Complete Guide to MSME Compliance: Classification, Delayed Payments & Form MSME-I Filing

 

New MSME Classification Criteria (Investment & Turnover)

The Government of India defines Micro, Small, and Medium Enterprises (MSMEs) based on a composite criterion involving both Investment in Plant & Machinery or Equipment and Annual Turnover. This classification applies to both manufacturing and service enterprises.

Composite Criterion & Calculation 

Enterprise Type	Investment in Plant & Machinery / Equipment	Annual Turnover
Micro	Less Than ₹1 Crore	Less Than ₹5 Crore
Small	Less Than ₹10 Crore	Less Than ₹50 Crore
Medium	Less Than ₹50 Crore	Less Than ₹250 Crore

 

Key Points on Classification:

• Composite Criterion: An enterprise must meet both the investment and the turnover limits to be classified under a particular category.
• Graduation: If an enterprise crosses either the investment limit or the turnover limit for its current category, it will move to the next higher category.
• Registration: The official registration is done through the Udyam Registration portal. The portal is integrated with the Income Tax and GSTN systems, which automatically fetch the investment and turnover data for classification.

 

Statutory Rights on Delayed Payments (Section 15 & 16)

MSME companies, specifically Micro and Small Enterprises, have special rights to recover their dues from clients through a Central government rule, primarily contained in the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

1. Mandated Payment Timeline (Section 15)

The Act mandates a strict payment schedule for buyers of goods or services from a Micro or Small Enterprise (Medium Enterprises are generally excluded from this protection for payment recovery).

• Agreement: The payment period agreed upon in writing between the buyer and supplier cannot exceed 45 days from the date of acceptance or deemed acceptance of the goods/services.
• No Agreement: If there is no agreement in writing, the buyer must make the payment within 15 days from the date of acceptance or deemed acceptance.

2. High Interest on Delayed Payments (Section 16)

If a buyer fails to pay within the stipulated time, they are legally liable to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India (RBI).

• Overriding Effect: This liability to pay interest is mandatory and overrides any contrary clause in the agreement between the buyer and the supplier (Section 24).
• Non-Deductibility: The interest amount paid by the buyer to the MSME is not allowed as a deduction for the computation of income under the Income Tax Act, 1961 (Section 23), making the penalty financially significant for the buyer.

3. Statutory Dispute Resolution Mechanism (Section 18)

The Act establishes a quasi-judicial body for the fast-track resolution of payment disputes:

• Authority: The Micro and Small Enterprises Facilitation Council (MSEFC), is the body to which an MSME can refer a dispute regarding delayed payment.
• Procedure:
1. The MSME files a case on the MSME Samadhaan Portal.
2. The case is referred to the respective MSEFC.
3. The Council first attempts to resolve the dispute through conciliation (mediation).
4. If conciliation is unsuccessful, the Council can itself take up the matter for arbitration or refer it to an institution for arbitration, as per the Arbitration and Conciliation Act, 1996.
• Time Limit: The MSEFC is required to decide on the reference within 90 days from the date of making the reference.
• Pre-Deposit Requirement: If a buyer wants to challenge the award/decree/order passed by the MSEFC, they are required to deposit 75% of the award amount with the court before the application for setting aside the award is entertained (Section 19). This is a powerful provision protecting the MSME.

 

The compliance requirement for reporting delayed payments to Micro and Small Enterprises is governed by the Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019, issued under Section 405 of the Companies Act, 2013.

 

Procedure for Filing Form MSME-I

1. Definitions

Term	Definition
Specified Company	Every company (Public or Private) that has received goods or services from a Micro or Small Enterprise and whose payment to such supplier is outstanding for more than 45 days from the date of acceptance or deemed acceptance.
Micro/Small Enterprise (MSE)	An enterprise classified as Micro or Small under the MSMED Act, 2006, based on the composite criteria of investment and turnover (as discussed previously), and which has obtained Udyam Registration. (The form excludes Medium Enterprises).
Outstanding Dues	The principal amount and the interest due (calculated at three times the RBI Bank Rate, compounded monthly) that remains unpaid to an MSE supplier for a period exceeding 45 days from the date of acceptance/deemed acceptance of goods or services.

2. Related Provisions

• Section 405(1) & 405(4) of the Companies Act, 2013: Section 405(1) grants the Central Government the power to order specified companies to furnish information. Section 405(4) prescribes the penalty for non-compliance.
• Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019: This Order, dated January 22, 2019, mandates the filing of the half-yearly return.
• Micro, Small and Medium Enterprises Development (MSMED) Act, 2006: Specifically Section 15 (maximum payment period of 45 days) and Section 16 (mandatory compound interest on delayed payment).

3. Interpretation in Query Context

The duty to file Form MSME-I is placed on the Buyer Company (the client) and not the MSME supplier. The buyer company must track its payables and file the form if, at the end of the half-year, it has any outstanding payments to a Micro or Small Enterprise that have exceeded the statutory/contractual period of 45 days.

The purpose of the filing is to ensure:

• Disclosure: The MCA is informed of the quantum and reasons for delayed payments to MSEs.
• Accountability: The process forces the buyer company to track and document its adherence to the MSMED Act's payment timeline, which aids the MSME in potential recovery proceedings.

4. Relevant Precedent/Case Studies

The penal provision under Section 405(4) is actively enforced by the Registrar of Companies (ROC).

Case Example (ROC Orders on Penalty): In multiple adjudication orders (e.g., in the matter of M/s Blissful Garments Private Limited or M/s Global Solutions), the ROC has imposed significant penalties on both the Company and every Officer in Default for failure to file Form MSME-I for multiple half-yearly periods. These penalties have exceeded $₹10$ Lakhs in some cases, highlighting that this is a serious and non-compoundable compliance lapse.

5. Conclusion/Action Summary

Every specified company must perform a half-yearly review of its payables to all Micro and Small Enterprise suppliers. If there are any payments outstanding for more than 45 days at the end of the period, the company must file the electronic form MSME Form-I with the ROC.

Reporting Period	Filing Due Date
April to September	October 31st
October to March	April 30th (of the following year)

6. Required Documentation

The company must gather the following information for accurate filing:

• Supplier Details: Name and PAN of every Micro or Small Enterprise supplier to whom payment is overdue for more than 45 days.
• Amount Due: The total principal amount outstanding to each supplier.
• Overdue Date: The date from which the amount became due (i.e., the date immediately following the expiry of 45 days from acceptance/deemed acceptance).
• Reasons for Delay: A clear and concise explanation for the delay in payment or the amount remaining outstanding.
• Ageing of Dues: Comprehensive details of amounts paid within and after 45 days, and amounts outstanding for 45 days or less, and more than 45 days (as per the recent amendment requirements).
• Udyam Registration Proof: Documentary evidence (like the Udyam Registration Certificate) to confirm the supplier's status as a Micro or Small Enterprise.

7. Required Filings (Forms & Authority)

Form Name	Filing Frequency	Governmental/Regulatory Authority
eForm MSME Form-I	Half-yearly (Regular Return)	Registrar of Companies (ROC) / Ministry of Corporate Affairs (MCA)
eForm MSME Form-I	Initial Return (No longer applicable, was a one-time filing after the Order's notification in 2019)	Registrar of Companies (ROC) / Ministry of Corporate Affairs (MCA)

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This MSME compliance is dual-pronged: it safeguards the MSME's working capital while placing a significant disclosure and financial burden (penalty) on the buyer for non-compliance.

The mandatory disclosure requirement stems from Section 22 of the MSMED Act, 2006, and its presentation format is integrated into Schedule III of the Companies Act, 2013, which governs the preparation of financial statements.

Financial Statement Disclosures & Tax Impact

The disclosure requirements are extensive and must be presented in the Notes to the Accounts of the buyer company’s annual financial statements.

1. Statutory Basis

• MSMED Act, 2006 (Section 22): Requires any buyer company whose accounts are required to be audited under any law to furnish the prescribed information regarding unpaid principal and interest to Micro and Small Enterprises.
• Companies Act, 2013 (Schedule III, Division I, Part I): Under the heading Trade Payables, it mandates separate disclosure of:
• Total outstanding dues of micro enterprises and small enterprises.
• Total outstanding dues of creditors other than micro enterprises and small enterprises.

2. Mandatory Disclosure Headings

The buyer company must provide the following five distinct amounts related to Micro and Small Enterprises (excluding Medium Enterprises) as a detailed note in their financial statements:

S. No.	Particular	Description
(i)	Principal Outstanding	The principal amount remaining unpaid as at the end of the accounting year.
(ii)	Interest Due on Principal	The statutory interest (at three times the RBI Bank Rate, compounded monthly) due on the principal amount in (i), remaining unpaid at the end of the accounting year.
(iii)	Interest Paid on Delay	The amount of interest paid by the buyer in terms of Section 16 during the financial year, along with the amount of the payment made to the supplier beyond the appointed day.
(iv)	Interest Due (Disallowed)	The amount of interest due and payable for the period of delay in making payment (for payments that were paid beyond the appointed day during the year) but without adding the interest specified under the MSMED Act. (This is for calculation clarity on payments already made.)
(v)	Further Interest Accrued	The amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues are actually paid to the small enterprise (relevant for Income Tax disallowance under Section 23).

3. Impact of Non-Compliance (The Disincentive)

The disclosure also reinforces the powerful disincentive against delayed payments contained in the Income Tax Act, 1961:

• Section 23 of MSMED Act: States that the statutory interest payable/paid for delayed payments under the MSMED Act shall not be allowed as a deduction for computing income under the Income Tax Act, 1961.
• Section 43B(h) of Income Tax Act, 1961 (Inserted by Finance Act, 2023): Mandates that any sum payable to a Micro or Small Enterprise shall be allowed as a deduction only in the financial year in which the amount is actually paid, if the payment is made beyond the maximum allowed time (15 days/45 days). This is the "Pay-when-Paid" rule applied specifically to MSEs, forcing companies to prioritise these payments before the year-end to claim the expense deduction.

The combination of the mandatory Form MSME-I filing (to the MCA), the detailed Schedule III disclosure (in Annual Accounts), and the Section 43B(h) disallowance (in the Tax Audit) creates a comprehensive regulatory framework to safeguard the financial health of Micro and Small Enterprises.