Centre approves amendments in classifying Micro, Small and Medium Enterprises (MSMEs)

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The Centre on Wednesday approved a change in the basis of classifying Micro, Small and Medium Enterprises (MSMEs) from ‘investment in plant and machinery/equipment’ to ‘annual turnover’ to encourage ease of doing business.

This will make the norms of classification growth oriented and align them to the new tax regime revolving around the Goods and Services Tax (GST). Section 7 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 will accordingly be amended to define the units producing goods and rendering services in terms of annual turnover wherein a micro enterprise will be defined as a unit where the annual turnover does not exceed Rs. five crore.

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Moreover, a small enterprise will be defined as a unit where the annual turnover is more than Rs. five crore but does not exceed Rs 75 crore. A medium enterprise will be defined as a unit where the annual turnover is more than Rs seventy five crore but does not exceed Rs 250 crore. Additionally, the Centre may, by notification, vary turnover limits, which shall not exceed thrice the limits specified in Section 7 of the MSMED Act.

At present the MSMED Act (Section 7) classifies the Micro, Small and Medium Enterprises (MSMEs) on the basis of investment in plant and machinery for manufacturing units, and investment in the equipment for service enterprises.

The criterion of investment in plant and machinery stipulates self declaration which in turn entails verification if deemed necessary and leads to transaction costs. In addition the amendment will provide flexibility to the government to fine-tune the classification of MSMEs in response to changing economic scenario without resorting to the amendment of MSMED Act. The consequent growth will pave the way for increased direct and indirect employment in the MSME sector of the country.