All you need to know about MSME

29/08/2019 CA Janhavi Phadnis Finance 0
all you need to know about msme
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Last updated on May 9th, 2021 at 03:28 pm

All you need to know about MSME

The Micro, Small and Medium Enterprises (MSMEs) sector is recently getting recognized and promoted as an engine of growth in India. Across the globe, there has been a significant contribution by MSME sectors.  The countries like Philippines etc have witnessed tremendous contribution by MSMEs in the development of the economy. In India as well, MSMEs are getting relaxations and recognitions. The government is making efforts for the promotion and development of Micro, Small and Medium Enterprises (MSMEs).
Why is MSME important?
MSMEs are crucial for the economic growth and stability of a country. They play a vital role; especially for developing countries like India as they facilitate economic activity and provide employment and contribute to poverty reduction.
Currently, MSMEs contribute approx. 29 % to the GDP of India and the government intends to take this to 50 % in the next 5 years.
Let us understand what can be considered as an MSME unit.
Who can be classified as MSME?
The Government of India in the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 has defined MSME. The definition of micro, small and medium enterprises provides different criteria for manufacturing and service units:

Manufacturing units:

Enterprises engaged in the manufacture or production, processing or preservation of goods are defined as below:

  • A micro-enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;
  • A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore;
  • A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

The Ministry of Small Scale Industries vide its notification No.S.O.1722(E) dated October 5, 2006, has clarified that in case of the above enterprises, investment in plant and machinery amounts to the original cost excluding land and building and the items specified by the Ministry.

Units providing or rendering services:

Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below.

  • A microenterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;
  • A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crores;
  • A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crores but does not exceed Rs. 5 crore.
A Change in the Definition of MSME

From time to time, the MSME sector has been raising demand for revision/amendment in the MSME definition. The demands for change in definition primarily emerge from the changing times and inflation. At the same time, there were some difficulties in the existing definition. The criterion of investment entails physical verification, bringing with it transaction costs. It also incentivizes promoters to keep the investment size small to retain the MSME tag.

The Parliamentary Standing Committee on Commerce & Industry had recommended some improvements in the definition of Micro, Small and Medium Enterprises (MSMEs) in 2018. The MSMEs Development (Amendment) Bill provides for a change in the criterion of classification of MSMEs from the existing based on ‘investment in plant and machinery or equipment’ to ‘annual turnover’ of the enterprise.

As per the new definition, businesses with revenue up to ₹5 crores will be termed as micro, those with revenue between ₹5 crores and ₹75 crores will be deemed small and those with revenue above of ₹75 crores up to ₹250 crores will be classified as medium-sized enterprises.

The highlights of the proposal are:

  • It removes the investment criterion and instead proposes to define MSMEs on the basis of annual sales turnover
  • The annual turnover is the criterion, the information available with the GSTN Network and other sources can be used
  • The turnover based classification will promote the ease of doing business.
  • The new definition is a step towards putting in place a non-discretionary, transparent, and objective classification system

There are some apprehensions about this definition too. For eg:

  • The distinction between manufacturing and service unit will go away.
  • The registration of a manufacturing unit itself would be difficult if it is based on turnover alone. Turnover can show huge changes and accordingly the classifications will keep changing too.
  • The new definition does not take into account the number of people employed. Globally, the two most important factors used to define MSMEs are turnover as well as employment.
What are the benefits of MSME registration?

The government is providing various benefits like:

  • Collateral Free loans from banks; marginal exemption on the interest rate on overdraft
  • Subsidy on Patent registration;  Industrial Promotion subsidy
  • Protection against delayed payments
  • Concession in electricity bills; etc.

We will discuss these benefits in detail in our next post.

 

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Disclaimer: The above content is for general info purpose only and does not constitute professional advice. The author/ website will not be liable for any inaccurate / incomplete information and any reliance you place on the content is strictly at your risk.

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