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New definition of MSME

The Indian Government has modified the definition of MSMEs under the Atmanirbhar Package announced in the year 2020 to increase the number of enterprises eligible for being classified as micro, small and medium enterprises. For this purpose, the threshold limits of investment and turnovers of MSMEs have been raised higher and have been extended to both goods-based and service-based businesses. Besides, the method of calculation of investments and turnovers have also been altered to introduce two new concepts of net investments and net turnovers. The purpose of this article is to educate the readers about the newly determined criteria for eligibility of businesses to be categorised as MSME. 
New-Deffenestion
The new definition of MSMEs was first announced when the pandemic hit and ruined the entire economy of India. While the relatively larger businesses somehow managed to get through the difficult times, it was the micro, small and medium enterprises that completely crashed in financial terms. Most small businesses had to shut down due to a lack of investment, sales, incomes, and profits. Post-pandemic, such businesses were in dire need of support from the government and private investors alike. As a result, the reforms in the MSME sector, due from a long time ago, was one of the first changes that was made immediately after the pandemic. The decision for reforms was also significant for the recovery of the health of the national economy, as it is the MSME sector that duly drives the GDP growth in India.

Table of Contents

What is the new definition of “Micro”, “Small”, and “Medium” Enterprises?

As effective from 1st July 2022, a new definition of MSMEs has been drawn on the basis of their net turnover, and their net investments in plants, machineries, and other equipment required for the proper functioning of their business. The definition is applicable for both goods-based and service-based MSMEs. For the purpose of defining MSMEs, net investment means the investment is the difference of investments in pollution control, research and development, and the installation of safety devices, from the total investment in plant and machinery, while net turnover is the difference of the export turnover from the total turnover of the MSME.
According to the new definition of MSMEs, businesses in the manufacturing industry, the wholesale industry, the retail industry, and the service industry are classified as “micro” enterprises, when their investments in plants, machineries, or equipment do not exceed Rs.1 crore, while their annual turnovers remain below Rs.5 crores. An enterprise is considered “small”, for an annual turnover ranging between Rs. 5 crores to Rs 250 crores and its net investments in plants, machinery, and equipment ranges between Rs.5 crores to Rs.250 crores. Enterprises are considered “medium” for an annual turnover ranging between Rs. 5 crores to Rs.250 crores, while the net investments on plants, machineries, and equipment ranges between Rs.1 crore to Rs.50 crores. Beyond an annual turnover of Rs.250 crores, an enterprise shall lose its MSME status regardless of the amount of its investment in plants, machineries, and equipment. Similarly, if the net investment of an MSME in plants, machineries, and equipment exceeds Rs.50 crores, it shall lose its MSME status, regardless of its annual turnovers.
Types of Enterprises New Definitions
Micro Enterprises
Net investment in plant and machinery or equipment upto Rs. 1 crore and net turnover ≤ Rs. 5 crores
Small Enterprises
Net investment in plant and machinery or equipment ≤ Rs. 10 crores and net turnover ≤ Rs. 50 crores
Medium Enterprises
Net investment in plant and machinery or equipment ≤ Rs. 50 crores and net turnover ≤ Rs. 250 crores

How is the new definition better than the old one?

The new definition of micro, small, and medium enterprises came into effect on 1st July, 2020. It is based on the annual turnovers of enterprises, and their investments in plant, machinery, and other equipment. The table below compares the new definition with the older one in order to identify its merits.
Old Definition of MSME New Definition of MSME
Different threshold limits for manufacturing and service sectors
Uniform threshold limits for manufacturing and service sectors
Excluded retail and wholesale sectors
Includes retail and wholesale sectors
Threshold limits not adjusted for inflation
Threshold limits adjusted for inflation
Cost of equipment not adjusted for depreciation
Cost of equipment adjusted for depreciation
Depreciated cost calculated as per commercial rates
Depreciated cost calculated as per IT rules
Upward limits of turnovers and investments were too low
Upward limits of turnovers and investments have been raised
Export turnover included in total turnover
Export turnover excluded from total turnover
A difference in the threshold limits for MSMEs in the manufacturing and service sectors often created confusion, especially for businesses that operated in both sectors. Streamlining the limits in the new definition has enhanced its simplicity and has made it relatively easier to identify businesses that qualify for the MSME status. Moreover, an inclusion of the retail and wholesale sectors in the new definition, has created a level-playing field for businesses across sectors. This will potentially increase the number of businesses that can qualify as micro, small, and medium enterprises. Increasing the upward limits of net turnover and net investments will ensure that larger businesses can also receive the benefits of MSME registration, as a relatively lower upward limit discouraged existing MSMEs from investing into plant, machinery, and other equipment, for the fear of losing their MSME status. Such investments, if brought into the business, could have reduced its labour cost and increased its productivity drastically.
Unlike the older definition, the threshold limits mentioned in the newer definition have been adjusted for inflation, and the costs of equipment have been adjusted for depreciation. The depreciated cost shall be recorded in the account books for the calculation of taxable income of the MSME. Additionally, the depreciated cost will be calculated under prescribed provisions of the Income Tax Rules, which are higher than the commercial rates of depreciation mentioned in Schedule II. Besides, the new definition has included the net value of turnover and investments, after excluding export turnovers and investments in pollution control, research and development, and industrial safety of the plants and machinery, thereby providing enough room for the growth and expansion of MSMEs.

What is the procedure of MSME Registration in India?

All enterprises that qualify as MSMEs under the new definition must undertake the Udyam Registration before 30th June 2022. Udyam Registration is the replacement of the older UAM registration for MSMEs, which in turn was the replacement of the EM II registration for MSMEs. Udyam Registration is mandatory for enterprises that qualify as MSMEs but have not yet taken the MSME registration, or have taken the outdated EM II or UAM registrations. Such MSMEs must visit theUdyam Registration Portal and file a self declaration form in which it shall declare that it qualifies for registration under the new definition of MSMEs. No supporting documents will be required to be attached with the form, apart from  the Aadhar number of the proprietor in case of a proprietorship, a managing partner in case of a partnership firm, and the authorised signatory in case of a company or LLP. The authorised signatory must also furnish his PAN card and the GSTN allotted to the company or LLP. Intentionally furnishing incorrect information or documents can lead to hefty penalties imposed on the signatory under Section 27 of the MSMED Act.
The PAN and Aadhar of the applicant shall be verified using an OTP sent to the contact number mentioned in the two documents. Besides, details like the name, type, and official address of the enterprise or the manufacturing plant, name, social category, gender, and personal contact details of the signatory, bank details, primary business activity, status of registration, total and net investments in plant and machinery, total and net turnovers, industrial classification (in cases of manufacturing businesses only), and the number of employees of the business.
After the procedure of Udyam Registration is complete, you shall receive a Certificate of Registration and shall be allotted a registration number as conclusive proof of the MSME registration of your enterprise. Once issued, the certificate and the registration number shall have a lifetime validity, without any need of periodic renewals. A single enterprise can undertake only one MSME registration, for one or more than one business activities. The new definition shall be applied retrospectively on enterprises registered as MSMEs before 1st July 2020. Such enterprises shall be reclassified in accordance with the new definition.

What is the cost of MSME registration in India?

The Udyam registration can be undertaken by MSMEs absolutely free of cost on the Udyam registration portal.

Conclusion

The new definition of MSMEs has overcome almost all the flaws that were present in the old definition. A lower threshold of turnover and investment has been raised to limits that would rightly encompass most small businesses henceforth, as compared to a very small number of businesses that came under the aegis of the old definition. Besides, the definition has been extended to services as well, which in the older version of definition only included merchandise business. This was extremely unfair to small businesses in India that were involved in selling services to customers. Moreover, the older definition had not been updated for almost a decade and was in urgent need of upgrading.

About Setindiabiz

Setindiabiz is an organized team of experienced CA, CS, & Lawyers, duly supported by a pool of trained accountants & paralegal staff that provides quality & affordable compliance services to startups & small businesses in India. The views, statements and recommendations expressed in this article or post are only for the sole objective of providing information, and it does not constitute professional advice or recommendation of the company. Neither the author nor the company or its affiliates accepts any liability for any loss or damage arising from any information in this article or any actions taken in reliance thereon.
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