MSME Reporting in Form 3CD: A Practical Guide to Clause 22 and Clause 26
TL;DR This note sets out the reporting requirements for Micro, Small and Medium Enterprises (MSME) dues under Clause 22 and Clause 26 of Form 3CD, the statutory basis for each clause, and the audit points relevant to compiling them. Statutory Background The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) requires a buyer to pay a registered micro or small supplier within the timeline prescribed under section 15, failing which compound interest accrues automatically under section 16. The Finance Act, 2023 inserted clause (h) in section 43B of the Income-tax Act, 1961, with effect from Assessment Year 2024-25. Under this provision, any sum payable to a micro or small enterprise beyond the section 15 timeline is deductible only in the year of actual payment, on a cash basis, rather than on accrual. Form 3CD was amended to give effect to this change. Following an initial notification and a corrigendum issued in March 2024 (CBDT Notification No. 27/2024 dated 5 March 2024, corrected by Notification No. 34/2024 dated 19 March 2024), the reporting is structured as follows: Clause 22 covers the interest disallowance under the MSMED Act and the principal disallowance under section 43B(h); Clause 26 is confined to the remaining categories under section 43B, clauses (a) to (g). Applicability — Micro and Small Enterprises Sections 15 and 16 of the MSMED Act, and the disallowance under section 43B(h), apply to suppliers registered as micro or small enterprises on the Udyam portal. Medium enterprises are outside the scope of this specific provision, although they are covered by the MSMED Act for other purposes. Classification under the MSMED Act is based on investment in plant, machinery or equipment together with annual turnover: micro enterprises are those with investment up to ₹1 crore and turnover up to ₹5 crore; small enterprises are those with investment up to ₹10 crore and turnover up to ₹50 crore. Retail and wholesale traders were included under Udyam registration for the limited purpose of priority sector lending. On this basis, trader-suppliers are generally not treated as covered by the delayed-payment protection under sections 15 and 16. The registration category of each supplier should be verified before applying this treatment. Payment Timeline — Section 15 of the MSMED Act Section 15 prescribes the payment timeline for dues to a micro or small supplier: in the absence of a written agreement, payment is due within 15 days from the date of acceptance (or deemed acceptance) of the goods or services; where a written agreement specifies a credit period, payment may be deferred, subject to a maximum of 45 days from that date. This 45-day limit cannot be extended by agreement. Where payment is not made within this timeline: (i) compound interest accrues under section 16, computed at three times the bank rate notified by the Reserve Bank of India, with monthly rests; and (ii) if the amount remains unpaid as at the end of the previous year, the corresponding expense is disallowed for that year under section 43B(h). The starting point for this timeline is the “day of acceptance” or “day of deemed acceptance”, as defined in section 2(b) and section 2(c) of the MSMED Act. Day of acceptance means the day of actual delivery of goods or rendering of services, or, where the buyer raises a written objection to the goods or services within 15 days of delivery, the day on which the supplier removes that objection. Day of deemed acceptance means the day of actual delivery, where no written objection is raised by the buyer within 15 days of delivery. In practice, the 15-day or 45-day clock runs from one of these two dates, not from the invoice date, and the two can differ where goods are received before the invoice is raised, or where an objection is recorded. Illustrative Computation of Interest under Section 16 The following illustrates the computation of interest under section 16 for a single delayed payment, assuming no written agreement on credit period (statutory limit of 15 days applies) and a notified bank rate of 6.50% per annum (three times the bank rate = 19.50% per annum, compounded with monthly rests): Date of acceptance of goods: 1 January Due date for payment (15 days from acceptance): 16 January Invoice value: ₹10,00,000 Actual date of payment: 15 April (89 days beyond the due date) Interest accrues from 17 January to 15 April at 19.50% per annum, compounded monthly, on ₹10,00,000 Approximate interest for the period (89 days, monthly compounding): ₹47,000, subject to exact computation based on the number of days in each monthly rest This interest amount is disallowed in full under section 23 of the MSMED Act, whether or not it is paid, and whether or not it has been provided for in the books of account. Firms should maintain a standard working paper — supplier-wise and invoice-wise — recomputing this interest at year end for every MSE payable that crossed the due date, rather than relying on amounts (if any) booked by the client. Transitional Treatment — Dues Pertaining to Earlier Previous Years Section 43B(h) applies in relation to Assessment Year 2024-25 and subsequent years, that is, previous year 2023-24 onward. Interest under section 16 and its disallowance under section 23 are not new — these have applied since the MSMED Act came into force in 2006 — and continue to apply to delayed payments outstanding in any year. The principal disallowance under section 43B(h), however, is prospective. A commonly encountered situation is a sum relating to a purchase made in an earlier previous year (for example, 2022-23), where the expense was already claimed as a deduction on accrual basis in that year under the normal provisions, and the amount remains unpaid as at the end of previous year 2023-24 or a later year. Since the deduction for that expense stands allowed in the year it was incurred, section 43B(h) does not operate to disallow it again merely because it remains unpaid in a subsequent year — the provision