Introduction

MSME Form 1 compliance is an important activity for companies dealing with Micro, Small, and Medium Enterprises (MSMEs) in India. Pursuant to Order 2 and 3 dated 22 January, 2019 issued under Section 405 of the Companies Act, 2013],  MSME-1 as a half yearly return to be filed by all the specified companies to the ROC.

The Ministry of Corporate Affairs (MCA) has laid down specific MSME Return guidelines that companies must follow to ensure transparency and timely payments to MSMEs.

In exercise of powers conferred by Section 9 of the Micro, Small and Medium Enterprises Development Act, the Central Government hereby directs that all companies who get supplies of goods or services from micro and small enterprises and whose payments to micro and small enterprise suppliers exceed  45 (Forty five) days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of the Act, shall submit a half yearly return to the Ministry of Corporate Affairs stating the following

(a) The amount of payments due; and

(b) The reasons for the delay.

These companies who have received supplies of goods or services from micro and small enterprises and whose payments to micro and small enterprise suppliers exceed forty five days from the date of acceptance or the date of deemed acceptance of the goods or services are also referred to as Specified Companies in the subsequent MCA notification in January 2020.

To ensure compliance with MSME Form 1, it becomes necessary for businesses to assess if any of their suppliers and vendors are registered under the MSME Act. This is generally done through a disclosure at the time of onboarding. However, many times, suppliers end up not disclosing their MSME registration status at the time of onboarding, but mention their MSME numbers on the invoices.

In such situations, the customer is still required to extend benefits to the MSME and do the required disclosure under Form 1 if delay in payments beyond the specified timeline. Ensuring compliance with this regulation requires finances teams to screen their supplier base for their MSME registration status and Identifying MSME vendors to calculate amounts due if any that requires to be disclosed

Particulars of the name of suppliers and amount of payments due (number of entries to be specified subject to maximum 99 rows)

Applicability

1. Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019, all companies, who get supplies of goods or services from micro and small enterprises and whose payments to micro and small enterprise suppliers exceed forty five days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) (hereafter referred to as “Specified Companies”), shall submit a half yearly return to the Ministry of Corporate Affairs stating the following: a. the amount of payment due and b. the reasons of the delay;

2. Every specified company shall file in MSME Form I details of all outstanding dues to Micro or small enterprises suppliers existing on the date of notification of this order within thirty days from the date of publication of this notification.

3. Every specified company shall file a return as per MSME Form I annexed to this Order, by 31st October for the period from April to September and by 30th April for the period from October to March.

I. Steps to Identify the specified companies.

To comply with these regulations and ensure correct MSME Form 1 filings, businesses have to have to execute the following steps:

Screen your active suppliers to identify firms presently registered as MSME. 
Screening of suppliers twice a year is necessary function today, by the fact that suppliers some times do not disclose that they are MSME registered at the time of onboarding but end up mentioning MSME numbers on their invoices expecting benefits, secondly a supplier’s MSME status may change during the course of engagement – some may exceed the MSME requirements and end up being considered Large Enterprises and some may not have registered themselves as MSME at the time of onboarding but may have registered themselves as MSMEs during the course of engagement.

Identify dues if any to these suppliers and disclose through the MSME Form 1 filing.
Conducting MSME registration checks on suppliers and vendors is a MSME verification solution that is capable of providing you with the MSME registration status against PAN numbers and also the Udyam Numbers for MSMEs that have not disclosed the same to you at the time of onboarding. This greatly simplifies the process of complying with this mandate.

The above activity is required to be conducted twice in a Financial Year.

II. Questions & Answers

1. When to File MSME Form 1?

Understanding the timeline for filing MSME Form 1 is crucial for maintaining compliance and avoiding penalties. Here’s a simple breakdown of when you need to file an MSME return form:

Twice a Year: MSME Form 1  needs to be filed two times in a financial year by all companies receiving goods and services from MSME registered suppliers. .

1. October to March Period: If your outstanding payments to MSME suppliers fall between October and March, you must file the form by 30th April.
2. April to September Period: For outstanding payments between April and September, the deadline for filing is 31st October.

Details to be Reported in MSME Form 1

When filing MSME Form 1, companies need to provide a range of information to ensure transparency and compliance. Below is a list of the essential details that must be included in the form:

• CIN and PAN of the Company
• Name, Address, and Email of the Company
• Name and PAN of the Suppliers
• Outstanding Amount Due for the respective period
• Particulars of the name of suppliers and amount of payments due (number of entries to be specified subject to maximum 99 rows) – For each supplier, the other details such as period (FY from and FY to), Name, PAN
• Date from Which the Amount is Due
• Reason for Delay in Payment
• Optional Attachment if any

2. What is the MSME 45 Days Payment Rule?

The MSME 45 days payment rule is based on sections 15  and 2(b) of the MSME Act. Section 15 of the MSME Act reads as follows:

Liability of buyer to make payment.—Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day:

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.

There are two dates that are important in understanding the above provision which are the ‘Appointed Day’ and the ‘Day of Acceptance or Deemed Acceptance’. These are defined under Section 2b of the Act as follows.

Appointed Day is defined as the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

Day of Acceptance or Deemed Acceptance is defined as the date when the goods are actually delivered or services are provided; or in cases where the buyer formally objects in writing to the acceptance of goods or services within 15 days from the date of delivery or service provision, the date when the supplier resolves such objections;

3. Is MSME 1 mandatory?

MSME Form 1 compliance is a critical aspect for companies dealing with Micro, Small, and Medium Enterprises (MSMEs) in India. The Ministry of Corporate Affairs (MCA) has laid down specific MSME Return guidelines that companies must follow to ensure transparency and timely payments to MSMEs.

According to the MSMED act of 2016 from MCA, it is mandatory for *specified companies to identify their MSME vendors and file MSME form 1 twice every year.

October to March Period: If your outstanding payments to MSME suppliers fall between October and March, you must file the form by 30th April.

April to September Period: For outstanding payments between April and September, the deadline for filing is 31st October.

*Note: Specified companies means

(i) All companies,who get supplies of goods or services from micro and small enterprises and

(ii) whose payments to micro and small enterprise suppliers exceed 45 days from the date of acceptance or the date of deemed acceptance of the goods or services, shall submit a return e-form MSME FORM I to the MCA in the interval mentioned below

1. Initial return or
2. Regular half yearly return

4. How do I know if a Vendor is MSME?

To determine if a vendor is an MSME (Micro, Small, and Medium Enterprise), you can use various methods. One common approach is to perform an MSME search by PAN (Permanent Account Number). You can provide a list of PAN numbers to Chhota CFO, which will then verify the MSME registration status for each PAN.

Alternatively, you can also use the vendor’s GST (Goods and Services Tax) number to identify their PAN and subsequently check their MSME status. Other methods include searching by product or NIC (National Industrial Classification) codes on the MSME website, or by using the company name and address to identify the GSTIN and then the PAN for MSME verification.

5. How to calculate 45 days in MSME?

The MSME 45-day payment rule is based on sections 15 and 2(b) of the MSME Act in India. According to the rule, when an MSME registered supplier provides goods or services to a buyer, the payment must be made within 45 days from the “Day of Acceptance or Deemed Acceptance” of the goods or services. The “Day of Acceptance or Deemed Acceptance” is defined as the date when the goods are actually delivered or services are provided.

If the buyer formally objects in writing within 15 days from the date of delivery or service provision, the 45-day period starts from the date when the supplier resolves such objections. Failure to make payment within this 45-day window will require the buyer to pay interest to the MSME at a rate three times the bank rate notified by the Reserve Bank of India.

6. Micro, Small and Medium (MSME) Enterprises

MSME means In accordance with Micro, Small and Medium Enterprises Development Act, 2006, the manufacture and service enterprise is defined in terms of investment in plant & machinery and services respectively as micro, small and medium enterprise as explained below:

• Micro Small Medium –Manufacturing Enterprises

• Micro: Up to Rs. 25 lacs
• Small: More than Rs. 25 lacs but up to Rs. 5 crores
• Medium: More than Rs. 5 crores but upto Rs. 10 crores

• Micro Small Medium –Manufacturing Enterprises

• Micro: Up to Rs. 10 lacs
• Small: More than Rs. 10 lacs but up to Rs. 2 crores
• Medium: More than Rs. 2 crores but upto Rs. 5 crores

Medium Enterprise suppliers are not considered as per the notification. Trading enterprises are not covered under MSME Act

7. “Date of acceptance” means In accordance with MSME Act, 2006, “the day of acceptance” means-

• the day of the actual delivery of goods or the rendering of services; or

• where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier.

8. “date of deemed acceptance” means In accordance with MSME Act, 2006, “the day of deemed acceptance” means where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services.

9. Due date of Filing eform MSME FORM I

• Initial Return: Every specified company shall file in e-form MSME Form 1 details of all outstanding duesto Micro and Small enterprise suppliers existing on the date of notification of this order within 30 days from the date of publication (22.01.2019) of this notification.

As per MCA General Circular No.01/2019 dated 21.02.2019 the due date extended for filing of initial return. i.e. from the  date of deployment of e-form on MCA portal. The e-form MSME FORM I available from 01.05.2019 and due date for filing initial return is 30 days from 01.05.2019. i.e. 30th May of 2019

• Half yearly return: Every specified company shall file a half yearly return in e-from MSME Form I as: Filing Period Due date of Filing From April to September 31st October From October to March 30th April

Note: Since e-form MSME FORM I available from 01.05.2019, the due date for Half yearly return – October 2018 to March 2019, may be consider as 30th May of 2019

Now, summarizing the above, the MSME 45 day payment rule means the following:

Where any MSME registered supplier supplies goods or services to any buyer, the buyer must make payment to the supplier on or before the payment due date as agreed between the buyer and supplier in writing, provided that such an agreed due date should not exceed 45 calendar days from the date of delivery of goods or services. If any objection is raised on the delivery by the buyer in writing, then within 15 days from the date when the supplier resolves such objections.

If supplier and buyer have no agreement in writing that states the payment due date, payments are to be made to the MSME supplier within 15 days from the date of delivery of goods or services.

 III. Consequence of Delayed Payments to MSME Vendors

In the MSME Act, Section 16 deals the consequences of delayed payments to MSME suppliers This section states that if a buyer fails to make payment to an MSME within 45 days of the acceptance or deemed acceptance of goods or services (assuming a due date is in writing between the buyer and the supplier), the buyer will be required to pay interest to the MSME at a rate equal to three times the bank rate notified by the Reserve Bank of India.

The interest rate can be subject to change as per the notification from the Reserve Bank of India, and MSME Samadhaan portal may update the interest rate accordingly.

The interest is to compound monthly. The rate of interest as provided in this section of the MSMED Act is applicable notwithstanding anything contained in any agreement between the buyer and the supplier.

IV. Non-Compliance Penalties

Non-compliance with filing MSME-1 will attract a penalty under Section 405(4) of the Companies Act, 2013. Under this section, the penalty for non compliance with MSME return is stated as follows: If any company fails to comply, or furnishes any information or statistics which is incorrect or incomplete in any material respect, the company and every officer of the company who is in default shall be liable to a penalty of INR 20,000 and in case of continuing failure, with a further penalty of INR 1000 for each day after the first during which such failure continues, subject to a maximum of INR 3 lakh rupees.

Conclusion

Navigating the complexities of MSME Form 1 compliance is crucial for companies engaged with MSME companies in India. This comprehensive guide has aimed to demystify the various aspects of MSME Form 1, MSME return and MSME form 1 applicability from understanding what it is to knowing who should file it and when.

The Ministry of Corporate Affairs has set forth stringent guidelines to ensure that MSMEs are paid on time, thereby enhancing their financial stability. Companies are not only required to identify their MSME suppliers but also to disclose any outstanding payments through bi-annual filings.

The MSME 45-day payment rule and the penalties for non-compliance further underscore the government’s commitment to safeguarding the interests of MSMEs. Failure to comply can result in hefty fines and a tarnished reputation, making it imperative for companies to adhere to these regulations diligently.