MSME Payment Terms 2022
The following quote justifies our discussion on the topic titled, “MSME payment terms.”
“The biggest hitch for an MSME today is longer credit periods and hurdles in getting bank finance.”
Before delving further in this regard, let us first understand what we mean by micro, small, and medium enterprises (MSMEs).
Basically, the MSMEs are classified as manufacturing and service enterprises.
(a) Manufacturing enterprises: Falling under this domain are enterprises that are engaged either in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (development and regulation) Act, 1951; or utilizing plant and machinery as value addition to the final product.
(b) Service enterprises: The enterprises that are engaged in providing or rendering services in terms of investment in equipment are defined as service enterprises.
The Micro and Small Enterprises Facilitation Council (MSEFC) has warned that the delay in payments for supplies received from the MSMEs would invite heavy penalties against defaulting buyers.
Recently, the MSEFC Chairperson Shri. Anoo Malhotra has issued a circular the contents of which are as follows:
“In case the buyer fails to make payment as required under Section 15 of the Micro Small and Medium Enterprises Development Act, the buyer is liable to pay compound interest with monthly rests to the supplier for a delayed period beyond 45 days, on the amount, payable at three times the bank rate notified by Reserve Bank of India as provided under Section 16 of the MSMED Act, 2006.”
The earlier discussed circular directed buyers including the government departments, public sector undertakings, autonomous bodies, agencies, or other industrial units “in their own interest” to “release the due payments of Micro and Small Enterprises well within 45 days of acceptance of goods so as to avoid a penalty in the shape of interest at the rate of three times the rate notified by the RBI for the period of delay.”
In the light of our earlier discussion, it is now crystal clear that payment to the MSMEs registration should be on time.
MSME Payment Terms
Our government has attached high priority to the MSMED Act with regard to the protection and development of MSMEs. Consequently, MSMEs enjoy protection from delayed payments under the MSMED Act.
Delayed Payments to MSMEs
Assuming that any micro or small enterprise that has an MSME registration supplies any goods or services, the buyer is obligated to make the payment on or before the date of the agreed-upon between the buyer and the micro or small enterprise.
However, in any case, a payment due to a micro or small enterprise cannot exceed 45 days from the day of acceptance or the day of deemed acceptance.
Quantum of Penal Interest to be paid on Delayed Payment to MSMEs
In case a buyer deliberately ignores payment on the specified time, then the buyer is obligated under the provisions of the law to pay compound interest with monthly interest rates to the supplier on that amount. In this regard, the penal interest chargeable for delayed payment to an MSME enterprise is thrice the bank rate notified by the Reserve Bank of India.
It is pertinent to note here that as per the current provisions included in the Income Tax Act, the penal interest paid by the buyer (or payable by the buyer) cannot be claimed as a tax deduction thus making the burden even higher for the buyer.
Table 1 includes different scenarios with reference to the payment date to an MSME.
Table 1. Credit period in terms of acceptable payment frequency
|Serial No.||Scenarios||Deciding dates||Payable within (days)||Credit periods|
|1||No agreement; no query||Day of delivery (deemed acceptance)||15 of delivery date||15|
|2||No agreement but query||Acceptance (15 days from i.e., 30 days delivery)||15 + 15 days (from the day of delivery)||30|
|3||Agreement but no query||45 days from delivery||45 days of maximum delivery||45|
|4||Agreement and query||Maximum of 45 days from deemed acceptance (15 days from delivery)||15 days + 45 days||60|
Payment of interest (Section 16)
If any buyer fails to honor payment to the supplier, as required under Section 16, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, is obligated to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at 3 times of the bank rate notified by the RBI (i.e., 8.75%´3=26.25%).
MSE Facilitation council (Section 18)
Any party to a dispute may, regarding any amount due under Section 18, can approach the MSEFC for dispute redressal.
The MSEFC shall conduct conciliation; consequently, the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 as deemed appropriate shall apply to such a dispute.
Penalties (Section 27)
Whoever contravenes any of the provisions of Section 8 (Registration) or Section 27 (Officer/Info) shall be punishable as specified hereunder:
A maximum of ₹ 1,000 in the event of first conviction and
Violation thereafter will attract a fine of up to ₹ 10,000.
The MSME data should be made available online so that once registered under the act, the status of MSME, the buyer classifies him or her as an MSME and the MSME gets paid within 45 days or for delayed payment gets paid with penal interest.
It is observed that corporate buyers have two lines of thinking toward payments to MSMEs as listed hereunder:
- Taking into account the importance of MSMEs on the overall economy and then paying within 45 days is part of Corporate Social Responsibility (CSR) and
- Renegotiating the terms and conditions with MSMEs as mutually agreed upon and paying them within 45 days.
Low awareness: The majority of the MSMEs do not know that there exists such an act. Moreover, many of the MSMEs are registered but do not know their rights. Regrettably, many of the MSMEs are aware of their rights but they do not claim them. However, it is also to be noted that many of the MSMEs claim their rights but the buyer neither makes the payment on time nor he or she pays any interest.
To sum up, the credit rating agency Credit Rating Information Services of India Limited (CRISIL) in a study says “if all the MSMEs are paid within the limits prescribed under this act then their profitability shall go up by 15%.”