Suppliers usually think of the Micro, Small and Medium Enterprises Development Act, 2006 as a recovery statute — Section 18 references, Samadhaan, compound interest. But the Act also operates on the buyer's books. Sections 22 and 23 make delayed payments visible in the buyer's audited accounts and expensive in its tax computation, and companies must additionally file half-yearly returns of outstanding MSME dues. For a supplier's counsel, these provisions are leverage; for a buyer's counsel, they are a compliance checklist whose neglect surfaces at the worst moments — audits, due diligence and litigation. This explainer covers both perspectives.
The statutory design: make delay visible, then make it expensive
The MSMED Act attacks payment delay from three directions. Sections 15 and 16 create the liability: payment within the agreed period not exceeding forty-five days from acceptance or deemed acceptance, failing which compound interest runs at three times the RBI bank rate with monthly rests. Section 18 creates the forum. Sections 22 and 23 then do something subtler — they conscript the buyer's own auditors, accounts and tax computation into the enforcement effort.
Section 22: disclosure in audited accounts
Every buyer whose annual accounts undergo audit must state, in those accounts, the anatomy of its MSME payables:
- principal and interest remaining unpaid to micro and small suppliers at the close of the year;
- interest actually paid under Section 16, with the delayed payments to which it relates;
- interest due and payable for the period of delay on amounts paid late without interest;
- interest accrued and remaining unpaid; and
- interest remaining due in succeeding years, until actually paid, for disallowance purposes.
The disclosure is not a formality. It creates a written, audited admission of the state of accounts with MSME suppliers — material that surfaces in Section 18 proceedings, in negotiations, and in insolvency. A buyer that under-discloses creates audit exposure; a buyer that discloses accurately hands its suppliers a running acknowledgment of the debt position.
The half-yearly return: MSME Form-1
Layered on top of the MSMED Act, the Companies Act machinery requires specified companies — those receiving goods or services from micro and small enterprises with payments outstanding beyond forty-five days — to file half-yearly returns with the Registrar of Companies disclosing the outstanding amounts and the reasons for the delay. Directors sign these returns; misstatement carries its own consequences under company law. Two practical effects follow. First, a company's payment discipline toward MSMEs becomes a searchable public record. Second, the return forces an internal reconciliation every six months: finance teams must identify which creditors are registered MSMEs — which is why buyers now routinely seek Udyam registration details at vendor onboarding.
Section 23: the tax sting
Ordinary commercial interest
Interest paid on trade dues or borrowings is generally a deductible business expense, reducing taxable profit — delay has a partially tax-subsidised cost.
Section 16 MSMED interest
Expressly disallowed as a deduction by Section 23 MSMED Act. The buyer bears the compounded penal interest entirely out of post-tax profits, with the disallowance recurring every year until payment.
The combined arithmetic is punishing: compound interest at three times the bank rate, monthly rests, no tax shield. Separately, income tax law also disciplines the principal itself — payments to micro and small enterprises made beyond the Section 15 timeline attract deferral of deduction under the Income-tax framework applicable to such payments, so even the purchase cost can lose its timing benefit when the supplier is kept waiting.
Practice note for suppliers: Keep the paper trail that these provisions presuppose — Udyam registration certificate communicated to the buyer, invoices bearing the registration number, and proof of delivery or acceptance. The buyer's statutory disclosures are keyed to your status as a registered micro or small enterprise; an undisputed registration on the record removes the buyer's most common escape route.
Where these provisions bite in litigation
In a Section 18 reference, the buyer's audited disclosures and ROC returns serve as corroboration of the debt and its ageing. In a challenge to an award, they undermine pleas that the debt was disputed in good faith. In insolvency proceedings, they help establish default. And in settlement negotiations, the accumulating non-deductible interest gives the buyer's own advisers a reason to close: every month of delay makes the eventual cheque larger and the tax position worse. Defending buyers, conversely, should treat the compliance stack as a warning system — a supplier appearing in the MSME ageing report for two consecutive returns is a dispute that should be resolved or provisioned, not ignored.
The takeaway
Sections 22 and 23 convert delayed payment from a private default into an audited, filed and tax-penalised fact. Suppliers should invoke the compliance web deliberately — in notices, in references and in negotiation. Buyers should manage it proactively: identify MSME vendors at onboarding, reconcile the forty-five-day position half-yearly, and remember that the cheapest date to pay a micro or small enterprise is always today.
Frequently Asked Questions
What must a buyer disclose in its annual accounts?
Section 22 MSMED Act requires any buyer who is required to get its annual accounts audited to disclose: the principal and interest remaining unpaid to any micro or small supplier at year end; interest paid along with amounts paid beyond the appointed day; interest due and payable for the period of delay; interest accrued and remaining unpaid; and further interest remaining due in succeeding years until actually paid.
What is MSME Form-1?
Under the Companies Act framework, specified companies whose payments to micro and small suppliers remain outstanding beyond forty-five days must file a half-yearly return with the Registrar of Companies stating the amounts outstanding and the reasons for delay. The return makes a company's payment behaviour a matter of public record accessible in due diligence.
Is the penal interest tax-deductible for the buyer?
No. Section 23 MSMED Act provides that interest payable or paid under Section 16 is not allowed as a deduction in computing income under the Income-tax Act. The buyer therefore pays the compounded interest out of post-tax profits — a deliberate legislative sting that makes prolonged default irrational for a tax-paying entity.
How does a supplier use these provisions in a dispute?
A demand notice that cites the buyer's own disclosure obligations — and the auditor's duty to report MSME dues — often changes negotiating behaviour, because finance teams and auditors become internal advocates for settlement. In proceedings, the buyer's accounts and MSME Form-1 filings can corroborate the debt and the delay.