The Union Cabinet has approved amendment to Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 for classifying MSMEs from current investment in plant and machinery criteria to annual turnover criteria.
The purpose of amendment to Section 7 of MSMED Act, 2006 is to encourage ease of doing business, make MSME classification norms growth oriented and align them to new indirect tax regime revolving around Goods & Services Tax (GST). This will define units producing goods and rendering services in terms of annual turnover. It will pave the way for increased direct and indirect employment in the MSME sector of the country.
MSME is second largest employment generating sector after agriculture sector. It provides 80% of jobs in industry with just 20% of investment. It contributes around 31% to nation’s GDP and 45% and 34% share of the overall exports and manufacturing output (2017 report).
At present Section 7 of MSMED Act classifies MSMEs on the basis of investment in plant and machinery for manufacturing units and investment in equipment for service enterprises. The criterion of investment in plant and machinery stipulates self-declaration which in turn entails verification and leads to transaction costs.
New Classification Criteria (based on turnover)
- Micro enterprise: It will be unit with annual turnover does not exceed Rs. 5 crore.
- Small enterprise: It will be unit with annual turnover is more than Rs. 5 crore but does not exceed Rs. 75 crore.
- Medium enterprise: It will be unit with annual turnover is more than Rs. 75 crore but does not exceed Rs. 250 crore.
- The amendment empowers Central Government to vary turnover limits, provided not exceeding thrice the limits specified in Section 7 of MSMED Act by issuing notification.
Significance of New Classification Criteria
The turnover criteria can be pegged with reliable available figures e.g. in GST Network (GSTN) and other methods of ascertaining. This will help in having non-discretionary, transparent and objective criteria. It will eliminate need for inspections and make classification system progressive and evolutionary.
It will also help in overcoming uncertainties associated with classification based on investment in plant & machinery and equipment and employment. It will also improve ease of doing business. It will provide flexibility to Government to fine-tune classification of MSMEs in response to changing economic scenario without resorting to amendment of MSMED Act.