The Ministry of Micro, Small, and Medium Enterprises (MSME) was approved in India in 2006. Enterprises in the manufacturing sector and enterprises in the service sector are the two types of enterprises that can register under the MSME Act. The pillar of strength for the country’s economy is MSME. Micro, small, and medium enterprises are very important for both developed and developing countries. MSME is required to boost the economy and employment of the nation. In this article, we will discuss MSME compliances.
In numerous developed and developing nations around the globe, Micro Small and Medium Enterprises or MSMEs stand as pivotal contributors to economic growth. MSMEs play a role in propelling our economy’s advancement and are regarded as the driving force behind progress.
Within India, the MSME sector holds substantial influence. To support the owners of these enterprises, the government has undertaken a variety of initiatives and extended benefits aimed at enhancing the efficiency of MSME operations. These measures serve to systematise records, ultimately contributing to the future acceleration of the country’s GDP growth. This article will provide an overview of MSME compliances in India, its importance, and the various compliance requirements that MSMEs need to adhere to.
What is an MSME?
MSME compliances in India, one must know the classification of MSMEs as per revised government criteria. MSMEs, which stands for Micro, Small, and Medium Enterprises, encompass a classification of business entities characterised by their size and annual turnover. In the context of India, these enterprises are categorised based on their investment in plant and machinery or equipment utilised for production activities. The MSME Development Act of 2006 outlines specific criteria for determining the classification of MSMEs:
1. Micro Enterprises- Micro Enterprises are defined as enterprises where the investment in plant and machinery or equipment does not surpassRs. 1 crore, and the annual turnover remains up to Rs. 5 crores. These small-scale units form the foundation of local economies and play a vital role in employment generation.
2. Small Enterprises- Small Enterprises are enterprises in which the investment in plant and machinery or equipment ranges from over Rs. 1 crore to Rs. 10 crore. Simultaneously, the annual turnover falls between Rs. 5 crores and Rs. 50 crores. This category represents a step beyond micro enterprises and often marks a phase of growth and expansion for businesses.
3. Medium Enterprises- Medium Enterprises are enterprises with an investment in plant and machinery or equipment ranging from over Rs. 10 crores to Rs. 50 crores. The annual turnover for medium enterprises falls within the range of Rs. 50 crores to Rs. 250 crores. These enterprises typically exhibit higher levels of operational scale and complexity.
Importance of MSME Compliance
Compliance with laws and regulations is not only a legal requirement, but also a business imperative. Failure to comply can lead to serious consequences such as sanctions, fines, legal action, loss of reputation, and even business closure.
In addition, compliance helps SMEs build credibility, gain the trust of their customers, investors, and other stakeholders and create a level playing field for all market players.
Significance of MSME Compliances in India
1. Reputation and Integrity- The reputation of an MSME holds immense value. Failure to comply with regulations can tarnish a business’s reputation, erode trust among customers, investors, and stakeholders, and thereby hinder growth opportunities. On the other hand, a reputation for adherence to compliance standards bolsters credibility and fosters positive relationships.
2. Sustainable Trust- MSME Compliances in India is a cornerstone of building sustainable trust within the business ecosystem. By adhering to legal mandates, MSMEs cultivate trust among stakeholders, from customers who rely on safe and ethical products/services to investors seeking secure investment opportunities. This trust forms the basis for long-term success.
3. Equitable Market Environment- A level playing field is essential for fair competition. When all market players adhere to the same compliance standards, the competition is based on merit rather than unfair advantages gained through non-compliance. This ensures healthy market dynamics and encourages innovation.
Reasons for MSME
The Government of India has introduced Micro, Small, and Medium Enterprises (MSME) Development to facilitate the promotion and development of MSMEs for the following reasons:-
- Improve the implementation of SME payments
- To implement statutory consultation and referral policies,
- Establish statutory MSME registration procedures and a statutory basis for purchasing preferences and credit policies
- To remove obstacles caused by multiple laws.
MSME compliances
Section 9 of the MSMED ((Micro, Small and Medium Enterprises Development) Act defines specific companies for which MSME Form 1 is very important compliance.
These specified companies submit MSME Form 1 once every six months to the Ministry of Corporate Affairs (MCA).
The listed companies are required to submit an annual return of outstanding payments to MSMEs to the Registrar of Companies (ROC) every year, which includes information on the amount due for payment and the reason for the delay. The above companies can file MSME Form 1 only if their outstanding payment to MSME suppliers has exceeded 45 days.
MSME Form 1 (MCA)
MSME Form 1 shows detailed and complete information with the registrar about outstanding payments to micro or small enterprises for more than 45 days in a half-year. The Ministry of Corporate Affairs has made changes to the protection and safeguarding of the interests of small businesses or enterprises.
MSME Form 1 on a half-yearly basis has to be filed by specified enterprises operating in India as MSME. To close the outstanding fees, these businesses must file the form and it must be filed within 30 days of the notification.
The MSME compliances that you should be aware of are-
- Every MSME operating in India has a match. Compliance is mandatory for running MSME businesses.
- Section 9 of the Micro, Small, and Medium Enterprises Development (MSMED) Act 2006 defines MSME Form 1. The said form should be filed on time.
- In India, every MSME has to file MSME Form 1 with the Ministry of Corporate Affairs of India once every six months.
- Director/CS/CEO/CFO/Manager can sign MSME Form 1 electronically as they are authorized by the company.
- DIN details for Director and Manager, Company Secretary, CEO, and CFO PAN card details must be provided.
- In the case of a supplier; FYI form, supplier name, PAN details of the supplier, the amount due and date from which the amount was due, the reason for late payment and if there is any optional attachment it must be. This data must be provided by each supplier.
Duties of MSME
- All MSME suppliers must be registered under the MSME Act.
- If there is any payment due at the end of the financial year, MSME has to check it. The due date of payments must not be longer than 45 days from the receipt of goods and services.
- Filing of Payables Returns is a must and must be done by all MSMEs. In MSME Form 1 this would be done and the reason for the delay should be mentioned.
Certain specifications are required such as:-
- The total amount due is essential
- Supplier company information
- The liability starts on a certain date, so the date from which the liability started should be given.
- PAN card of supply companies is a must.
Penalties
It is mandatory to comply with these agreements, otherwise, there would be sanctions for non-compliance. An MSME that fails to comply will be liable for the penalties listed below-
- Under Section 405(4) of the Companies Act, 2013, a defaulting company would be fined INR 25,000.
- Under this provision, any officer who failed to comply would also be liable to imprisonment for six months.
FAQs
Q: What is MSME compliance?
MSME compliance refers to adhering to the regulations and requirements set by the government for Micro, Small, and Medium Enterprises. These regulations often include registration, reporting, and other statutory obligations.
Q: Who qualifies as an MSME?
the definition of MSME is based on criteria such as investment in plant and machinery or equipment and annual turnover. The exact criteria may vary by country. As of my last knowledge update in January 2022, India’s definition, for example, was based on investment in plant and machinery or equipment for manufacturing enterprises and on annual turnover for service enterprises.
Q: Is MSME registration mandatory?
MSME registration is not always mandatory, but it offers various benefits such as access to credit, subsidies, and other government schemes. Many businesses choose to register voluntarily to avail themselves of
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