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MSME Vendor Onboarding in India

MSME Vendor Onboarding in India: Here’s Complete Legal Guide

Legal and Compliance Aspects of MSME Vendor Onboarding in India

Micro, Small, and Medium Enterprises (MSMEs) play a pivotal role in India’s economic growth, contributing significantly to employment generation and industrial output. As the Indian government continues to promote the MSME sector, evidenced by initiatives such as increasing limits for MSME/Udyam Registration, Compulsory Registration with TReDS for companies with turnover above INR 250 crore and other such measures, understanding the nuances of MSME vendor onboarding is crucial for businesses seeking to engage with these enterprises effectively.

Legal Necessities for Identifying MSME Vendors During MSME Vendor Onboarding:

1. Disallowance under Income Tax Act: One of the key aspects to consider in MSME vendor onboarding is the disallowance :

a) under Section 43B(h) of the Income Tax Act, 1961 – Disallowance in case of non-timely payment
b) Disallowance for interest paid to MSME’s for delayed payment of their dues.

2. Reporting to Registrar of Companies:

Companies engaging with MSME vendors need to report the particulars of their transactions with MSMEs for statutory compliance. This reporting requirement, mandated under the Companies (Accounts) Rules 2014, is crucial for transparency and regulatory adherence. Failing to report such transactions can lead to legal complications, making it essential for businesses to fulfill this obligation promptly.

The above necessities and the urgency Government is demonstrating to support MSME emphasizes that companies must identify such MSME Vendors from the very beginning of business relationship with them.

MSME Vendor OnboardingMSME Vendor Onboarding: Details to Collect for Vendor MSME Status:

Udyam Certificate: If possible, companies shall prefer the Udyam certificate with updated details such as latest classification, current activity codes etc. for a current financial year in which the vendor is getting onboarded.

Latest Classification: Classification into a Micro, Small or Medium Category, if the same is not available with the vendor, then companies shall run real-time APIs, provided by Government, to identify the same as many compliances are not applicable in case of Medium Category.

Nature of activities: Nature of activities determines which compliances are applicable for a particular MSME vendor. If the nature of the activities for which vendor is registered under MSME Act and the activities for which it is engaging with a company are different then a company shall request a vendor to modify its Udyam Certificate.

Vendor Declaration: Company shall collect from the vendor, a declaration stating that any change in its MSME classification or status shall be communicated to the company through a specified mode only or this declaration can be a part of the contract or Purchase Order (PO) itself.

Conditions in Purchase Order: PO shall specify that any question asked by company on MSME status and classification must be responded to, failing which company shall have a right to assume the Vendor is Non-MSME or continue with the classification and status available with it.

Conclusion :-

MSME vendor onboarding in India involves meticulous attention to legal and regulatory requirements and documentation. The documentation list provided above will help in supporting your position or reason for non-compliance in case of any queries or legal disputes. By adhering to these guidelines, businesses can not only comply with the law but also foster sustainable and mutually beneficial relationships with MSME vendors, contributing to the growth and development of the Indian economy.

Accounts Payable

Accounts Payable: Unlock Best Practices for Success in India

Top Strategies to Optimize Your Accounts Payable Process

The accounts payable (AP) process plays a pivotal role in maintaining healthy cash flows and nurturing robust vendor relationships. However, the AP process is not without its challenges. Issues such as missing purchase orders for invoices or overlooked late payment notices can disrupt the smooth functioning of this essential function.
To circumvent these obstacles and enhance efficiency, businesses must adopt a set of best practices designed to streamline the AP process. From negotiating favorable payment terms to prioritizing critical invoices and embracing automation, several strategies can significantly improve the management of accounts payable.
Continue reading to discover the top five strategies for optimizing your accounts payable process and ensuring your business remains financially sound and vendor relationships strong.

1. Implement Automation in Accounts Payable Workflows

In India, where the business landscape is rapidly digitizing, automating accounts payable workflows is crucial. Manual handling of accounts can lead to errors such as incorrect data entries, repeated payments, and payment delays. Automation not only enhances the accuracy and efficiency of processes like invoice handling, vendor management, and purchase order matching but also significantly cuts costs over time. Moreover, it provides valuable insights through digital tracking and analysis of performance metrics.

Key Accounts Payable processes you can automate:

  • Invoice processing
  • Data validation
  • Vendor management
  • Vendor payments
  • Purchase order matching

2. Organize and Prioritize Invoice Payments

Effective management of invoices is central to the operational efficiency of any enterprise. Instead of paying invoices as they arrive, companies should prioritize payments based on due dates and payment terms to optimize cash flow. Regular analysis of accounts payable aging data can help in determining payment priorities, ensuring timely handling of financial obligations.

3. Strengthen Vendor Relationships

Evaluating and improving relationships with vendors can lead to more favorable payment terms. Identify key suppliers where payment practices could be improved—particularly those that have experienced delayed payments. Enhancing these relationships by adhering to agreed payment terms or adjusting payment processes to suit vendor preferences (such as issuing payments via cheques when requested) can be beneficial.

4. Vendor KYC and Onboarding Formalities

Before establishing a relationship with any vendor, businesses in India must ensure that vendors are properly onboarded and verified through a robust Know Your Customer (KYC) process. Vendor onboarding is crucial for mitigating risks, ensuring compliance, and maintaining smooth accounts payable operations.

Key Steps in Vendor Onboarding :-

  • Vendor Identification and Documentation: Collect important documents such as GST registration certificates, PAN cards, bank account details, and audited financial statements. This ensures that the vendor is legitimate and financially stable.
  • Verification of Documents: The collected documents must be verified against internal standards to ensure compliance with regulatory requirements. This step helps avoid fraud and ensures that the vendor meets the company’s operational standards.
  • Conveying Expectations: Once verified, it’s important to communicate the company’s expectations regarding payment terms, invoicing procedures, and delivery timelines to ensure mutual understanding.
  • Integration into Systems: Vendors should be integrated into the company’s ERP or procurement system to streamline future transactions. Automating this process reduces manual errors and enhances efficiency.

5. Quotation Invitation (Request for Quotation – RFQ)

The Request for Quotation (RFQ) process is an integral part of managing procurement and accounts payable. It involves soliciting price quotes from multiple vendors for required goods or services. This process helps businesses select the most cost-effective supplier while ensuring quality.

Steps in RFQ Process :-

  • Identifying Requirements: The procurement department identifies the items or services needed by internal departments.
  • Sending RFQs: RFQs are sent to pre-qualified vendors who have been onboarded through the KYC process.
  • Evaluating Responses: Once quotations are received, they are evaluated based on price, delivery timelines, and other terms.
  • Vendor Selection: The best-suited vendor is selected based on the evaluation criteria, and a purchase order is issued.

Accounts Payable6. Vendor Bill Discounting

Vendor bill discounting is a financing mechanism that allows vendors to receive early payment on their invoices at a discounted rate. This practice can be highly beneficial for both vendors and businesses.

Benefits of Bill Discounting :-

  • For Vendors: It improves cash flow by allowing vendors to get paid before the invoice due date without waiting for the credit period to end. This is especially helpful for small and medium-sized enterprises (SMEs) that need quick access to working capital.
  • For Businesses: By offering bill discounting, businesses can negotiate better payment terms or discounts with vendors. It also strengthens relationships by supporting vendors’ liquidity needs.

How Bill Discounting Works :-

  1. Vendors submit their unpaid invoices to a financial institution or through a digital platform
  2. The financial institution advances a percentage of the invoice value (usually 80-90%) to the vendor.
  3. When the invoice matures, the buyer pays the full amount to the financial institution, minus a discount fee charged to the vendor.

7. Automation in Vendor Management

Automation plays a key role in streamlining both vendor onboarding and accounts payable processes. Automated systems can handle tasks such as the ones below.
Automatically collecting KYC documents during onboarding.\

  • Sending out RFQs and processing responses digitally.
  • Matching purchase orders with invoices using 2-way or 3-way matching systems.
  • Managing bill discounting programs seamlessly through ERP integrations
  • Incorporating these processes into your accounts payable strategy will not only improve efficiency but also reduce risks associated with manual errors and enhance relationships with vendors.

8. Conduct Regular Reconciliation of Accounts

Reconciliation is a critical process that ensures the accuracy of financial records, helps prevent fraud, and maintains smooth operations in accounts payable (AP). To improve the reconciliation process, businesses can adopt different levels of matching—2-way, 3-way, or 4-way matching—depending on the complexity of their transactions.

In a 2-way matching process, the invoice is compared with the purchase order (PO) to verify that the quantity and price match what was agreed upon. This method ensures that the company only pays for what was ordered and invoiced.

  • Documents matched: Purchase Order (PO) and Invoice
  • Use case: Suitable for straightforward transactions where goods or services are delivered as expected without additional documentation like receipts.

3-way matching adds an additional layer by comparing three documents: the purchase order, invoice, and receiving report. This ensures that not only are the quantities and prices correct, but that the goods or services have actually been received before payment is made.

  • Documents matched: Purchase Order (PO), Invoice, Receiving Report
  • Use case: Commonly used for physical goods to ensure they were received in good condition before payment is issued.

In 4-way matching, a fourth document—an inspection report—is included to verify that the received goods meet quality standards. This is particularly useful in industries where quality control is critical.

  • Documents matched: Purchase Order (PO), Invoice, Receiving Report, Inspection Report
  • Use case: Ideal for industries with stringent quality requirements such as manufacturing or pharmaceuticals.

9. Internal vs. External Reconciliation

It’s important to differentiate between internal reconciliation (within an organization) and external reconciliation (with vendors or third parties). Each type serves a unique purpose in maintaining financial accuracy and preventing discrepancies.

Internal reconciliation focuses on ensuring that all internal records—such as general ledger entries and accounts payable sub-ledgers—are accurate and up to date. This involves comparing internal records with bank statements, payment records, and other internal financial documents to detect any discrepancies early on.

  • Benefits: Prevents internal errors such as duplicate payments or misallocated funds.
  • Best practice: Automating internal reconciliations through software can reduce manual errors and improve efficiency.

External reconciliation involves comparing a company’s records with those of external parties like vendors or banks. This process ensures that both parties agree on outstanding balances, payments made, and any discrepancies are resolved promptly.

Firmway’s reconciliation solutions excel in this area by automating external reconciliations with vendors. Their software helps identify discrepancies such as unbooked debit/credit notes or tax differences, ensuring smoother vendor relationships and audit readiness.

Benefits of Firmway’s External Reconciliation Software

  • Fraud Prevention: By automating data comparison between internal records and vendor statements, potential fraud or unauthorized payments can be detected early.
  • Error Reduction: Automated matching reduces human error by flagging discrepancies like duplicate payments or missing invoices.
  • Efficiency Gains: The software streamlines communication with vendors by automatically generating reports on discrepancies that need resolution.
  • Audit Readiness: With comprehensive tracking of reconciliations and adjustments, businesses are better prepared for internal or external audits.

To optimize this process, consider utilizing software equipped with advanced automation and data matching capabilities, such as Firmway’s reconciliation software. Firmway’s Reconciliation Software plays a crucial role in automating customer and vendor reconciliations. Streamlining the reconciliation process helps identify discrepancies such as unbooked debit/credit notes, tax differences, and duplicate payments. This ensures that financial records are accurate and compliant with regulations like GST. While this strengthens vendor relationships by preventing payment disputes, it primarily focuses on the financial aspects of vendor management rather than directly optimizing the procurement process.

Vendor Ledger Reconciliation: A Key to Better Procurement

In the world of finance and accounting, there’s a critical process that brings clarity to chaos, harmony to discrepancies, and balance to the books- it’s called reconciliation. One paramount part of the overall reconciliation process is Vendor Ledger Reconciliation. The vendor ledger reconciliation process ensures accuracy and transparency in the accounts payable function of an organization.

Definition
Vendor ledger reconciliation refers to the process of comparing and matching vendor ledgers or vendor statements of accounts with internal records to identify and resolve any discrepancies or inconsistencies. This crucial reconciliation process not only benefits the finance team but also extends its advantages to the entire procurement department.

Benefits of vendor ledger reconciliation for the purchase department of your organization

  • Strengthened vendor relations

A well-reconciled vendor ledger also paves the way for improved vendor relations. All vendors prefer to receive timely payments accompanied by clear and reconciled invoices. Imagine you are buying parts for gadgets and the bill you get is not the same as what you agreed on. Reconciling the records carefully helps find and fix these differences. Plus, when you are good at keeping track of your purchases and paying on time, the people you buy from like you more. This can get you cool perks like bigger discounts, being a priority customer, and even getting special deals.

  • Preventing Overpayments and Duplicate Payments

Duplicate payments and overpayments can occur in large organizations with numerous transactions. Vendor reconciliation helps the purchase team identify such instances and claim refunds or correct the errors, leading to cost savings.

  • Data-driven price comparison

An effective comparison of quoted prices with invoiced amounts, helping the purchase department identify overcharges, undercharges, or pricing inconsistencies. Proper reconciliation guarantees that procurement decisions are based on accurate data, fostering better vendor relationships and optimizing cost management strategies.

  • Access to Extended Credit Days and Discounts

Accurate reconciliation of vendor invoices instills confidence in the reliability of the purchase team’s payment processes. Vendors, reassured of timely payments and efficient financial management, may offer extended credit days to the organization. Additionally, they might even be more inclined to extend early payment discounts as a gesture of appreciation for the smooth and prompt payment process.

  • Mitigated Purchasing Risks

Vendor ledger reconciliation mitigates the risk of financial errors and fraud in the procurement process. The purchase team can identify and address discrepancies, unauthorized charges, or potentially fraudulent activities. Thus, ensuring that all transactions are legitimate and accurate. This safeguards the organization from financial losses and reputational damage caused by discrepancies in vendor transactions.

Vendor ledger reconciliation is a crucial activity that offers numerous benefits to the purchase team. It contributes to better financial management, vendor relationships, and overall operational efficiency. By maintaining accurate and up-to-date records, the purchase team can make well-informed decisions and reduce financial risks.

Adopt the new-age approach for vendor ledger reconciliation with Firmway’s cutting-edge reconciliation.

With its advanced automation and data matching capabilities, the software helps identify discrepancies, prevent overpayments, and improve accuracy in financial records. It provides updates like unbooked debit note/credit note, tax discrepancies, duplicate payments, and more. This enhances vendor relationships, achieve audit readiness, and optimize their procurement process for better financial management.

Mastering 26AS Reconciliation

Mastering 26AS Reconciliation: Proven Ways to make it a Breeze

Understanding the Need for Mastering 26AS Reconciliation

In recent years, tax laws has experienced significant changes. The authorities take many actions to guarantee that taxpayers properly report all transactions to the Income Tax Department. Mastering 26AS Reconciliation is crucial amid these changes. Department (IT Department). With the help of this information, the IT Department will be able to analyze and catch hold of tax evaders.

Decoding Section 194Q: Mastering 26AS Reconciliation Amidst TDS On Goods

One such change is the introduction of Tax Deducted at Source (TDS) on the purchase of goods vide Section 194Q of the Income Tax Act (IT Act). The introduction of the same has resulted in flooding of the TDS entries in Form 26AS. It is a form that captures details of the TDS deducted and reported for a particular Taxpayer.

Further, the IT Department relies on this form before allowing the TDS refund or adjustment of TDS against Income Tax liabilities. Therefore, it has indirectly become mandatory on the part of the Taxpayer to ensure that the Deductor has reported all the TDS in its Form 26AS. However, to identify the same one needs to first identify the Deductor who has not reported the same. Therefore, it has become necessary to reconcile Form 26AS.

However, Reconcile with what other data source?? There are two options 1) TDS ledger and 2) Sales Register. Let’s try to understand how each of these ways works and which one to select for your organization.

1) 26AS v/s TDS Ledger (Approach 1)

In this way, Form 26AS of Taxpayer is reconciled with the TDS receivable ledger maintained by the Taxpayer. This is a direct approach where we are comparing two different data sets capturing the same information.

Mastering 26AS Reconciliation

2) 26AS v/s Sales Register (Approach 2)

In this way, Form 26AS is compared with what TDS should have been deducted for each and every sales line item. Assuming that the Tax Deductor has diligently deducted the TDS, this is an indirect way.

Both approaches have their benefits and drawbacks, so organizations should choose the one that best suits their needs. Below are the areas which one should consider before choosing the approach:

A) Timing of booking of TDS receivable

Most organizations record TDS Receivable at the moment of payment receipt. So, while completing reconciliation, there will be a date discrepancy, and in the scenario where there are ‘000s of line items, which can be difficult to resolve when using Approach 1. However, if payment and invoice connection is available, Approach 1 becomes much easier to execute.

If the organization books TDS Receivable on an ad hoc basis, it shall opt for Approach 2, provided all the other details are available.

B) Reporting pattern of Tax Deductor

Are the Tax Deductor reporting based on the actual date or are they either putting the date of the end of the month or the end of the quarter? Accordingly, one shall select the approach of reconciliation. If the Tax Deductor is clubbing the amount for the quarter or month and just reporting a single line item then in that case just a TAN level month-wise or quarter-wise reconciliation will suffice.

C) Availability of TDS rate for each sales line item

Approach 2 is possible only when one has proper records of the TDS rate applicable on each sales invoice or each line item of the sales invoice. In many cases, when billing services and goods in a single invoice, each line item of the invoice will have a different TDS rate.

Hence, it is crucial to exercise precision when choosing an approach. Selecting the wrong method can elongate the activity and potentially result in repetition.

Future-Proofing Your Finances: Mastering 26AS Reconciliation for Long-Term Compliance

Organizations can also evaluate various software which are available to automate 26AS reconciliation. One such solution is provided by Firmway. Firmway’s 26AS reconciliation software provides both the approach as mentioned above. Moreover, it also provides the option of line level as well as TAN level reconciliation. To know more about Firmway’s 26AS Reconciliation Click here.

Data Digging

Data Digging in Accounting: Insights for Improved Cash Flow

Transforming Accounting: From Data Digging to Enhancing Cash Flow

Accounting has traditionally played the role of the data keeper. However, recent developments have expanded the roles of account teams, changing this perception from mere data recording to actively enhancing cash flow. Businesses have regarded the accounting team as both a booster of cash flow and a cost center, with their main function being the maintenance of records of company activities. The 21st Century has realized the importance of data and its analysis. Moreover, data analysis is not just limited to operational activities; it has also made its presence felt in the accounting function. One such Data Digging exercise we will be focusing on today is boosting cash flow through ledger reconciliation.

The Impact of Ledger Reconciliation on Cash Flow

Our experience with clients has led to the following observations from ledger reconciliation activities:

  • We identified Rs 998 crore in vendor-unadjusted advances.
  • The company raised a Rs 3,761 crore debit note that vendors or customers did not book.
  • Vendors reversed a Rs 2,942 crore invoice, even though the company had claimed GST credit.
  • Vendors issued Rs 314 crore in credit notes that the company did not account for.
  • Customers deducted Rs 53 crore in TDS, which the company failed to record.

All the above can have a direct and/or indirect impact on the cash flow of the Company. If the account team is able to identify such a mismatch on a timely basis and deep dive into it, then it can convert itself from a cost center to a profit center.

Data Digging for Cash Flow Enhancement

Manual reconciliations, even with Excel – MATCH, HIGHLIGHT, or LOOKUP formulas, bear the risk of human errors. Any inefficiency or deficiency in reconciliation plagues the entire enterprise; it affects the credibility of financials, causes inefficient decision-making, and affects the goodwill of a company. Automated reconciliation is the solution to all the above issues.

Data Digging

The Power of Automated Reconciliation

Automation can simplify and streamline the tedious reconciliations process. With minimal human involvement, the entire process of vendor communication, follow-ups, tracking, gathering, and summarizing voluminous information works automatically in the background. The added leverage of real-time analytics makes companies proactive and efficient. 

Enhancing Data Digging with Technology

Using technology for reconciliation has led to the observations shared above. Thus, CFOs and account teams should continue to adopt technologies that allow them to analyze and interpret the vast amount of data at their disposal.

The Role of Technology in Accounting

A team of chartered accountants started Firmway, a cloud-based automation software, to simplify time-consuming reconciliations. Using the latest technology, such as AI, it performs reconciliations on par with industry standards and practices.

Technology makes reconciliations, be it vendor, bank, GST, or TDS, simple and efficient. It also simplifies the communication of reconciliation differences through a world-class online action tracker. Thus, adopting technology in accounting and reconciliations should be a priority for CFOs and account teams.

External Confirmations In Audits: Best Practices For Success

External Confirmation In Audit: Best Practices For Success

Consequences of Non-Compliance with SAs

Members of The Institute of Chartered Accountants of India (ICAI) must conduct financial audits following Standards on Auditing (SAs) when fulfilling their attestation function. These standards include procedures for external confirmations. These standards represent widely accepted audit procedures. Deviation from SAs, especially in matters related to external confirmations, necessitates a formal declaration by the member. Failure to do so may lead to disciplinary proceedings under The Chartered Accountants Act, 1949. One such standard is SA 505: External Confirmations. It discusses the use of external confirmations and procedures to obtain direct evidence from third parties as required in SA 330: The Auditor’s Responses to Assessed Risks and SA 500: Audit Evidence.  External Confirmation In Audit is necessary to provide a true and fair view of a company’s financials. It serves as an extremely crucial piece of the puzzle when determining whether such financials are free from material misstatements or not.

External Confirmation :-

External Confirmations is a substantive procedure used to obtain audit evidence as a direct written response from a third party (customer/ vendor/bank) to the auditor in a paper, electronic or any other form.  Generally, auditors use it to determine account balances, status, or terms of agreements. There are primarily three types of confirmation requests:

1. Positive Confirmation Request:

It requires the confirming party to directly respond to the auditor whether it agrees or disagrees with the information provided in the request. Positive confirmations provide reliable audit evidence.

2. Negative Confirmation Request:

It asks the confirming party to respond directly to the auditor only if the confirming party disagrees with the information provided in the request. They provide less persuasive audit evidence than positive confirmations.

3. Blank Confirmation Request:

It is a type of positive confirmation request where the third party (confirming party) is asked to fill in the amount or provide certain information. It provides persuasive audit evidence since the confirming party must verify the information before responding.

External Confirmation In AuditWhy External Confirmation In Audit is needed?

For instance, in Mahavir Jain vs. Disciplinary Committee (Appellate Authority), the auditor formed his opinion without obtaining and examining external confirmations of all bank balances as required by SA 505. Consequently, the Chartered Accountant Act of 1949 held him guilty under Part 1 of the Second Schedule. This was due to his failure to exercise the due diligence expected of him and not obtaining sufficient information to form an opinion.

Further, SA 505 is the 3rd most non-compliant standard as per Quality Review Board in Financial Year (FY) 2020-21.

Process of external confirmations

As we know, obtaining confirmations manually via letters or even e-mails is a cumbersome procedure. One needs to maintain records and follow up continuously. External confirmations involve repetition of the following steps for every audit:

  1. Determine the information to be confirmed;
  2. Choose the appropriate parties;
  3. Design the confirmation requests, properly addressed with a request to send responses directly to the auditor;
  4.  Send and follow-up requests.

To simplify and streamline this process, major firms are adopting automated confirmation procedures. This enables audit teams to concentrate on analyzing results and identifying exceptions rather than investing time in evidence collection.

A team of Chartered Accountants started Firmway, a web-based SaaS software company, to help auditors automate the confirmation process in compliance with auditing standards. They digitized the entire confirmation process. Auditors benefit from automating the time-consuming external confirmation process in the following way:

  • Save 90 % man-days by automating the process of sending, receiving, and tracking confirmations using our portal
  • Complete audit documentation as highlighted in peer review process 
  • Increase response rate by 2x
  • Send 1000+ confirmation requests in compliance with standards on auditing
Section 43B

Section 43B Boost: Empower MSE Payments Now!

Introduction to Section 43B Amendment

The recent Union Budget 2023 stirred discussions, especially regarding the unprecedented inclusion of payments to MSE vendors. This falls within the ambit of Section 43B of the Income Tax Act 1961. Section 43B contains provisions pertaining to “Income from Business and Profession.” It lists all the expenses a given business entity can seek as deductions from their business income only in the financial year when they make the actual payment, disregarding the year when the entity incurred such expenses. Thus, it advocates deduction of spending on an actual payment basis.

Section 43B: An Overview

 The inclusion of payments to MSE vendors in the above regulatory framework strives to address the key issues MSEs counter as a result of prolonged payments. MSEs make up a fundamental segment of the Indian business ecosystem. According to quantitative analysis estimates by the Economic Times, delayed payments to MSMEs in India have resulted in approximately Rs 10.7 lakh crore being held up, which represents around 6% of India’s Gross Value Added (GVA) for the financial year 2020-21. 

MSE Inclusion in Section 43B

The addition of the MSE payments clause (h) in Section 43B can prove as a cornerstone amendment to streamline the payment receipt process for MSE ventures. Business organizations dealing with MSE suppliers, need to duly comprehend the applicability of the amended Section 43B on your payments. You also need to pay attention to the requirements of Section 15 of the Micro, Small, and Medium Enterprises Development Act (MSMED), 2006. The latest Finance Bill 2023 permits the deduction of expense paid to MSEs in line with Section 43B only when it abides by the time limit specified in Section 15 of the MSMED Act 2006. Thus, one can claim deduction on payment to MSE vendors if they are paid within 15 days in cases where there is no agreement. Or 45 days or as per the time period in a pre-defined written agreement, whichever comes first.

Guide to Section 43B Amendment for Businesses

Practical Insights and Illustrations

We provide practical insights on the treatment of payments to MSE vendors in various scenarios, assuming a predefined written agreement. Let’s explore specific situations to determine eligibility for deductions on MSE vendor payments based on the new clause addition.

Illustration 1:

A made a payment to a MSE after the time limit set by section 15 of the MSMED Act, 2006, but within the same financial year in which the expense was incurred. 

In this situation, A settled the payment after the specified time limit of Section 15 of MSMED Act, 2006. This activates the revised provisions of Section 43B. However, as the payment was made within the same financial year that the expense was accrued, deduction shall be permitted in that financial year as outlined by the regulations of the Income Tax Act, 1961.

Illustration 2:

Within the specified time limit under Section 15 of the MSME Act, 2006, B completes payment to an MSE and accrues the expense in the same financial year.

The provisions of section 43B of the Act would not apply to the payment that B made to the MSE. In the financial year in which the expense accrued, he will be permitted to take a deduction.

Illustration 3:

C dealt with an MSE where he had expenses that accrued in March 2024. However, he paid the vendor during the subsequent financial year in April 2024, within the deadline specified under Section 15 of the MSMED Act, 2006.

In this situation, C made the payment as per the time limit specified under section 15 of the MSMED Act, 2006. In the financial year 2023-2024, C will be able to calculate the payment in its tax on an accrual basis.

Illustration 4: 

D incurred an expense in the financial year 2023-2024 that was payable to an MSE. However, he settled it in the subsequent financial year, 2024-25. After the expiration of the time limit specified in Section 15 of the MSMED Act, 2006.

In this situation, because D made the payment beyond the time limit specified in Section 15 of the MSMED Act, 2006, and in the subsequent year, 2024-25, D will not be eligible to claim a deduction for that payment in the financial year 2023-2024 when the expenses initially accrued.

Illustration 5:

On March 16, 2024, E received an invoice from the MSE (Micro and Small Enterprise) for the supply of goods. E dealt with the MSE. The delivery person delivered the goods on the same day. On March 18, 2024, E communicated concerns about the quality of the supplied goods to the MSE vendor. Both parties resolved the dispute on April 30, 2024, and E made the payment on May 31, 2024.

Regulatory Compliance

It’s important to note that the disputing party raised the invoice dispute within 15 days of the delivery date. Therefore, the time limit defined in section 15 of the MSMED Act 2006 starts from the resolution of the dispute. E can claim a deduction for the payment in the financial year 2023-24. If E makes the payment within 45 days from the resolution of the dispute when the expenses accrued.

In summary, to ensure timely deductions and optimize your tax liability. It’s crucial to adhere to the regulatory requirements outlined in both the Income Tax Act 1961. The MSMED Act 2006. Failure to confirm your vendor’s MSME registration status could result in disallowed payment deductions and late payment penalties.

Firmway’s MSME Status Confirmation Tool

Collaborate with Firmway to gain an avante-garde solution in the form of an MSME status confirmation software. By using Firmway’s MSME Status confirmation tool, you can seek MSME status from your vendors and verify the same through MSME government databases and OCR technology. It simplifies the process of getting your vendor’s MSME status validation by leaps and bounds. 

Reach out to know more about this software.

Firmway is a SaaS based startup that has successfully automated Balance Confirmation and Ledger Reconciliation, for well-known companies such as Sodexo, Asian Paints, IPCA, Bluestar, Gati Logistics, and 500 more.

MSMEs

Timely Payments to MSMEs: Impact of Budget 2023-24

Introduction and Budget 2023-24 Highlights

The Indian government’s unwavering commitment to promote Micro, Small, and Medium Enterprises (MSMEs) growth remains a cornerstone of economic development. This sector significantly contributes to employment, production, and exports, making it a focal point in the recent Budget 2023-24. In her recent Budget 2023-24 speech, Finance Minister Nirmala Sitharaman introduced pivotal measures, consequently aiming at incentivizing timely payments to MSMEs. Now, let’s delve into the key proposals, thereby shaping the landscape for MSMEs in India.

Understanding the Proposed Clause

A critical aspect of the budget is the proposed insertion of clause (h) in  section 43B of the Income Tax Act. This clause dictates that any sum payable to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 is deductible only upon actual payment.

The MSMED Act 2006 defines the time limit for payments as 45 days from the date of acceptance or the date of deemed acceptance of any goods or services.

Empowering MSMEs

The new clause not only promotes timely payments but also bolsters the bargaining power of MSMEs in negotiations with larger businesses. This is a significant stride towards creating a more equitable business environment.

Challenges in Identifying MSMEs Vendors

Despite these positive develop ments, identifying MSME vendors poses challenges due to turnover limit fluctuations and UDYAM certificate migrations. The need for a reliable solution is evident.

Timely Payment to MSMEs: Key Budget 2023-24 UpdatesFirmway’s MSME Confirmation Software

To address this issue, the introduction of Firmway’s MSME confirmation software comes as a great relief for enterprises. The software helps enterprises identify the MSME status of their vendors, collect UDYAM certificates, and validate them using OCR technology.

By using Firmway’s software, enterprises can ensure that they are not only making timely payments to MSMEs but also saving them from incorrect information pass by MSME vendors.

The software efficiently streamlines the process of identifying MSMEs, consequently eliminating the need for manual verification and significantly reducing the chances of making mistakes.

Conclusion

In conclusion, the Indian government’s initiative to promote timely payments to MSMEs. Firmway’s MSME confirmation software and, consequently, go hand in hand in promoting the growth and development of this vital sector. Additionally, the software provides a simple and efficient solution to the challenge of identifying MSME vendors. Consequently, it aids enterprises in taking advantage of the tax benefits offered by the government.

  • Data collection with customized forms and follow-ups
  • MSME confirmations to help you know whether an entity is an MSME or not

It is time for all our readers to accelerate processes in their respective companies through efficient automation. Click here if you wish to take help.

Struck off Companies

How to Identify Struck-Off Companies and Avoid Risks

What is the Meaning of Struck Off Companies?

The term struck-off, on the other hand, implies that the Registrar of Companies (ROC) has removed the name of a company from the register of companies for certain reasons. For example, this could happen due to non-compliance with certain laws or regulations. Once the register removes the company’s name, the company’s legal existence is lost. As a result, struck-off companies cannot continue their operations until they restore their name in the register. The striking of a company’s name can happen either voluntarily; furthermore, it can occur due to a compulsory strike-off by the ROC.

Voluntary Striking Off:

To clarify, in this case, the company decides to shut down its operations and liquidate the company. Additionally, the company shall file an application with the ROC for dissolution and the consequent striking off of the name of the company.

Compulsory Striking Off:

For instance, if the company fails to comply with the requirements of the law or any rules or regulations made henceforth, the ROC may strike off the name of the company from the register considering the intensity of the contravention. In such cases, the company has no option but to comply with legal formalities to restore its name.

Disclosure Requirements for Struck-Off Companies

While we understood the struck-off meaning, it is equally important to understand the associated disclosure requirements. Furthermore, as per the requirements of the Ministry of Corporate Affairs (MCA), companies need to disclose their transactions with struck-off companies. This disclosure requirement is effective beginning from FY 2021-22. In detail, they shall disclose their relationships with the company as part of additional regulatory information.

The following are the disclosures required:

  1. Name of the company being struck off
  2. Nature of transactions. This can include:
  • Receivables
  • Investment in securities
  • Payables
  • Shares held by the struck-off company
  • Any outstanding balance

3. Balance outstanding

4. Relationship with the company

Struck-Off CompaniesSteps to Identify Struck-Off Company on MCA

To identify struck-off companies from the register firstly, you can visit the Ministry of Corporate Affairs website. Follow the below steps to identify:

  1. Visit the MCA portal
  2. Navigate as follows: MCA Services >> Master Data >> View Company / LLP Master Data
  3. Add a company name or CIN number and enter the captcha
  4. Check the status of the company.

How Firmway Identifies Struck-Off Companies?

Finding the companies on the MCA website can be cumbersome and time-consuming, especially if you transact with multiple companies. The solution, therefore, is to identify such companies with Firmway!

Firmway allows for bulk searches using the list of struck-off companies; consequently this helps in determining if it hasn’t been struck off. Following are the steps to identify companies using Firmway:

  1. Download the template, Input & upload the party list with the Name or PAN
  2. Automate Matching the Name with the list shared by MCA
  3. Highlight the risk associated in the percentage
  4. Automate scrutinize the data highlighted with the MCA list for 100% verification

Firmway has a data repository storing 1-year data. Its software checks and share the probability % and helps you identify how many companies are there in the list of struck-off companies. Ease your search with Firmway and ensure accurate disclosures!