MSME Guide

MSME, an acronym for Micro, Small and Medium Enterprises, encapsulates a sector that’s synonymous with growth, innovation, and dynamism in India’s economy. Also known as Small Scale Industries (SSI), this sector has been steadily expanding over the last six decades. The government has played a significant role in promoting MSME through various policies, initiatives, and support mechanisms. The Udyam Registration system, investment classifications, and various incentives reflect an ongoing commitment to fostering growth within this sector.

The Uniqueness of MSME:

Employment Generation

MSMEs are a major employment engine, providing opportunities across various skill levels. Unlike large industries that require substantial capital investment, MSMEs are more labor-intensive, resulting in employment creation at a lower cost.

Rural and Backward Area Development:

MSMEs are instrumental in rural industrialization. By setting up units in remote areas, they contribute to regional development, alleviating disparities between urban and rural regions. This leads to balanced growth and social inclusion.

Complementary to Large Industries:

MSMEs are not competitors to large industries but complementary. They often act as ancillary units, supplying essential components, intermediate goods, and finishing tasks, thereby forming a synergistic relationship.

Equitable Distribution of Wealth:

The decentralized nature of MSMEs ensures a fairer distribution of wealth and income across the country. They promote a more balanced development model by allowing entrepreneurship and innovation to thrive in various regions.

Agility and Flexibility:

MSMEs are known for their agility and ability to adapt to market changes. Their size allows them to respond quickly to new trends, demands, or shifts in the economy.

Eligible Enterprises for Udyam registration under New MSME schema.
Any Kind of Business Entity or Enterprise or Undertaking is qualified to acquire the Udyam Registration Certificate: -

• Individual or Proprietorship
• Hindu Undivided Family (HUF)
• Undertaking
• Partnership firm
• Limited Liability Partnership (LLP)
• Company
• Co-operative Societies
• Association of persons or Body of Individuals
• Others

Classification of MSMEs:

Definition of MSMEs revised effective from 1st July 2020, the Government of India introduced a new classification for MSMEs. This new classification combines both investment and annual turnover criteria, leading to a more holistic view.

List of permitted Business Activities for Udyam Registration under NEW MSME Schema:

• Enterprises engaged in manufacturing
• Enterprises engaged in services

Services covered (Illustrative)

• Business Processing Services or Knowledge Processing Services
• Celebrity Management Services
• Sports Management Services
• Event Management Services
• Logistics Management Services
• Tours and Travel Management Services
• Consultancy Services including Management Services;
• Renting of Agricultural Machinery (Harvesting)
• Composite Broker Services in Risk and Insurance Management;
• Third Party Administration (TPA) Services for Medical Insurance Claims;
• Seed Grading Services;
• Training-cum-Incubator Centre;
• Educational Institutions;
• Training Institutes;
• Practice of Law, i.e., Legal services;
• Trading in medical instruments (brand new);
• Placement and Management Consultancy Services; and
• Advertising agency and Training centres
• Re-treading of tyre
• Infrastructure and real estate activities
• Power Distribution Service
• Warehouse, godown and cold storage services

Enterprises engaged in Trading w.e.f July 2,2021 however, benefits to Retail and Wholesale Trade MSMEs are to be restricted to Priority Sector Lending only.

List of Business Activities which are not permitted for Udyam Registration under NEW MSME Schema

• Forestry and logging
• Fishing and aquaculture
• Activities of households as employees for domestic personnel
• Undifferentiated goods and services producing for own use.
• Activities of extraterritorial organisations and bodies

Benefits of MSME:

• Subsidized Loan from banks with low interest rate
• Collateral free loans from banks
• Protection against delayed payments, against material/services supplied
• Time Bound resolution of disputes with Buyers
• ISO certification fees reimbursement
• NSIC performance and credit rating fees subsidy
• Counter Guarantee from Government of India through CGSTI
• Electricity bills concession
• Ease of obtaining registrations, licenses, and approvals
• Special beneficial reservation policies in the manufacturing/ production sector
• Preference in procuring Government Tenders
• Government security deposit (EMD) waiver (Useful while participating tenders)
• Patent registration subsidy
• International trade fair special consideration
• Technology Upgradation linked subsidy
• Industrial Promotion Subsidy (IPS) Subsidy Eligibility.

Required Documents for Udyam Registration:

• Aadhaar - Proprietor, Partner, HUF and in case of companies - Aadhaar number of authorised signatories
• Aadhaar Number has to be linked to PAN Number of the Assessee.
• Now Income Tax Return can be filed based on Aadhaar Number whereby PAN Number shall be allotted such Aadhaar Card holder by the Income Tax Department.
• Value of Plant and Machinery as reported in ITR and GST Turnover details shall be automatically verified through GSTN Portal.
• List of Business activities to be listed out in the Udyam registration applications (no limit to any number of activities) but care should be exercised that whatever activities that we are reporting are the same activities disclosed under other laws viz. Income Tax, GST, Company Law or any other Law.

Udyam Registration: A Step-by-Step Guide
Step 1: Navigate to the Udyam Registration Portal

• URL: https://udyamregistration.gov.in/
• This is the official website for Udyam Registration, making the process accessible online.

Step 2: Create an Account Using Aadhaar Number

• An Aadhaar number links the business with its proprietor or authorized representative, ensuring unique identification.

Step 3: Fill in Business Details:

• Name: The legal name under which the business operates.
• Address: The official location of the business.
• Type of Organization: Whether the business is a sole proprietorship, partnership, company, etc.
• Bank Details: Information on the business’s bank account.

Step 4: Provide Investment Details

• Information about the investment made in plant and machinery or equipment, depending on the nature of the enterprise (manufacturing or service).

Step 5: Upload Required Documents

• Aadhaar Card: For identity verification.
• PAN Card: For tax-related purposes.
• Bank Statement: To verify the bank details provided.

Step 6: Verify and Submit the Application

• Ensures accuracy and completeness of the information.
• Submission initiates the verification process.

Step 7: Receive Acknowledgement

• An acknowledgement with a unique registration number confirms the successful submission.
• This number can be used to track the application status.

Step 8: Obtain the Registration Certificate

• After due verification, the registration certificate with the Udyam Registration Number will be issued.
• This is the final document, providing official recognition as an MSME.

Calculation of investment in Plant and Machinery or Equipment

• The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years filed under the Income Tax Act, 1961.
• The expression - plant and machinery or equipment of the enterprise, shall have the same meaning as assigned to the plant and machinery under the Income Tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings).
• The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Act shall be excluded from the calculation of the amount of investment in plant and machinery.
• In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.
• The purchase (invoice) value of a plant and machinery or equipment, whether purchased first hand or second hand, shall be taken into account excluding Goods and Services Tax (GST), on self-disclosure basis, if the enterprise is a new one without any ITR.

Calculation of Turnover

• Exports of goods or services or both shall be excluded while calculating the turnover of any enterprise
• Information as regards turnover and export turnover for an enterprise shall be linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN.
• The turnover related figures of such enterprises which do not have PAN will be considered on self-declaration basis for a period up to 31st March 2021 and thereafter, PAN and GSTIN shall be mandatory.

Suggestions for the maintenance of accounting data in respect of MSME

Maintenance of accounting records plays a significant role for the timely recording, reporting and compliance in respect of the MSME. Each stakeholder must be vigilant in maintaining the records so that such information is available at the click in respect of records maintained in electronic formats. Following records may be maintained which will prove to be greatly beneficial for enterprises in general:

• All Organisations shall maintain the digital copies of all statutory registrations so that same can be shared with clients or any authorities if desired.
• All Organisations shall introduce the process of KYC for pre-qualifying their suppliers to identify if they are registered under the provisions of MSME. If not registered, then suitable declarations duly executed on the letterhead of the client must be kept on record;
• If Supplier is registered under MSME then such Udyam registration information should be properly and prominently disclosed on all Tax Invoices, Vouchers, Documents, physical and electronic Communications so that Client or Recipient is aware that supplier is registered under the MSME category;
• The accounting systems of all Stakeholders shall capture such information of MSME registrations so that transactions or supplies procured are captured in the MIS reporting to ensure that their dues are settled on or before the 45 days from the date of the valid invoice irrespective of the credit period given by the suppliers;
• An MSME Supplier whose dues are not getting settled within 45 days can, as an aggrieved person, file a complaint on MSME SAMADHAAN - Delayed Payment Monitoring System.
• If the dues of MSME Vendors are settled on or before 45 days, then it would save the outgo on account of interest payable to such vendors as per section 23 of the MSME Act, 2006.
• Timely settlement of MSME dues would help to build the goodwill of an enterprise and at the same time it would also benefit the MSME Vendors in general.
• If Accounting MIS reports are well conceptualised, designed and formalised, it would help to improve the working capital management of the business enterprise. (Fields of information in Accounting MIS Reports can be synchronised with various reporting requirements under Income Tax Act 1961, Companies Act 2013, The Limited Liability Partnership Act 2008 and any other laws. These are covered in subsequent paras, thus same are not deliberated here).
• Proper compliance with Udyam norms by all stakeholders shall benefit everyone whereby the MSME Sector shall achieve greater presence and hegemony in various spheres of business activities. It will enable today’s MSME Enterprises to scale up its operations which in turn would generate employment opportunities for a gender-neutral workforce in most segments of business activities;
• Considering the data integration and cross-verification of Income Tax Returns with MSME Udyam Registration and reporting of Transactions in Form 26AS/AIS/TIS as well as Compliance on the Income Tax Portal, care should be taken to ensure that accounting data is always reconciled across all data points before filing of Income Tax Returns of any enterprises;
• While capitalising any item of Plant and Machinery in the books of accounts, care should also be appropriately taken that they are capitalised considering the provisions of MSME Act 2006 and claiming the benefits of Input Tax Credits as permissible under the provisions of Goods and Services Act 2017 and it is properly disclosed in the Depreciation Schedule of the Business Enterprise in general.
• If any capital subsidy is received under MSME provisions granting such benefits, then such subsidy needs to be reduced from the cost of such Plant and Machinery and it should be properly accounted in the books of accounts of the Business Enterprise.
• If Revenue subsidy is received under MSME provisions granting such benefits, then it should be disclosed as “Other Income “in the books of account of the business enterprise and it should also be reported and disclosed appropriately in the financial statements of the MSME Business Enterprise.
• If MSME Compliances are routinely and properly adhered to, it would help an Enterprise to enjoy a good credit rating, and will also enable it to obtain concessional loans at lower rates of interest. Sovereign is encouraging MSME sector by providing various concessions such as Capital Subsidies, GST Refunds, Waiver of Loan processing fees, Reduced rate of fees in respect ISO Certifications, Reduced Rates of electricity charges and so on…………….
• To conclude, in my considered opinion, good accounting documentation, timely accounting and professionally designed MIS reports can play a significant and vital role in MSME compliance of any business enterprise. In fact, such an accounting centre can act as a Profit Centre for evaluating the yardstick performance of a business enterprise.

Impact of MSME Registration and Disclosure Requirements under Income Tax Act 1961

Under the provisions of the Income Tax Act, 1961 several obligations are cast upon the Business Assessees in respect of business transactions with MSME. Non-compliance can result in monetary outgo in the form of penalties for the incorrect determination of Total Income u/s 28 of the Income Tax Act 1961 irrespective of the fact as to whether Tax Audit is applicable u/s 44AB or presumptive system of taxation under section 44AD/Section 44ADA/ Section 44AE and certain other provisions.

• This clause 22 is applicable to all the Assessees and requires Tax Auditor to report specifically in Form No 3CD, the amount of interest inadmissible u/s 23 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED, Act 2006).
• As per the said section, any interest for delayed payment to Micro, Small and Medium Enterprises is not allowed as deductible expenditure while computing the income of the assessee under the Income Tax Act, 1961.
• If Tax Auditor does not report such fact of non-deductible expenditure in Form 3CD signed by him, then he shall be liable to face the disciplinary actions as per Code of Ethics applicable to any member who is governed as per the provisions of the Chartered Accountants Act, 1949.

Section 43B Changes by Finance Bill, 2023

Payments to MSME Enterprises as provided under section of 15 MSME Act are now included for the purpose of disallowing u/s 43B(h) of the Income Tax Act 1961 for all the assessees (whether tax audit is applicable or not) (i.e. any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 1554b of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), which essentially means that if payment to such supplier is not done as per timelines specified then it would be compulsorily disallowed but allowed to be deducted on payment basis only.
Following clause (g) shall be substituted for the existing clause (g) of Explanation 4 to section 43B by the Finance Act, 2023, w.e.f. 1-4-2024:

• (e) “Micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006);
• (g) “Small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006)
• As the amendment to section 43B of the Act would allow the payment as deduction only on payment basis, it will be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.
• Further, disallowance u/s 43B of the Income Tax Act, 1961 shall not applicable to the enterprises falling under the categories of “medium enterprises”. Thus, such classification needs to be examined and monitored on yearly basis.
• Further, there is dissenting view expressed by many experts that even though Traders are allowed to be registered under the provisions of MSME Act, 2006, that such traders can’t be considered as enterprise as envisaged under MSME Act, 2006. With utmost respect, as author of this article, I would like to state that such aggressive view would increase the litigation and time involved in getting relief from the litigation by exploring alternative remedies is often unpredictable which may hamper the business feasibility of many enterprises in general.
• All Taxpayers need to consider the above provisions while planning for their Advance Tax liability, MAT/AMT Workings and/or its impact on carry forward of business loss as per the provisions of the Income Tax Act and Rules thereunder especially considering time limits specified u/s 139 shall not extended in future.
• Liability outstanding as on 31st March of the previous year shall be allowed as deduction only if paid within 15/45 days (which period shall expire any time after 31st March), as the case may be. For the balance, only on payment basis in the respective financial years.

Relevant provisions of MSMED Act, 2006: -

Section 15 of MSMED Act, 2006.

• This section requires the buyer to make payment on or before the date agreed upon in writing, or where there is no agreement in this behalf, before the appointed day. It also provides that the period agreed upon in writing shall not exceed 45 days from the day of acceptance or the day of deemed acceptance.

Section 16 of MSMED Act, 2006.

• Section 16 of the MSME Act provides for the date from which and the rate at which the interest is payable. Accordingly, where a buyer fails to make payment of the amount to the supplier, as required u/s 15, the buyer shall, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed date 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 Reserve Bank.

Section 22 of MSMED Act, 2006.
This section provides that where any buyer is required to get his annual accounts audited u/s 44AB of Income tax Audit,1961 or under any law, such buyer shall furnish the following additional information in his annual statement of accounts, namely: -

• The principal amount and interest due thereon (to be shown separately) remaining unpaid.
• The amount of interest paid by the buyer in terms of Section 16 along with the amount of payment made to supplier beyond the appointed date during each accounting year.
• The amount of interest due and payable for the delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act
• 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 u/s 23.

Section 23 of MSMED Act, 2006

• This section provides that notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.

Impact of MSME Registration and disclosures requirements under Companies Act 2013

Half yearly reporting requirements under Companies Act, 2013
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 45 days shall submit a half yearly return (eform MSME Form I) to the ministry of corporate affairs (MCA) stating the following: -

• the outstanding amount due and
• the reasons for delay;

Suggested disclosure in the financial statements: -

Specified Companies: As per the provisions of section 9 of the MSME Development Act, 2006, Specified companies are those companies who receive the supply of goods or services from MSMEs and the payment against these supplies to the suppliers of these MSMEs exceed 45 days from the date of acceptance (deemed acceptance) of the goods or services.

Following the provision of section 405 of the Companies Act, 2013, (18 of 2013), the Central Government made it necessary for all the “Specified Companies” to furnish the above-notified information about the payment to micro and small enterprise suppliers.

Late Filing Penalty for MSME Form 1:
Section 405(4) which includes non-furnishing/incomplete/incorrect information penalty states a fine up to Rs.25000 (Co.,), Rs.25000/- (Min) & Rs.3 lacs (max) and imprisonment of 6 months for directors or both. Therefore, it is mandatory for Directors to file and submit i.e., in MSME form 1.

Details required for Half Yearly Return
Information to be compiled for the filing of MSME -I:

Services we offer to MSMEs:

We specialize in offering tailored solutions for Micro, Small, and Medium Enterprises (MSMEs), addressing their unique needs and challenges. With our dedicated support and expertise in MSME services, you'll receive personalized guidance to propel your business forward. Here are the services we offer for MSMEs.

Registration of MSME:
At Kanumuri & Co, we facilitate the seamless registration of your Micro, Small, or Medium Enterprise (MSME) to ensure compliance with regulatory requirements. Our team assists you throughout the registration process, making it simple and hassle-free.

Assistance in Understanding What is MSME:
Our experts provide comprehensive guidance on understanding the concept and classification criteria of MSMEs. We help you determine the eligibility criteria and benefits associated with being recognized as an MSME, empowering you to make informed decisions for your business.

Income Tax Implications:
We offer expert insights into the income tax implications specific to MSMEs, ensuring compliance with tax laws and regulations. Our team helps you understand your tax obligations, deductions, exemptions, and other relevant aspects to optimize your tax position and minimize liabilities.

Help in Understanding Requirements Under Various Acts:
Navigating the regulatory landscape can be challenging for MSMEs. At Kanumuri & Co, we provide tailored assistance in understanding the requirements under various acts applicable to MSMEs, such as the Companies Act, labor laws, environmental regulations, and industry-specific legislation. Our experts offer clarity on compliance obligations, helping you stay on the right side of the law while focusing on business growth.

Assistance in Loans to MSMEs:
We understand the importance of access to finance for MSMEs. Our team assists in facilitating loans and financial assistance for MSMEs, connecting you with suitable lending institutions and guiding you through the loan application process. We help you access the funds needed to fuel growth and expansion while ensuring compliance with relevant regulations.

With Kanumuri & Co, you can count on reliable support and guidance at every step of your MSME journey, ensuring compliance, efficiency, and success.