of the manner of invoicing.(Ref – Circular 102/21/2019).
However the time of supply in case of interest, late fee or penalty received for delayed payment of consideration shall be the date of receipt of such interest. So on receipt of such interest BUYER is liable to pay GST @ 18% (as applicable) on which credit will be available to SUPPLIER .
Even though the MSME Act was introduced in the year 2006, the effective implementation of the law was being observed in the recent years. Government has initiated several steps for the compliance with the Act – Filing of MSME Return, Sharing ITR Data with MSME Ministry. However it can be observed that the laws are unnecessarily complicated and there is no relaxation available in the Act for related parties, Cases where payments are pending on the consent of the Supplier, etc. The above provisions can be correlated with Rule 37(2) of CGST Rule (180 Days Input Reversal). Government cannot decide the Credit period which can be provided by the supplier to the recipient. As law of the state is to be followed, Suppliers should ensure compliance with disclosures and other provisions of the Act.
Revised limits for classification introduced vide Notification No. S.O. 2119(E) dated 26.06.2020 –
|Enterprises||Investment in and Turnover||Limit|
|A Micro Enterprises||Investment in plant and machinery or equipment; AND||does not exceed one crore rupees(< 1Crore)|
|||Turnover||does not exceed five crore rupees (< 5 Crore)|
|A Small Enterprise||Investment in plant and machinery or equipment; AND||does not exceed ten crore rupees (< 10Crore)|
|||Turnover||does not exceed fifty crore rupees (< 5Crore)|
|a Medium Enterprise||Investment in plant and machinery or equipment; AND||does not exceed fifty crore rupees(< 50 Crore)|
|||Turnover||does not exceed two hundred and fifty crore rupees(<Rs. 250 crore)|
Registration of Existing Enterprises –
1. All existing registered MSME’s shall register again on the Udyam Registration portal on or after 1 July, 2020.
2. All enterprises registered till 30 June 2020, shall be re-classified in accordance with this notification.
3. The existing enterprises registered prior to 30 June 2020 shall continue to be valid only for a period upto the 31 March 2021.
** Illustration for calculation of Interest –
A Ltd an MSME (Micro) sold goods of value amounting to Rs 2,00,000 to B Ltd on 31/03/2020. There are no terms of payment agreed between the parties. Payment against such goods is not made till date. Calculate the interest payable by B Ltd to A Ltd.
Facts of the Case –
Consideration – 2,00,000
Date of Invoice – 31/03/2020
Due date of payment as per MSME Act (Appointed Date) – 16/04/2020
Period of Default – 203 Days (Calculated till 04/11/2020)
For Calculation of Interest we have to determine whether there is a change in bank rate during the default period.
Bank rate was changed on 22/05/2020. So interest is to be calculated at old rate (4.65%) till 22/05/2020 and at new rate (4.25%) from 23/05/2020.
Calculation of Interest –
|Start Date||End Date||No of Days||Base Amount||Interest Rate||Interest Amount||Accumulated Amount (Principal+Interest)|
# Points to Consider-
- Interest amount is to be calculated on monthly compounding basis
- There is no monetary limit for the amount of Interest payable. Therefore Interest amount can exceed principal amount.
- Change in bank rate needs to be considered while calculating Interest.
- If bank rate changes in the middle of a month then Base amount to be taken is the amount outstanding at the end of the previous amount.( In the above example rate is changed w.e.f 22/05/2020, so base amount taken is the amount outstanding at the end of April)
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