What is unique about the new MSME definition?

The government has modified the definition of micro, small and medium enterprises (MSMEs) in June 2020. This new criterion is a composite criterion that adopts investment and turnover limits while classifying the micro, small and medium enterprises. Similarly, it gives the same criteria for Manufacturing Enterprises and Enterprises rendering Services.

According to the Minister for MSMEs, Sri Nitin Gadkari, the definition will bring more entities under the MSME concessional umbrella. The MSME sector is providing vital contribution to the economy. There are around 6.5 crore MSME units that contribute nearly 29 per cent of the GDP and 48 per cent of exports, besides providing nearly 11 crore jobs to the people.

Now, the new classification will enable more firms to be included under the MSME category and hence they can get the concessions given to the sector. The new definitoin for MSMEs have two important uneiqueness:

(i) It brings a composite criteria by mixing both investment and turnover criteria.

(ii) It introduces a common criteria for manufacturing and services setctor enterprises.

1. Classification of MSMEs

An enterprise will be classified as a Micro, Small or Medium enterprise based on the following criteria:

(i)  Micro enterprise: investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees.

(ii) Small enterprise: investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees.

(iii) Medium enterprise: the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

Table: New composite classification for MSMEs – Investment and turnover limits in (Rs crores)

The New criteria will be same for both Manufacturing Enterprises and Enterprises providing Services.

One peculiarity of the new classification is the composite criteria that incorporate both investment in machinery and plant and turnover limits is adopted for differentiating micro, small and medium enterprises.

Under the composite criteria, if an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category.

At the same time, no enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for both investment and turnover are low compared to the present category that it is placed.

1. GST registration and MSME classification

All units with same GST PAN number shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together to decide the category.

1. Calculation of investment in plant and machinery or equipment

The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years filed. In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter.

1. Calculation of turnover

Exports of goods or services or both, shall be excluded while calculating the turnover. Information regarding turnover and exports turnover shall be linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN.

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