Stox N Tax

MSME Samadhaan – Recovery of Dues by MSMEs

Introduction

India’s Micro, Small and Medium Enterprises (MSMEs) form the backbone of its economy, contributing significantly to employment generation, exports, and GDP. However, one of the most persistent challenges faced by MSMEs is delayed payment from buyers—particularly large corporates and government departments. In response to this, the Government of India launched the MSME Samadhaan Portal under the aegis of the Ministry of MSME to facilitate filing of delayed payment complaints and ensure time-bound redressal.

This article explores the MSME Samadhaan portal in depth, along with the governing legal provisions, compliance obligations of buyers, redressal mechanisms, consequences of non-compliance, and recent developments including the new disclosure requirements under the Companies Act, 2013 and Income Tax implications.

1. Legislative Framework: Protection for MSMEs

The legal foundation for the MSME Samadhaan initiative is rooted in:

1.1 Micro, Small and Medium Enterprises Development (MSMED) Act, 2006

Key Provisions:

  • Section 15 – Obligation of buyer to make payment to supplier (MSE) within 45 days from the date of acceptance or deemed acceptance of goods/services.
  • Section 16 – Interest payable by buyer for delay beyond the above period at a compound interest rate, which is three times the bank rate notified by the RBI.
  • Section 18 – Empowers the supplier to make a reference to the Micro and Small Enterprises Facilitation Council (MSEFC) for dispute resolution.
  • Section 19 – Buyer cannot appeal against MSEFC’s award unless 75% of the award amount is deposited.
  • Section 22 – Obligation of buyers (companies) to disclose amount due to MSEs and interest paid or payable in their annual financial statements.

1.2 Other Relevant Legal Provisions

  • Companies Act, 2013 (Section 134 & 137, along with Schedule III) – Mandatory disclosure of MSME dues in the financial statements.
  • Income Tax Act, 1961 – Section 43B(h) (Effective AY 2024-25) – Deductions for expenses payable to MSEs allowed only if paid within the time limit prescribed under Section 15 of MSMED Act.

2. MSME Samadhaan Portal – Overview and Process

Launched on 30th October 2017, the MSME Samadhaan portal (https://samadhaan.msme.gov.in) enables Micro and Small Enterprises to directly file applications regarding delayed payments online.

2.1 Who Can File a Complaint?

Only Micro and Small Enterprises (not Medium) having a valid Udyam Registration are eligible to file.

2.2 Step-by-Step Filing Procedure

  1. Register with Udyam Portal (mandatory pre-condition).
  2. Login to MSME Samadhaan using Udyam Registration Number.
  3. Fill in details of buyer, invoice date, amount due, due date.
  4. Upload supporting documents: invoice copies, work orders, emails, agreements, etc.
  5. Submit the application electronically.
  6. Application is forwarded to the concerned MSEFC, which initiates conciliation or arbitration proceedings.

2.3 Role of MSEFC (Facilitation Council)

  • MSEFC functions as a quasi-judicial body under the Arbitration and Conciliation Act, 1996.
  • First initiates conciliation; if not resolved, proceeds to arbitration.
  • Orders passed are enforceable like a civil court decree.

3. Consequences for Buyers – Legal and Financial Impact

3.1 Penal Interest

  • Interest @ 3x RBI Bank Rate is mandatory under Section 16 of the MSMED Act.
  • Such interest is non-deductible under the Income Tax Act (as per judicial pronouncements).

3.2 Financial Reporting Requirements

  • Disclosure under Schedule III of Companies Act regarding:
    • Principal and interest due to MSEs
    • Interest accrued but unpaid
    • Interest paid during the year
  • Non-disclosure can attract CARO remarks and auditor qualifications.

3.3 Income Tax Disallowance (Section 43B(h))

  • Introduced via Finance Act 2023, applicable from AY 2024-25.
  • Any amount due to MSE not paid within 15 or 45 days (as applicable) shall be disallowed for tax computation.

4. Scenarios and Practical Implications

4.1 Case 1: Private Company Failing to Pay MSE Vendor within 45 Days

  • Interest accrues @ 3x bank rate.
  • Deduction for purchases will be disallowed under Section 43B(h) unless paid within prescribed time.
  • Must disclose liability in financials; auditors may qualify report.

4.2 Case 2: MSE Files Complaint via Samadhaan

  • Application sent to MSEFC.
  • Buyer summoned for conciliation/arbitration.
  • Decree passed for principal + interest, enforceable under civil law.
  • Buyer cannot appeal unless 75% of award is deposited.

4.3 Case 3: Buyer is a Government Department

  • No immunity.
  • Samadhaan portal is regularly used against departments like Railways, Defence PSUs, State Govts.

5. Legal Recourse for MSMEs Beyond Samadhaan

While MSME Samadhaan is a powerful tool, other legal remedies also exist:

  • Filing civil suits for recovery.
  • Arbitration clause if present in agreement.
  • Insolvency proceedings under IBC if debt exceeds ₹1 crore (for corporate buyers).
  • Complaint to ROC for non-disclosure in financials.

6. Audit and Compliance Considerations

6.1 For Auditors

  • Mandatory reporting of MSE dues under CARO, 2020 (Clause 3(v)).
  • Auditor must verify and report non-compliance with Sections 15 and 16.

6.2 For Companies

  • Maintain vendor-wise ageing report with MSME tagging.
  • Take declarations from suppliers whether they are registered MSEs.

7. Challenges and Suggestions

7.1 Challenges

  • MSEs unaware of the portal.
  • Buyers pressure MSEs to not report.
  • Delayed response by some MSEFCs due to lack of infrastructure.

7.2 Recommendations

  • MSEs should register and utilize the portal proactively.
  • Companies must implement internal controls to track MSE dues.
  • State governments should strengthen MSEFCs with trained officers.

8. Recent Updates and Policy Moves

  • Mandatory Udyam Registration for availing Samadhaan benefits.
  • Finance Act, 2023 – Introduction of Section 43B(h) to curb delayed payments.
  • MCA Circular dated 22 Jan 2024 – Reiterated the disclosure obligations under Schedule III.
  • Integration of Udyam and GST databases to validate supplier classification.

Conclusion

MSME Samadhaan is not just a grievance redressal portal—it is a vital economic reform initiative aimed at restoring the financial health of India’s micro and small business segment. With legal backing under the MSMED Act, compliance enforcements under Companies Act, and tax penalties under the Income Tax Act, the system is now robust and multidimensional. As Chartered Accountants and financial professionals, it is our duty to educate, assist, and ensure compliance for both suppliers and buyers. MSMEs should be encouraged to exercise their rights fearlessly, and buyers must be advised to build ethical procurement practices and financial discipline.

Annexures

Annexure I – List of Documents Required to File Complaint on Samadhaan

  • Copy of Udyam Certificate
  • Invoice Copies
  • Work Order/Purchase Order
  • Emails/Proof of Service/Delivery Challan
  • Declaration Letter

Annexure II – Key Legal References

ProvisionLawApplicability
Sec 15-16MSMED Act, 2006Delayed payments & interest
Sec 18-19MSMED Act, 2006MSEFC dispute resolution
Sec 22MSMED Act, 2006Disclosure in financials
Sec 43B(h)Income Tax ActDisallowance of unpaid MSE dues
CARO 2020 Clause 3(v)Companies ActAudit remarks on MSE dues

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