Small enterprises to benefit from Companies' Act amendment

A recent Notification issued by the Union Ministry of Corporate Affairs reinforces compliance with the balance sheet disclosure norms prescribed in the MSMED Act for defaulting buyers, and the statutory auditors are bound to ensure such compliance. The interest amounts (already paid and/or accrued due and remaining paid) for the period of delay in settling the bills of micro/SSI units as disclosed in the balance sheet will be subject to income tax (at 33.99% presently) as provided in Section 23 of the MSMED Act, which will as a more effective deterrent against delays in settling bills of MSMEs.

Despite representing from Oct 2006 for such amendment, the same has been delayed and has eventually come into effect only from 16.11.2007 with the result that virtually no balance sheet of any defaulting buyer for the previous year 31.03.2007 (which would have been finalized by 30.09.2007), would have contained the statutory disclosures, and so would have escaped liability to income tax on the interest amounts, in the assessment year 2007-2008.

The issue of similar amendments to the Income Tax Act, 1961 and Income Tax Rules, 1962 (with the continued support of the Union Ministry of MSME) is also pending a resolution since Oct 2006. It is now understood that the Union Ministry of Finance (CBDT) will include the requisite amendments in the Finance Bill 2008, so as to complete the process of knitting together and streamlining the regulations in the MSMED Act, the Companies’ Act, the Income Tax Act and Rules, which will largely ensure prompt settlement of the amounts due to the micro/small enterprises by their customers at least from fiscal 2007-2008 onwards.

It is pertinent to note in this connection that a column has already been included in the revised IT Return forms effective from FY 2007-2008, for disclosure of interest paid/payable to micro/SSIs for delayed settlement of their bills and subject the same to IT. But this had not been complied with by any defaulting assessee-buyers and their statutory auditors also failed to enforce compliance, BECAUSE no enabling provision had been made simultaneously in the IT Act/Rules/Form 3 CD. If the IT Act/Rules are amended at least in the Finance Act, 2008, we can hope for stricter compliance from fiscal 2007-2008 onwards.

To disclose delayed payment of bills
The relevant excerpts from the Notification mentioned above are reproduced below for the benefit of readers:
Alteration in Schedule VI of Companies Act, 1956 – Form of Balance Sheet

1. In the said Schedule in Part I Form of Balance Sheet, under heading, “Horizontal Form”, …the following shall be disclosed under notes to the accounts:-

a) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;

b) the amount of interest paid by the buyer in terms of Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;

c) the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under the Micro, Small and Medium Enterprises Development Act, 2006;

d) the amount of interest accrued and remaining unpaid at the end of each accounting year and;

e) 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 enterprises, for the purpose of disallowance as a deductible expenditure under Section 23 of the Micro, Small and Medium Enterprises Development Act, 2006.

2. In the second column, relating to “Liabilities”, under the heading “current liabilities and provisions” after item (2), the following sub-items shall be substituted namely –

a) total outstanding dues of micro enterprises and small enterprises and;

b) total outstanding dues of creditors other than micro enterprises and small enterprises.