New Rule Mandates Reporting on Delayed MSME Payments

- The mandated half-yearly returns must be filed with the Ministry of Corporate Affairs (MCA) using Form MSME-1. The deadlines for submission are the 31st of October for the April-September period and the 30th of April for the October-March period. - This measure is designed to address a significant issue, with estimates suggesting that ₹7.34 lakh crore to ₹10.7 lakh crore in payments to MSMEs are delayed, impacting their cash flow, limiting growth potential, and increasing borrowing costs. - The reporting requirement is triggered for payments that exceed the 45-day credit period limit set by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. In cases where there is no written agreement, the payment deadline is 15 days. - This rule complements Section 43B(h) of the Income Tax Act, effective from April 1, 2024, which disallows businesses from claiming tax deductions on expenses for payments to micro and small enterprises that are not cleared within the statutory 45-day period. - Failure to pay within the stipulated time not only requires reporting but also makes the buyer liable to pay compound interest to the supplier at a rate three times the bank rate notified by the Reserve Bank of India. - This new mandate is part of a broader government effort to improve financial discipline, which includes initiatives like the MSME Samadhaan portal for grievance redressal and the Trade Receivables Discounting System (TReDS) to facilitate early payment of invoices. - Data highlights the severity of the problem, with a 2024 report indicating that in major cities like Hyderabad, Kolkata, Chennai, and Pune, nearly 52% of B2B payments were overdue by more than 90 days. - Penalties for non-compliance with filing MSME Form 1 can include a fine of ₹20,000 on the company and each defaulting officer, with a potential additional daily fine of ₹1,000 for continued non-compliance, up to a maximum of ₹3 lakh.