About MSMED Act

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UNDERSTANDING The MICRO, SMALL, MEDIUM ENTERPRISE DEVELOPMENT ACT 2006

CHAPTER I: PRELIMINARY

1. (1) This Act may be called the Micro, Small and Medium Enterprises Development Act, 2006.
(2) It shall come into force on such date as the Central Government may, by notification, appoint; and different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.

2. In this Act, unless the context otherwise requires, -
(a) "Advisory Committee" means the committee constituted by the Central Government under sub-section (2) of section 7;
(b) "appointed day" means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

Explanation – For the purpose of this clause,-
(i) "the day of acceptance" means,-
(a) the day of the actual delivery of goods or the rendering of services; or
(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;
(ii) "the day of deemed acceptance" means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;
(c) "Board" means the National Board for Micro, Small and Medium Enterprises established under section 3;
(d) "buyer" means whoever buys any goods or receives any services from a supplier for consideration;
(e) "enterprise" means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services;
(f) "goods" means every kind of movable property other than actionable claims and money;
(g) "medium enterprise" means an enterprise classified as such under sub-clause (iii) of clause (a) or sub-clause (iii) of clause (b) of sub-section(1) of section 7;
(h) "micro enterprise" means an enterprise classified as such under sub-clause (i) of clause (a) or sub-clause (i) of clause (b) of sub-section (1) of section 7;
(i) "National Bank" means the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981;
(j) "notification" means a notification published in the Official Gazette;
(k) "prescribed" means prescribed by rules made under this Act;
(l) "Reserve Bank" means the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934;
(m) "small enterprise" means an enterprise classified as such under sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b) of sub-section (1) of section 7;
(n) "supplier" means a micro or small enterprise, which has filed a memorandum with the authority referred to in clause (a) of sub-section (1) of section 8, and includes,-
(i) the National Small Industries Corporation, being a company, registered under the Companies Act, 1956;
(ii) the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956;
(iii) any company, cooperative society, society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises;
(o) "Small Industries Bank" means the Small Industries Development Bank of India established under sub-section (1) of section 3 of the Small Industries Development Bank of India Act, 1989;
(p) "State Government", in relation to a Union territory, means the Administrator thereof appointed under article 239 of the Constitution.

CHAPTER II: NATIONAL BOARD FOR MICRO, SMALL AND MEDIUM ENTERPRISES

3. (1) With effect from such date as the Central Government may, by notification, appoint, there shall be established, for the purposes of this Act, a Board to be known as the National Board for Micro, Small and Medium Enterprises.
(2) The head office of the Board shall be at Delhi.
(3) The Board shall consist of the following members, namely:-
(a) the Minister in charge of the Ministry or Department of the Central Government having administrative control of the micro, small and medium enterprises who shall be the ex-officio Chairperson of the Board;
(b) the Minister of State or a Deputy Minister, if any, in the Ministry or Department of the Central Government having administrative control of the micro, small and medium enterprises who shall be ex officio Vice-Chairperson of the Board, and where there is no such Minister of State or Deputy Minister, such person as may be appointed by the Central Government to be the Vice-Chairperson of the Board;
(c) six Ministers of the State Governments having administrative control of the departments of small scale industries or, as the case may be, micro, small and medium enterprises, to be appointed by the Central Government to represent such regions of the country as may be notified by the Central Government in this behalf, ex officio;
(d) three members of Parliament of whom two shall be elected by the House of the People and one by the Council of States;
(e) the Administrator of a Union territory to be appointed by the Central Government, ex officio;
(f) the Secretary to the Government of India in charge of the Ministry or Department of the Central Government having administrative control of the micro, small and medium enterprises, ex officio;
(g) four Secretaries to the Government of India, to represent the Ministries of the Central Government dealing with commerce and industry, finance, food processing industries, labour and planning to be appointed by the Central Government, ex officio;
(h) the Chairman of the Board of Directors of the National Bank, ex officio;
(i) the chairman and managing director of the Board of Directors of the Small Industries Bank, ex officio;
(j) the chairman, Indian Banks Association, ex officio;
(k) one officer of the Reserve Bank, not below the rank of an Executive Director, to be appointed by the Central Government to represent the Reserve Bank;
(l) twenty persons to represent the associations of micro, small and medium enterprises, including not less than three persons representing associations of women's enterprises and not less than three persons representing associations of micro enterprises, to be appointed by the Central Government;
(m) three persons of eminence, one each from the fields of economics, industry and science and technology, not less than one of whom shall be a woman, to be appointed by the Central Government;
(n) two representatives of Central Trade Union Organisation, to be appointed by the Central Government; and
(o) one officer not below the rank of Joint Secretary to the Government of India in the Ministry or Department of the Central Government having administrative control of the small and medium enterprises to be appointed by the Central Government, who shall be the Member-Secretary of the Board, ex officio.
(4) The term of office of the members of the Board, other than ex officio members of the Board, the manner of filling vacancies, and the procedure to be followed in the discharge of their functions by the members of the Board, shall be such as may be prescribed;
Provided that the term of office of an ex officio member of the Board, shall continue so long as he holds the office by virtue of which he is such a member.
(5) No act or proceedings of the Board shall be invalid merely by reason of-
(a) any vacancy in, or any defect in the constitution of, the Board; or
(b) any defect in the appointment of a person acting as a member of the Board; or
(c) any irregularity in the procedure of the Board not affecting the merits of the case.
(6) The Board shall meet at least once in every three months in a year.
(7) The Board may associate with itself, in such manner and for such purposes as it may deem necessary, any person or persons whose assistance or advice it may desire in complying with any of the provisions of this Act and a person so associated shall have the right to take part in the discussions of the Board relevant to the purposes for which he has been associated but shall not have the right to vote.
(8) Without prejudice to sub-section (7) the Chairperson of the Board shall, for not less than two of the meetings of the Board in a year, invite such Ministers of the State Governments having administrative control of the departments of small scale industries or, as the case may be, the micro, small and medium enterprises, or the Administrators of Union territories and representatives of such other associations of micro, small and medium enterprises, as he may deem necessary for carrying out the purposes of this Act.
(9) It is hereby declared that the office of member of the Board shall not disqualify its holder for being chosen as, or for being, a member of either House of Parliament.

4. (1) The Central Government may remove a member of the Board from it, if he –
(a) is, or at any time has been, adjudged as insolvent; or
(b) is, or becomes, of unsound mind and stands so declared by a competent court; or
(c) refuses to act or becomes incapable of acting as a member of the Board ; or
(d) has been convicted of an offence which, in the opinion of the Central Government,involves moral turpitude; or
(e) has so abused, in the opinion of the Central Government, his position as a member of the Board as to render his continuance in the Board detrimental to the interests of the general public. (2) Notwithstanding anything contained in sub-section (1), no member shall be removed from his office on the grounds specified in clauses (c) to (e) of that sub-section unless he has been given a reasonable opportunity of being heard in the matter.

5. The Board shall, subject to the general directions of the Central Government, perform all or any of the following functions, namely:-
(a) examine the factors affecting the promotion and development of micro, small and medium enterprises and review the policies and programmes of the Central Government in regard to facilitating the promotion and development and enhancing the competitiveness of such enterprises and the impact thereof on such enterprises;
(b) make recommendations on matters referred to in clause (a) or on any other matter referred to it by the Central Government which, in the opinion of that Government, is necessary or expedient for facilitating the promotion and development and enhancing the competitiveness of the micro, small and medium enterprises; and
(c) advise the Central Government on the use of the Fund or Funds constituted under section 12.

6. Subject to other provisions of this Act, the Member-Secretary of the Board shall exercise such powers and perform such functions as may be prescribed.

CHAPTER III: CLASSIFICATION OF ENTERPRISES, ADVISORY COMMITEE AND MEMORANDUM OF MICRO, SMALL AND MEDIUM ENTERPRISES

7.(1) Notwithstanding anything contained in section 11B of the Industries (Development and Regulation) Act, 1951, the Central Government may, for the purposes of this Act, by notification and having regard to the provisions of sub-sections (4) and (5), classify any class or classes of enterprises, whether proprietorship, Hindu undivided family, association of persons, co-operative society, partnership firm, company or undertaking, by whatever name called, -
(a) in the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951, as –
(i) a micro enterprise, where the investment in plant and machinery does not exceed twenty five lakh rupees;
(ii) a small enterprise, where the investment in plant and machinery is more than twenty five lakh rupees but does not exceed five crore rupees; or
(iii) a medium enterprise, where the investment in plant and machinery is more than five crore rupees but does not exceed ten crore rupees;
(b) in the case of the enterprises engaged in providing or rendering of services, as –
(i) a micro enterprise, where the investment in equipment does not exceed ten lakh rupees;
(ii) a small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees; or
(iii) a medium enterprise, where the investment in equipment is more than two crore rupees but does not exceed five crore rupees

Explanation 1 For the removal of doubt, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

Explanation 2 It is clarified that the provisions of section 29B of the Industries (Development and Regulation) Act, 1951, shall be applicable to the enterprises specified in sub-clauses (i) and (ii) of clause (a) of sub-section (l) of this section.
(2) The Central Government shall, by notification, constitute an Advisory Committee consisting of the following members, namely:-
(a) the Secretary to the Government of India in the Ministry or Department of the Central Government having administrative control of the small and medium enterprises who shall be the Chairperson, ex officio;
(b) not more than five officers of the Central Government possessing necessary expertise in matters relating to micro, small and medium enterprises, members, ex officio;
(c) not more than three representatives of the State Governments, members, ex officio; and one representative each of the associations of micro, small and medium enterprises, members, ex officio;
(3) The Member- Secretary of the Board shall also be the ex officio Member-Secretary of the Advisory Committee.
(4) The Central Government shall, prior to classifying any class or classes of enterprises under sub-section (1), obtain the recommendations of the Advisory Committee.
(5) The Advisory Committee shall examine the matters referred to it by the Board in connection with any subject referred to in section 5 and furnish its recommendations of the Board.
(6) The Central Government may seek the advice of the Advisory Committee on any of the matters specified in section 9, 10, 11, 12 or 14 of Chapter IV.
(7) The State Government may seek advice of the Advisory Committee on any of the matters specified in the rules made under section 30.
(8) The Advisory Committee shall, after considering the following matters, communicate its recommendations or advice to the Central Government or, as the case may be, State Government or the Board, namely:-
(a) the level of employment in a class or classes of enterprises;
(b) the level of investments in plant and machinery or equipment, in a class or classes of enterprises;
(c) the need of higher investment in plant and machinery or equipment for technological upgradation, employment generation and enhanced competitiveness of the class or classes of enterprises;
(d) the possibility of promoting and diffusing entrepreneurship in micro, small or medium enterprises; the international standards for classification of small and medium enterprises.
(9) Notwithstanding anything contained in section 11B of the Industries (Development and Regulation) Act, 1951 and clause (h) of section 2 of the Khadi and Village Industries Commission Act, 1956, the Central Government may, while classifying any class or classes of enterprises under sub-section (1), vary, from time to time, the criterion of investment and also consider criteria or standards in respect of employment or turnover of the enterprises and include in such classification the micro or tiny enterprises or the village enterprises, as part of small enterprises.

8. (1) Any person who intends to establish,-
(a) a micro or small enterprise, may, at his discretion; or
(b) a medium enterprise engaged in providing or rendering of services may, at his discretion; or
(c) a medium enterprise engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, shall file the memorandum of micro, small or, as the case may be, of medium enterprise with such authority as may be specified by the State Government under subsection (4) or the Central Government under sub-section (3):
Provided that any person who, before the commencement of this Act, established— (a) a small scale industry and obtained a registration certificate, may, at his discretion; and
(b) an industry engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, having investment in plant and machinery or more than one crore rupees but not exceeding ten crore rupees and, in pursuance of the notification of the Government of India in the erstwhile Ministry of Industry (Department of Industrial Development) number S.O.477(E), dated the 25TH July, 1991 file an Industrial Entrepreneurs' Memorandum, shall within one hundred and eighty days from the commencement of this Act, file the memorandum, in accordance with the provisions of this Act.
(2) The form of the memorandum, the procedure of its filing and other matters incidental thereto shall be such as may be notified by the Central Government after obtaining the recommendations of the Advisory Committee in this behalf.
(3) The authority with which the memorandum shall be filed by a medium enterprise shall be such as may be specified, by notification, by the Central Government.
(4) The State Government shall, by notification, specify the authority with which a micro or small enterprise may file the memorandum.
(5) The authorities specified under sub-sections (3) and (4) shall follow, for the purposes of this section, the procedure notified by the Central Government under sub-section (2).

CHAPTER IV: MEASURES FOR PROMOTION, DEVELOPMENT AND ENHANCEMENT OF COMPETITIVENESS OF MICRO, SMALL AND MEDIUM ENTERPRISES

9. (1) The Central Government may, from time to time, for the purposes of facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises, particularly of the micro and small enterprises, by way of development of skill in the employees, management and entrepreneurs, provisioning for technological upgradation, providing marketing assistance or infrastructure facilities and cluster development of such enterprises with a view to strengthening backward and forward linkages, specify, by notification, such programmes, guidelines or instructions, as it may deem fit.

10. The policies and practices in respect of credit to the micro, small and medium enterprises shall be progressive and such as may be specified in the guidelines or instructions issued by the Reserve Bank, from time to time, to ensure timely and smooth flow of credit to such enterprises, minimise the incidence of sickness among and enhance the competitiveness of such enterprises.

11. For facilitating promotion and development of micro and small enterprises, the Central Government or the State Government may, by order notify from time to time, preference policies in respect of procurement of goods and services, produced and provided by micro and small enterprises, by its Ministries or departments, as the case may be, or its aided institutions and public sector enterprises.

12. There shall be constituted, by notification, one or more Funds to be called by such name as may be specified in the notification and there shall be credited thereto any grants made by the Central Government under section 13.

13. The Central Government may, after due appropriation made by Parliament by law in this behalf, credit to the Fund or Funds by way of grants for the purposes of this Act, such sums of money as that Government may consider necessary to provide.

14. (1) The Central Government shall have the power to administer the Fund or Funds in such manner as may be prescribed.
(2) The Fund or Funds shall be utilised exclusively for the measures specified in sub-section (1) of section 9.
(3) The Central Government shall be responsible for the coordination and ensuring timely utilisation and release of sums in accordance with such criteria as may be prescribed.

CHAPTER V: DELAYED PAYMENTS TO MICRO AND SMALL ENTERPRISES

15. 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.

16. Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.

17. For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under section 16.

18 (1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council.
(2) On receipt of a reference under sub-section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.
(3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996, shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act.
(4) Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.
(5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.

19. No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court: Provided that pending disposal of the application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as it considers reasonable under the circumstances of the case subject to such conditions as it deems necessary to impose.

20. The State Government shall, by notification, establish one or more Micro and Small Enterprises Facilitation Councils, at such places, exercising such jurisdiction and for such areas, as may be specified in he notification.

21. (1) The Micro and Small Enterprise Facilitation Council shall consist of not less than three but not more than five members to be appointed from among the following categories, namely:-
(i) Director of Industries, by whatever name called, or any other officer not below the rank of such Director, in the Department of the State Government having administrative control of the small scale industries or, as the case may be, micro, small and medium enterprises; and
(ii) one or more office-bearers or representatives of associations of micro or small industry or enterprises in the State; and
(iii) one or more representatives of banks and financial institutions lending to micro or small enterprises; or
(iv) one or more persons having special knowledge in the field of industry, finance, law, trade or commerce.
(2) The person appointed under clause (i) of sub-section (1) shall be the chairperson of the Micro and Small Enterprise Facilitation Council.
(3) The composition of the Micro and Small Enterprise Facilitation Council, the manner of filling vacancies of its members and the procedure to be followed in the discharge of their functions by the members shall be such as may be prescribed by the State Government.

22. Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely:-
(i) 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;
(ii) the amount of interest paid by the buyer in terms of section 18, along with the amounts of the payment made to the supplier beyond the appointed day during each accounting year;
(iii) 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 this Act;
(iv) the amount of interest accrued and remaining unpaid at the end of each accounting year; and
(v) 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 enterprise, for the purpose of disallowance as a deductible expenditure under section 23.

23. Notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.

24. The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

25. Notwithstanding anything contained in any law for the time being in force, the Central Government may, with a view to facilitating closure of business by a micro, small or medium enterprise, not being a company registered under the Companies Act, 1956, notify a scheme within one year from the date of commencement of this Act.

CHAPTER VI: MISCELLANEOUS

26(1). The Central Government or State Government may appoint such officers with such designations and such other employees as it thinks fit for the purposes of this Act and may entrust to them such of the powers and functions under this Act as it may deem fit.
(2) The Officers appointed under sub-section (1) may, for the purposes of this Act, by order require any person to furnish such information, in such form, as may be prescribed.

27. (1) Whoever intentionally contravenes or attempts to contravene or abets the contravention of any of the provisions contained in sub-section
(1) of section 8 or sub-section (2) of section 26 shall be punishable -
(a) in the case of the first conviction, with fine which may extend to rupees one thousand; and
(b) in the case of any second or subsequent conviction, with fine which shall not be less than rupees one thousand but may extend to rupees ten thousand.
(2) Where a buyer contravenes the provisions of section 22, he shall be punishable with a fine which shall not be less than rupees ten thousand.

28. No court inferior to that of a Metropolitan Magistrate or a Magistrate of the first class shall try any offence punishable under this Act.

29. (1) The Central Government may, by notification, make rules to carry out the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:-
(a) the term of office of the members of the Board, the manner of filling vacancies, and the procedure to be followed in the discharge of functions by the members of the Board under sub-section (4) of section 3;
(b) the powers and functions of the Member-Secretary under section 6; (c) the manner in which the Fund may be administered under sub-section (1) of section 14;
(d) the criteria based on which sums may be released under sub-section (3) of section 14;
(e) the information to be furnished and the form in which it is to be furnished under subsection (2) of section 26; and
(f) any other matter which is to be or may be prescribed under this Act.
(3) Every notification issued under section 9 and every rule made by the Central Government under this section shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the notification or rule or both Houses agree that the notification or rule should not be made, the notification or rule shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that notification or rule.

30 (1). The State Government may, by notification, make rules to carry out the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rule may provide for all or any of the following matters, namely:-
(a) the composition of the Micro and Small Enterprise Facilitation Council, the manner of filling vacancies of the members and the procedure to be followed in the discharge of their functions by the members of the Micro and Small Enterprise Facilitation Council under sub-section (3) of section 21;
(b) any other matter which is to be or may be, prescribed under this Act.
(3) The rule made under this section shall, as soon as may be after it is made, be laid before each House of the State Legislature where there are two Houses, and where there is one House of the State Legislature, before that House.

31 (1). If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act as may appear to be necessary for removing the difficulty: Provided that no order shall be made under this section after the expiry of two years from the commencement of this Act.
(2) Every order made under this section shall, as soon as may be after it is made, be laid before each House of Parliament.

32(1). The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 is hereby repealed.
(2) Notwithstanding such repeal, anything done or any action taken under the Act so repealed under sub-section (1) shall be deemed to have been done or taken under the corresponding provisions of this Act.

Frequently Asked Questions (FAQ's) on MSMED Act 2006

This is an act for facilitating the promotion and development and enhancing the competitiveness of micro. small and medium enterprises and for matters connected therewith or incidental thereto.

The Act was published in gazette of India on June 16, 2006. However, it came into force from 2'd October 2006, the birth-date of the father of the nation.

An enterprise for above purpose may be a proprietorship, partnership fimi, hindu undivided family, association of persons, co-operative society, company or undertaking, by whatever name called. An enterprise, engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951, (IDR Act. 1951) is said to be :
(a) a micro enterprise. where the investment in Plant and Machinery does not exceed Rs.25 lakhs:
(b) a small enterprise. where the investment in Plant and Machinery is more than Rs.25 lakhs but does not exceed Rs.5 crore;
(c) a medium enterprise, where investment in Plant and Machinery is more than Rs.5 crore but does not exceed Rs.10 crores.
Note : The limit for small scale industry has increased from Rs.1 crore to Rs.5 crore. An enterprise, engaged in providing or rendering of services is said to be :
(a) a micro enterprise, where the investment in equipment does not exceed Rs.10 lakhs:
(b) a small entierprise, where the investment in equipment is more than Rs.10 lakhs but does not exceed Rs.2 crore:
(c) a medium enterprise, where the investment in equipment is more than Rs.2 crore but does not exceed Rs.5 crore.
An enterprise for above purpose may be a proprietorship, partnership fimi, hindu undivided family, association of persons, co-operative society, company or undertaking, by whatever name called.

As per Ministry of Small Scale Industries notification dated 5 October, 2006, the investment in Plant and Machinery referred to in respective limits is the original price, irrespective of whether the Plant and Machinery are new or second hand. In respect of imported machinery, the following is to be included in calculating the value :
(i) import duty (excluding miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port);
(ii) shipping charges:
(iii) customs clearance charges and
(iv) sales tax or value added tax.

Further, as per the said notification, the following are excluded while calculating the investment in Plant and Machinery :
(i) equipments such as tools, jigs, dies, moulds and spare parts for maintenance and the cost of consumable stores:
(ii) installation expenditure for Plant and Machinery;
(iii) research and development equipment and pollution control equipment;
(iv) power generation set and extra transfomier installed by the enterprise as per the regulations of the State Electricity Board:
(v) bank charges and service charges paid to the National Small Industries Corporation or the State Small Industries Corporation.
(vi) Procurement or installation of cables. wiring, bus bars. electrical control panels (not mounted on individual machines), oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the Plant and Machinery or for safety measures.
(vii) gas producer plants;
(viii) transportation charges (excluding sales-tax or value added tax and excise duty) for indigenous machinery from the place of their manufacture to the site of the enterprise.
(ix) charges paid for technical know-how for erection of Plant and Machinery.
(x) such storage tanks which store raw materials and finished products only and are not linked with the manufacturing process. and
(xi) fire fighting equipment.

Further, investment in Land. Building, Vehicles, Furniture and Fixtures. Office Equipments etc. shall not be considered in determining the threshold limits of Plant and Machinery or Equipment as the case may be.

The Government, through the MSMED ACT. 2006, have. specified the following objectives for small, micro and medium enterprises, more particularly for small and micro enterprises :
(a) hold such programmes, provide guidelines or instructions to micro, small and medium enterprises for development of skills in the employees, management and entrepreneurs; provisioning for technological upgradation; providing marketing assistance or infrastructure facilities.
(b) issue guidelines or instructions from time to time for smooth flow of credit to such enterprises, minimise the incidence of sickness among and enhance the competitiveness of such enterprises.
(c) Central or State government to notify from time to time, preference policies in respect of procurement of goods and services, produced or provided by micro and small enterprises.
(d) the Central government shall constitute Fund or provide grants for purposes mentioned in (a) above.

As per section 8(1) of the Act, registration of micro or small enterprise (both manufacturing and rendering of services) or a medium enterprise engaged in providing or rendering of services is optional. However, a medium enterprise engaged in manufacture or production of goods pertaining to any industry specified in the First Schedule to the IDR Act, 1951 is required to file the memorandum with the General Manger, District Industries Centre or any District level officer of equivalent rank in the Directorate or the Department dealing with Micro. Small and Medium enterprises of the state government or union territory administration.

The Act, further provides any enterprise established before this Act came to force i.e. enterprise pre-existing before 2 October 2006 :
(a) in case of a registered small scale industry filing of memorandum is optional;
(b) in case of an industry engaged in manufacture or production of goods pertaining to industry specified in the First Schedule to IDR Act, 1951 having investment in Plant and Machinery more than Rs.1 crore but not exceeding Rs.10 crores, shall within 180 days i.e. by 31 March 2007 file an Industrial Entrepreneurs' Memorandum.

Note : Prior to the MSMED Act. 2006, concept of Micro or Medium enterprise did not exist. Only concept of SSI was there.
Ministry of Small Scale Industries has on 30th September 2006, notified the Entrepreneurs Memorandum for setting up Micro, Small or Medium Enterprise. New units have to fill up Part I. whereas existing units /new units commencing production have to fill up Part U of the memorandum. The same is to be filed with District Industries Centre of its area. The District Industries Centre shall within five days of receipt of the form of memorandum issue an acknowledgement after allotting an Entrepreneurs Memorandum Number.

Apart from getting other benefits, if a micro or small enterprise has filed a memorandum with District Industries Center (DIC) of its area, then it stands to gain as to timely payment in respect of supply of goods or rendering of services to any buyer.

It must be noted that with the enactment of MSMED Act, 2006. The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act. 1993 is repealed. with effect from October 2, 2006.

As per this Act. if the buyer has purchased goods or availed services from micro or small enterprise, Mich has filed a memorandum with the authority, than the buyer shall make payment on or before the date agreed upon between him and the supplier in writing. If no agreement is there in writing then within a period of 15 days (30 days were mentioned in the repealed Act) from the day the goods are delivered or services are rendered. The Act further stipulates that even if the period between the buyer and supplier is agreed in writing, such period shall not exceed 45 days (120 days were mentioned in the repealed Act) from the day of delivery of goods or rendering of services. In short, any credit term from a micro or small enterprise stipulating payment terms beyond 45 days, shall be in violation of the MSMED Act, 2006.

 

If the buyer fails to make payment of the amount to the supplier as required under terms and conditions of supply. (but not later than 45 days) than the buyer is liable to pay compounded interest with monthly rests from the date falling after due date, at three times of the bank rate notified by the Reserve Bank. At present the bank rate is 6%, meaning thereby buyer has to pay interest at the rate of 18% to the supplier, to be compounded on a monthly basis.

The buyer can make a reference to the Micro and Small Enterprises Facilitation Council. Such council or councils shall be set up by the state government. having not less than three but not more than five members. The constitution of council shall be director of industries as its chairman: representatives of association of micro or small industry in the state; representatives of banks and financial institutions lending to micro or small enterprises and persons having special knowledge in the field of industry, finance, law, trade or commerce.

The council shall first try for conciliation. If conciliation is not successful than council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services and the provisions of the Arbitration and Conciliation Act, 1996 shall apply.

Every reference made under MSMDED Act, 2006 shall be decided within a period of 90 days. The buyer to the dispute can be located anywhere in India. Only the supplier's jurisdiction is to be seen.

If the buyer does not accept the decree or award of the council or of the arbitrator, no court shall entertain the buyer's application, unless 75% of the amount in terms of decree or award is deposited by the buyer.

As per section 23 of the Act, amount of interest paid or payable by buyer in accordance with the provisions of MSMED Act. 2006. shall not be allowable as a deductible expenditure under the Income-Tax Act, 1961. Central Board of Direct Taxes (CBDT) has already issued instruction no.12/2006 dated 14-12-2006. to bring the provisions of this Act, to the notice of all assessing officers, for effective implementation. Similar provision also existed in case of now repealed 'The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.

Yes the Act would apply to a buyer (even if it is a trading, investment or service enterprise) who is a micro or a small enterprise, and buys from a "Supplier (can be a micro or small manufacturer / producer or a micro or small service provider) who has filed the memorandum with the district industries center of its area.

Sub-section (n) of section 2 of the Act. defines a supplier. As per the definition. supplier means a micro or small enterprise, which has filed a memorandum with the district Industries centre of its area.

Further, supplier will also include the following :

        (i)         the National Small Industries Corporation Ltd.

        (ii)        a company under the Small Industries Development Corporation of a state or a Union territory.

        (iii)       any company, co-operative society, society. trust or body, engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises.

Thus, a supplier would not only be a micro or small enterprise engaged in manufacture or production but also one which is engaged in providing or rendering of services. Further, certain other national or state enterprises and other enterprises engaged in selling goods produced by micro or small enterprises and rendering services, which are provided by such enterprises shall also be covered.

As per section 22 of the MSMED ACT, 2006, the buyer in its audited annual statements is required to furnish the following additional information:

The principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of accounting year, the amount of interest paid by the buyer under MSMED Act, 2006 along with the amounts of the payment made to the supplier beyond the due date during each accounting year, the amount of interest due and payable for the period (where the principal has been paid but interest under the MSMED Act, 2006 not paid) .The amount of interest accrued and remaining unpaid at the end of accounting year; and  The amount of further interest due and payable even in the succeeding year, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23As will be seen from above, considerable disclosure requirements are to be made in respect of amount payable, or not paid to micro and small enterprises.

A question that then arises is how to ascertain which supplier is a micro or small enterprise. This is an uphill task. As per the provisions of the MSMED Act. 2006, only those micro or small enterprises shall be eligible for interest for delayed payments. which have filed a memorandum with the authority. Thus, every buyer will have to take not only in writing from the supplier that it is a supplier falling under the category of micro or small enterprise as defined under MSMED Act, 2006 but also collect documentary evidence of getting itself registered with the prescribed state authority. The task seems to be a continuous, warranting extra efforts on part of each buyer.

Section 27, of the MSMED Act. 2006 deals with fines! penalties :

Where a person intentionally contravenes or attempts to contravene or abets the contravention of the followings :
    -    where person fails, to file memorandum. as required under section 8 of the MSMED Act, 2006.

    -    Fails to furnish such information as called by an officer appointed under section 26(1) of the MSMED Act. 2006.

    -    In case of first conviction. the fine may extend up to Rs.1.000 and in case of second and subsequent conviction, fine shall not be less than Rs.1,000 and can extend up to Rs.10.000.

    -    Where a buyer contravenes the provisions of section 22 of the Act, 2006 i.e. fails to furnish additional information in the financial statements. The fine is heavy and sub­section (2) of section 27 states the fine shall not be less than Rs.10.000. Thus, a minimum fine of Rs.10.000. can go up to what amount is anybody's guess.

Schedule VI, part I, of the Companies Act. 1956, at present requires, the following to be disclosed under 'Sunday creditors/. Total outstanding dues of small scale industrial undertakings. Further, the names of small scale industrial undertakings to whom the company owe any sum together with interest outstanding for more than thirty days are to be disclosed.

On top of above, the disclosure as required under section 22 of the MSMED Act, 2006 is also to be made. However. for the year ending 312 march 2007, data may not be available (not filed) with the companies by micro and small enterprises suppliers who have filed the memorandum with state government. Under such circumstances, disclosure by way of following note can be made in Notes to the accounts" in the financial statements :

'Based on the information available with the company, there are no suppliers who are registered under the Micro. Small and Medium Enterprises Development Act, 2006 as at March 31s" 2007. Hence, the information as required under the Micro Small and Medium Enterprises Development Act. 2006 is not disclosed'.

As. the requirements of disclosure in schedule VI is not dispensed with, in respect of amounts due to small scale industrial undertakings, the company will also have to disclose under sundry creditors, amount due to small scale industries. Further. names of small scale industrial undertakings to which amount is payable and outstanding for more than 30 days will also have to be disclosed.

According to provisions of section 27 of the MSMED Act, 2006, company may be liable for a minimum fine of Rs.10,000.

Further, as per Accounting Standard29. 'Provisions, Contingent Liabilities and Contingent Assets'', the company is required to make provision for the interest liability. Again, as the accounts are required to be maintained under accrual basis under the companies Act, 1956, such liability of interest shall have to be provided for.

If in the later year/s, the company is required to make interest payment. the same cannot be considered as current year expenditure but will have to be debited as "Prior Period Expenditure".