The Indian Government has introduced MSME new definition 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 extended to both goods-based and service-based businesses. Besides, the calculation method of investments and turnovers has also been altered to introduce two new concepts net investments and net turnovers. This article aims to educate the readers about the newly determined criteria for the eligibility of businesses to be categorised as MSMEs.
The MSME new definition 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, income, 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 a long time ago, were one of the first changes that were 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.
MSME New Definition under the MSMED Act
As effective from 1st July 2020, an MSME new definition has been drawn for businesses based on their net turnover, and net investment limits in plant, machinery, and other equipment. This definition applies to both goods-based and service-based MSMEs. Before digging deeper into the definition and revised limits, let’s first understand what net investment and net turnover mean!
- Net Investment: Difference between investments in pollution control, research and development, and the installation of safety devices, from the total investment in plant and machinery
- Net Turnover: Difference between export turnover from the total turnover of the MSME
These definitions are considered while classifying businesses into micro, small and medium enterprise as per the revised limits mentioned in the table below. Note that these limits apply similarly to goods and service-based enterprises, as well as those operating in the retail, wholesale, and manufacturing sectors.
Play Video
| Types of Enterprises | Revised MSME Limits |
|---|---|
|
Micro Enterprises |
Net investment in plant and machinery or equipment up to 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 |
MSME New Definition vs MSME Old Definition
MSME new definition came into effect on 1st July, 2020. It is based on the annual turnovers of enterprises, and their investment in plant, machinery, and other equipment. The revised limits of these parameters have significantly impacted the MSME sector as the number of enterprises now qualifying for MSME registration has drastically increased. Businesses can enjoy several benefits offered by the government and enhance their overall potential for growth. The table below compares the new MSME definition with the older one to highlight the significance of the revised limits
| 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 |
Beginning with the first point of difference, you can see that the older definition of MSME prescribes different limits for the goods and services sector. On the contrary, the new definition presents limits that are uniform for both these sectors, streamlining the qualification process to a great extent. Moreover, the inclusion of the retail and wholesale sectors in the new definition has created a level-playing field for businesses as well. The upward limits of net turnover and net investments have been raised to ensure that relatively larger businesses can also receive the benefits of MSME registration. Moreover, the previous lower limits discouraged registered MSMEs from investing in plants, machinery, and other equipment due to the fear of losing MSME status. Such investments, when brought into the business, drastically reduce labour costs and enhance productivity.
Unlike the older MSME definition, the revised limits in the newer definition have been adjusted for inflation, and the costs of equipment have been adjusted for depreciation. Depreciation will be recorded in the account books for calculating the taxable income of the MSME. Additionally, the depreciated cost will be calculated by the rates prescribed in the Income Tax Rules. These rates 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 industrial safety of the plants and machinery. This has not only enhanced the transparency of calculation but has led to achieving more accurate results.
MSME Registration Process in India
The MSME registration process redefined to align with the new MSME definition, encompasses several crucial steps. These steps are meticulously designed to facilitate businesses in qualifying for the diverse benefits extended by the government to Micro, Small, and Medium Enterprises (MSMEs). By navigating through the following stages, businesses can formalize their MSME status, opening avenues for financial assistance, priority access to government tenders, and other advantages.
Step 1: Initiate Udyam Registration
Commencing the MSME registration process involves accessing the dedicated Udyam Registration Portal. This online platform serves as the central hub for businesses seeking recognition under the new MSME definition.
Step 2: File a Self-Declaration Form
Once on the portal, businesses qualifying for MSME status, especially those not previously registered or those holding outdated registrations (EM II or UAM), must complete a self-declaration form. This form serves as a pivotal declaration of eligibility under the revised MSME classification.
Step 3: Provide Aadhar, PAN, and GSTN Details
In the self-declaration form, businesses need to furnish specific details, including the Aadhar number of the proprietor (for proprietorships), managing partner (for partnerships), or authorized signatory (for companies or LLPs). Additionally, the authorized signatory must supply PAN card details and the GSTN allotted to the company or LLP.
Step 4: Verification Process
Ensuring the accuracy and legitimacy of provided information, the PAN and Aadhar details undergo verification. This crucial step adds an extra layer of authentication to the registration process, maintaining the integrity of the MSME database.
Step 5: Submit Enterprise Details
Businesses are required to provide comprehensive details about their enterprise, including official addresses, social category, gender, and personal contact details of the signatory. Additionally, furnish bank details, primary business activity, registration status, total and net investments, turnovers, and industrial classification where applicable.
Step 6: Certificate Issuance
Upon successful completion of the Udyam Registration process, a Certificate of Registration and a unique registration number are issued. This certificate, signifying official MSME recognition, and the registration number boast a lifetime validity, eliminating the need for periodic renewals.
MSME Registration Fees in India
One notable advantage of the MSME registration process is that it incurs minimal costs for businesses. As of the latest update, the MSME registration can be undertaken on the Udyam Registration Portal free of charge. Unlike various certifications and registrations that often involve substantial fees, the government has strategically eliminated the financial barrier for businesses seeking MSME recognition.
This fee waiver aligns with the government’s objective to encourage more enterprises to formalize their MSME status, thereby fostering the growth and development of small and medium-sized businesses across diverse sectors. The absence of registration fees ensures that businesses, especially those with limited financial resources, can access the benefits and support services associated with MSME status without incurring additional financial burden.
However, while the MSME registration itself is free, businesses should be cautious about any potential services or agencies claiming to offer registration assistance for a fee. The official Udyam Registration Portal provides a user-friendly platform for businesses to independently complete the registration process without the need for intermediary services. Thus, understanding the cost-free nature of MSME registration underscores the accessibility and inclusivity of this essential formalization process for businesses in India.
The MSME new definition 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 MSME new definition has been extended to services as well, which in the older version of the MSME 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.
FAQs
Q1: How does MSME new definition impact businesses in India?
The MSME new definition, effective since 1st July 2020, brings about critical changes in the classification criteria for Micro, Small, and Medium Enterprises. It considers net turnover and net investments, streamlining the categorization process. This redefinition is crucial for businesses seeking MSME status, impacting their eligibility for government benefits, financial assistance, and priority access to tenders.
Q2: What is the MSME registration fees?
The MSME Registration process, a pivotal step for businesses to access government support, is currently fee-free on the Udyam Registration Portal. This significant change eliminates financial barriers, encouraging more businesses to formalize their MSME status without incurring any registration fees. It ensures inclusivity and accessibility for enterprises, aligning with the government’s pro-growth initiatives.
Q3: How can businesses navigate the MSME Registration Process?
Businesses can initiate the MSME Registration process on the Udyam Registration Portal, ensuring compliance with the new definition criteria. Key steps involve filing a self-declaration form, providing Aadhar, PAN, and GSTN details, undergoing a verification process, submitting comprehensive enterprise details, and receiving a Certificate of Registration with a unique registration number.
Q4: What are the advantages of the MSME new definition?
The MSME new definition addresses several shortcomings of the previous criteria. It introduces uniform threshold limits for manufacturing and service sectors, includes retail and wholesale sectors, adjusts limits for inflation, accounts for equipment depreciation, and excludes export turnover from total turnover. These changes enhance simplicity, fairness, and accuracy in classifying businesses.
Q5: How does the MSME Registration process contribute to the growth of MSMEs?
The MSME Registration process, being fee-free and accessible through the Udyam Registration Portal, actively encourages businesses to formalize their MSME status. This formalization, aligned with the new definition, opens doors to various government benefits, financial assistance, and priority access to tenders. By eliminating financial barriers, the process promotes the inclusive development of small and medium-sized enterprises across diverse sectors in India.
Thanks for sharing this nice and informative blog.
I am really happy to read your beautiful blog and I’m really grateful for the Indian government’s efforts to modernize the MSME definition. It’s a relief to see them considering both goods and service-based businesses like mine, and adjusting limits to reflect today’s economic realities. Thanks for sharing this useful information with me and I will try to visit your blog in the near future.
I appreciate how the blog explains the concepts of net investment and net turnover, making it easier for readers to understand the criteria for categorizing businesses as MSMEs. Thank you for providing this helpful information.