Interest Under MSMED Act explained with example. #msme

Summary

This video explains the interest liability provisions under the MSMED Act, focusing on Section 16, which mandates interest on delayed payments to micro and small enterprises. The interest rate is three times the RBI bank rate, currently set at 19.5% per annum. It also covers the maximum allowable due date of 45 days, and how it’s adjusted in different scenarios based on agreements between buyers and sellers. The video further demonstrates interest calculations with examples, showing how to apply monthly compounding interest using Excel’s future value formula. It’s a comprehensive guide for understanding delayed payment interest under the MSMED Act.

Takeaways

• 😀 Interest is payable for delayed payments to micro and small enterprises under the MSMED Act, Section 16.
• 😀 The interest rate for delayed payments is three times the bank rate notified by the Reserve Bank of India (currently 19.5% per annum).
• 😀 The maximum due date for payments cannot exceed 45 days as per Section 15 of the MSMED Act.
• 😀 If the agreement between the buyer and seller specifies a due date exceeding 45 days, it must be restricted to 45 days as per the MSMED Act.
• 😀 If the due date is within 45 days as per the agreement, that date should be followed, and interest will apply for any payment made after this date.
• 😀 In cases where there is no agreement between the buyer and seller, the due date is 15 days from the acceptance or deemed acceptance of goods or services.
• 😀 Example scenarios were provided for calculating interest: no agreement, 30 days agreement, and 60 days agreement.
• 😀 In the absence of an agreement, the due date is considered to be 15 days from the day of delivery or deemed acceptance of goods or services.
• 😀 For an agreement specifying 60 days, the due date must be reduced to 45 days as per Section 16, even if the agreement states otherwise.
• 😀 The formula used for calculating interest is based on future value and compounded monthly, with interest calculated on the outstanding amount and added cumulatively for each month of delay.

Q & A

What does Section 16 of the MSMED Act specify regarding interest on delayed payments?

Section 16 of the MSMED Act mandates that interest must be paid on delayed payments to micro and small enterprises. The interest rate is three times the bank rate as notified by the Reserve Bank of India.

How is the interest rate calculated under Section 16 of the MSMED Act?

The interest rate is calculated as three times the bank rate notified by the Reserve Bank of India. Currently, the bank rate is 6.5%, so the interest rate for delayed payments is 19.5% per annum.

What is the maximum allowed due date for payments under Section 15 of the MSMED Act?

According to Section 15, the maximum due date for payments cannot exceed 45 days.

What happens if the payment due date exceeds 45 days according to the MSMED Act?

If the due date exceeds 45 days, the buyer is still obligated to pay the interest as per the Act, even though the contract may allow for a later payment.

How is the due date determined if there is no agreement between the buyer and seller?

If there is no agreement, the due date is considered to be 15 days from the day of acceptance or the deemed day of acceptance of the goods or services.

How do due dates work when there is an agreement between the buyer and seller?

If there is an agreement, the due date is based on the terms specified in the agreement. If it is less than 45 days, the due date mentioned in the agreement is considered final. If it exceeds 45 days, the due date is restricted to 45 days as per the Act.

What happens if the due date in the agreement exceeds 45 days?

If the due date in the agreement exceeds 45 days, the due date will be restricted to 45 days as per Section 16 of the MSMED Act.

How do you calculate the delay days if the payment is made after the due date?

The delay days are calculated as the difference between the payment date and the due date, based on the agreement or the provisions of the Act.

What is the method used to calculate interest on delayed payments?

The interest on delayed payments is calculated using the future value formula, which compounds the interest on a monthly basis, taking into account the outstanding amount and the number of delay days.

Can you give an example of how interest is calculated on delayed payments?

For instance, in a scenario where the outstanding amount is ₹1,00,000 and the delay is 78 days, interest is compounded monthly. After the first month, the outstanding balance is ₹1,01,000, and interest is calculated on the cumulative balance. This process continues until the delay is fully accounted for, resulting in an interest amount of ₹4,283 for the 78-day delay.