A Guide to MSME Form 1: Compliance, Applicability, and Due Date

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. This blog post aims to provide a comprehensive understanding of MSME Form 1, answering questions like what it is, who should file it, and when it should be filed. We will also touch upon MSME Form 1 applicability and how it affects MSME companies.

What is MSME Form 1?

MSME Form 1 is a half-yearly return issued by the MCA which rules that specified companies are required to file to disclose their outstanding payments to MSME suppliers. The MSME Return form was introduced by the Ministry of Corporate Affairs (MCA) on 22 January 2019 to strengthen the provisions of the MSME Development Act, 2006 (MSMED). The primary purpose of this MSME form is to keep track of companies that have outstanding dues towards MSMEs and to ensure that MSME suppliers receive their payments in a timely manner.

Who Should File MSME Form 1?

In a notification dated 2nd November 2018, the Ministry of MSME issued the following MSME Form 1 applicability guidelines:

New Delhi, the 2nd November, 2018 S.O. 5622(E).—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 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.

Read the full act here

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. This is a simple exercise that can be performed using SignalX’s MSME verification tool.

Identifying MSME vendors to calculate amounts due if any that requires to be disclosed

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

1. Screen your active suppliers to identify firms presently registered as MSME.
2. Identify dues if any to these suppliers and disclose through the MSME Form 1 filing.
   

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

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.

Conducting MSME registration checks on suppliers and vendors is a easy task using tools like SignalX’s 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.

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. .

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.

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:

1. CIN and PAN of the Company
2. Name, Address, and Email of the Company
3. Name and PAN of the Suppliers
4. Outstanding Amount Due
5. Date from Which the Amount is Due
6. Reason for Delay in Payment

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;

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.

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.

Non-Compliance Penalties

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 use of advanced verification tools like SignalX’s MSME verification solution can significantly streamline this process, making compliance easier and more efficient.

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.

In summary, MSME Form 1 compliance is not just a legal obligation but a step towards fostering a more equitable business environment. Companies must take proactive measures to ensure they are in full compliance to avoid penalties and contribute to the overall well-being of the MSME sector.