All you need to know about MSME

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.