Government Moves to Decriminalise Minor Defaults for MSMEs

The government is reviewing the decriminalisation of minor offenses under the MSMED Act to ease the burden on MSMEs. This initiative is part of broader efforts to improve the business environment for small enterprises struggling with capital and credit issues.

Ahead of the Union budget, the MSME ministry has recommended to the law ministry that minor infractions, such as incorrect self-declaration or failure to disclose details, be decriminalised. This also includes the failure of buyers to disclose MSME dues in annual accounts.

This move aims to enhance the ease of doing business for MSMEs, which often operate with limited capital and face delays in payments. The government’s Vivaad Se Vishwas scheme has already been prioritized to help MSMEs settle disputes.

Currently, under Section 27 of the MSMED Act, MSMEs face penalties ranging from ₹1,000 to ₹10,000 for failing to disclose their registration or furnish other required information. Such penalties often lead to court battles, adding to the financial strain of MSMEs.

India’s 5.58 crore registered MSMEs contribute significantly to the economy, employing over 230 million people. Many MSMEs struggle to raise funds from banks and non-banking financial companies (NBFCs), making timely access to credit a critical issue.

The MSME ministry has also highlighted the difficulties MSMEs face in obtaining bank financing due to high perceived risks and a lack of collateral, especially for micro-enterprises and first-generation entrepreneurs.

FISME has suggested further amendments to the MSMED Act, including expanding the definition of “supplier” to cover medium enterprises and addressing delayed payment issues through more facilitation councils.

The decriminalisation effort is aligned with the government’s broader agenda to ease business operations, as seen in the 2023 amendment to the Jan Vishwas Bill, which seeks to remove minor offenses from the legal system. The decriminalisation of Section 27 is part of this ongoing initiative, which aims to alleviate the legal challenges faced by MSMEs in recovering dues and other disputes.