New criteria for classification of Micro, Small and Medium Enterprises

New criteria for classification of Micro, Small and Medium Enterprises – GAZETTE NOTIFICATION – 26th June, 2020

The Government has always been in favor of providing benefits to Micro, Small and Medium Enterprises (MSMEs). There are many benefits of MSME registration in India, which can be only availed if the business had registered itself as an MSME/SSI under MSME Act.

It is important to note that since last 14 years, the industry was waiting for definition change in MSME for quite a long time. As there was fear among MSME that if they grow in terms of number, they might lose the title of being MSME and lose benefits of Government provided for MSME.

Therefore, it was great news for everyone when a revision in MSME definition was announced in the Aatmanirbhar Bharat Package on 13^th May, 2020. MSME will no longer have to worry that growing in number might make them ineligible to avail MSME benefits.

The Government, in the Ministry of Micro, Small and Medium Enterprises has issued a notification number S.O.1702 (E), dated the 1st June, 2020, to make the change the MSME definition in accordance with Aatmanirbhar Bharat Package on 13^th May, 2020. New definition and criterion have been notified and has come into effect from 1st July, 2020.

As per said notification number S.O.1702 (E), dated the 1st June, 2020, the definition of Micro manufacturing and services units was increased to Rs. 1 Crore of investment and Rs. 5 Crore of turnover. The limit of small unit was increased to Rs. 10 Crore of investment and Rs 50 Crore of turnover. Similarly, the limit of medium unit was increased to Rs. 50 Crore of investment and Rs. 250 Crore of turnover.

Classification of Enterprises (w.e.f. 01.07.2020):

As per revised definition, An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:–

Revised MSME Classification
Sr. No.	Enterprises	Investment in and Turnover	Limit
(i)	A Micro Enterprises	Investment in plant and machinery or equipment; AND	does not exceed one crore rupees (<Rs. 1 crore)
		Turnover	does not exceed five crore rupees (<Rs. 5 crore)
(ii)	A Small Enterprise	Investment in plant and machinery or equipment; AND	does not exceed ten crore rupees (<Rs. 10 crore)
		Turnover	does not exceed fifty crore rupees (<Rs. 50 crore)
(iii)	a Medium Enterprise	Investment in plant and machinery or equipment; AND	does not exceed fifty crore rupees (<Rs. 50 crore)
		Turnover	does not exceed two hundred and fifty crore rupees (<Rs. 250 crore)

Earlier, MSMEs are classified in two categories, such as manufacturing and service enterprises. Now it has been removed both will be the same. MSMEs were defined on the basis of investments they put, now the revised definitions will also include turnover of the company, this will be notified once changes in the law are made. Under the new definition, manufacturing and service MSMEs will be defined under a common metric that will be a mix of investment in plants and machinery or equipment and turnover.

Definition of MSME valid upto 30^th June 2020.

The limit for investment in plant and machinery / equipment for manufacturing / service enterprises, as notified, vide S.O. 1642(E) dtd.29-09-2006 are as under-

Existing MSME Classification
Criteria: Investment in Plant and Machinery or Equipment
Classification	Micro	Small	Medium
Manufacturing Enterprises	Investment <Rs. 25 lakh	Investment <Rs. 5 crore	Investment <Rs. 10 crore
Service Enterprises	Investment <Rs. 10 lakh	Investment <Rs. 2 crore	Investment <Rs. 5 crore

New Consolidated Notification No. S.O.2119 (E), dated the 26th June, 2020.

Ministry of Micro, Small and Medium Enterprises (MSME) has come out with a Consolidated Notification No. S.O.2119 (E), dated the 26th June, 2020 (referred as “said notification”) in the form of guidelines for classification and registration of MSMEs to be effected from July 1, 2020.

In exercise of the powers conferred by sub-section (1) read with sub-section (9) of section 7 and sub-section (2) read with sub-section (3) of section 8, of the Micro, Small and Medium Enterprises Development Act, 2006, (the Act),  the Government, in the Ministry of Micro, Small and Medium Enterprises has issued a notification number S.O.2119 (E), dated the 26th June, 2020.

It is also pertinent to note that the said notification has been issued in supersession of the notifications of the Government of India in the Ministry of Micro, Small and Medium Enterprises number S.O.1702 (E ), dated the 1st June, 2020, S.O. 2052 (E), dated the 30th June, 2017, S.O.3322 (E ), dated the 1st November, 2013 and S.O.1722 (E ), dated the 5th October, 2006, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-Section (ii), except as respects things done or omitted to be done before such supersession.

Therefore, the entrepreneurs, enterprises and the MSMEs have to refer to just the new consolidated Notification No. S.O.2119 (E), dated the 26th June, 2020 for matters relating with classification or registration w.e.f. July 1, 2020. Existing MSMEs have to register again on or after 1 July, 2020 at “Udyam Registration portal”.

As per the said notification, an MSME will be known as ‘Udyam’, as this is more closer to the word Enterprise and accordingly, the registration process will be known as ‘Udyam Registration’. Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the ‘Udyam Registration Portal’, based on self-declaration with no requirement to upload documents, papers, certificates or proof.

On registration, an enterprise will be assigned a permanent identity number to be known as “Udyam Registration Number”. Thereafter, an e-certificate, namely, “Udyam Registration Certificate” shall be issued on completion of the registration process.

New registration process as per the said notification.

1. The requisite form shall be provided in the Udyam Registration Portal, for which there will be no fee.
2. It is necessary for a person to have Aadhaar Number for Udaym Registration. The Aadhaar number shall be of the proprietor in the case of a proprietorship firm and of the managing partner in the case of a partnership firm and of a Karta in the case of a Hindu Undivided Family (HUF).
3. In case of a Company or a Limited Liability Partnership or a Cooperative Society or a Society or a Trust, the organisation or its authorised signatory shall provide its GSTIN and PAN along with its Aadhaar number.
4. It is to be noted that no enterprise shall file more than one Udyam Registration. Any number of activities including manufacturing or service or both may be specified or added in one Udyam Registration.

Registration of Existing Enterprises

1. All existing registered under EM-Part-II or UAM shall register again on the Udyam Registration portal on or after 1 July, 2020.
2. All enterprises registered till 30 June 2020, shall be re-classified in accordance with this notification.
3. The existing enterprises registered prior to 30 June 2020 shall continue to be valid only for a period upto the 31 March 2021.
4. An enterprise registered with any other organization under the Ministry of Micro, Small and Medium Enterprises shall register itself under Udyam Registration.

Composite criteria of Investment and Turnover for Classification-

A composite criterion of investment and turnover shall apply for classification of an enterprise as micro, small or medium.

It is pertinent to mention that if an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category but no enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover.

For Example: If an enterprise is having its investment in plant and machinery for an amount of Rs. 9 crore and also having turnover of Rs. 45 crore. In this case, the enterprise shall be classified as a ‘Small Enterprise’. Suppose, its turnover is increase more than Rs. 50 crore but investment in plant and machinery remains same to Rs. 9 crore. In that case, its category as Small Enterprise will cease to exist and will shifted in the next higher category i.e. as a ‘Medium Enterprise’. But please note that in the said, if turnover is decrease to Rs. 4.5 crore (which is below Rs. 5 crore), the enterprise shall not be shifted to lower category i.e. as Micro Enterprise unless the investment in plant and machinery is also reduced below Rs. 1 crore.

Further, it is also pertinent to note that all units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.

Calculation of Investment in Plant and Machinery or Equipment.

In case of Existing Enterprise-

Calculation of investment in plant & Machinery or equipment will be linked to the ITR of the previous years filed under Income Tax Act, 1961.

In case of a New Enterprise-

• where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.
• the purchase (invoice) value of a plant and machinery or equipment, whether purchased first hand or second hand, shall be taken into account excluding Goods and Services Tax (GST), on self-disclosure basis, if the enterprise is a new one without any ITR.

Note:

1. The expression “Plant and Machinery or Equipment” of the enterprise, shall have the same meaning as to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings).
2. The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Act shall be excluded from the calculation of the amount of investment in plant and machinery.

Calculation of Turnover.

In case of Existing Enterprise-

Information as regards turnover and exports turnover for an enterprise shall be linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN.

In case of a New Enterprise-

In case of new enterprise or if any enterprise does not have PAN, turnover will be considered on self-declaration basis for a period up to 31^st March 2021 and thereafter PAN and GSTIN shall be mandatory.

Note: For calculating the turnover of any enterprise, exports of goods or services or both, shall be excluded.

*****

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.