Construction Industry Delayed Payments
Need for Construction Contractor for MSME registration
Criteria for Contractor’s MSME classification
MSME buyer payment terms
Construction companies have long been facing a problem of delayed payments of their bills and receivables no matter whether it is from government organization or a large organization. This is affecting the contractor’s growth and sustainability. For a construction company, it would be, therefore, foolish to not register under MSME.
The MSME Act:
The Micro, Small and Medium Enterprises Development Act, 2006, [MSME] made provisions to mitigate the problem of delayed payment, whereby any client, who fails to make payment to an MSMEs registered contractor, no matter what the contractual terms are, as to make the payments within a maximum of 45 days. Failure to make payment by the client, the buyer, would make them liable to pay monthly compounded interest at three times the bank rate notified by RBI. Further, in case of any dispute concerning the realization of principal and interest, MSME councils would be established by state governments and would conduct proceedings to resolve all disputes.
The MSME Act:
An entity can be classified as a medium, small or micro-industry under the criteria defined in the table below as per the MSMED Act, 2006.
Type of enterprises Investment in Plant & MachineryMSME-1 applicability Manufacturing activities Services activities Small enterprises Up to 25 lacs Up to 10 lacsMSME-1 applicable Micro enterprises More than 25 lacs but up to 5 crore More than 10 lacs but up to 2 croreMSME-1 applicable Medium enterprises More than 5 crores but up to 10 crores More than 2 crores but up to 5 croreMSME-1 not applicable
In case of late payments, a contractor can file an online application, which would be reviewed by the facilitation councils for proactive actions. This facility has an asset for the cash-challenged construction contractors. All the cases can easily be filed through the portal named as Samadhan Portal. Therefore, there is a need to devise alternative solutions to resolve this issue, as MSMEs are caught in a vicious cycle, where they avoid reporting their defaults to not lose out on a business relationship, despite being vulnerable.
The Dispute Resolution Mechanism:
MSMEs supplying to various corporations and other buyers should be able to get their bills released on due dates as per agreed terms. In cases of delays, buyers should bear interest for such delays, thereby transferring the burden of interest payment on the discounting of such bills for the period of delay to buyers.
The Requirement to Disclose in the Annual Statement by Companies (Buyers)
As per The Companies’ Act, it is the responsibility of all the companies, the buyer, to disclose the following facts in the annual statement.
The principal amount and interest due
The amount of interest paid by the buyer
The reasons for the delay
The Benefit to Micro & Small Enterprises:
Quick Payments: Micro & Small Concerns can get Quick Payment of Due Bills within 45 Days.
Benefits from Banks: All banks and other financial institutions have special schemes for MSME. This usually includes priority sector lending, which means that the likelihood of your business being sanctioned a loan is high, and lower bank interest rates. There may also be preferential treatment in case of delay in repayment.
Tax Benefits: Exemption from certain direct taxes in the initial years of your business.
Benefits from State Governments: Subsidies on power, taxes and entry to state-run industrial estates.
Benefits from Central Government: Special schemes such as the credit guarantee scheme.