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The conceptual and legal framework for small scale and ancillary industrial undertakings is derived from the Industries Development and Regulation Act, 1951. The Small and Medium Enterprises Development Bill 2005 which was enacted in June 2006 was renamed as “Micro, Small & Medium Enterprises Development Act, 2006” aims at facilitating the promotion and development of small and medium enterprises. MSMEs are governed by Micro, Small & Medium Enterprises Development Act, 2006 (MSMED Act, 2006 – hereafter referred as “Act”) which came into force w.e.f. 02.10.2006.

Salient Feature of the Act:

  • Setting up of a National Board for MSME’s
  • Classification of Enterprises
  • Advisory committees to support MSME’s
  • Measures for promotion development and enhancement of MSME’s
  • Schemes to control delayed payments to MSME’s
  • Enactment of rules by State Governments to implement the MSME’s Act, 2006 in their respective states.

According to the Act, Enterprise means an Industrial undertaking or a business concern or any other establishment, by whatever name called engaged in manufacture or production of goods, or engaged in providing or rendering of any service or services (Earlier concept of Industries have been changed to Enterprises). Thus broadly MSME are classified in two categories:

1. Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951)1 or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use.

2. Service Enterprises: The enterprises engaged in providing or rendering of service.

Section 2(e) of the Act ” enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services.

Classification of Enterprises

An Enterprise is classified as Micro, Small or Medium on the basis of Investment made in Plant and Machinery / Equipment2. Accordingly, the section of Act, the ceiling on investment and turnover to be classified as micro, small or medium enterprises is as under.

For Manufacturing Enterprises

S.No. Enterprises Investment in Plant and Machinery
1. Micro Enterprises Does not exceed Rs. 25 lacs
2. Small Enterprises More than Rs. 25 lacs but does not exceed Rs. 5 crore
3. Medium Enterprises More than Rs. 5 Core but does not exceed Rs. 10 crore

For Service Providers

S.No. Enterprises Investment in Equipment
1. Micro Enterprises Does not exceed Rs. 10 lacs
2. Small Enterprises More than Rs. 10 lacs but does not exceed Rs. 2 crore
3. Medium Enterprises More than Rs. 2 Core but does not exceed Rs. 5 crore

On 13/05/2020, FM have announced to revise the basis on which enterprises is to be classified as Micro, Small and Medium Enterprises. Investment Limit will be revised upwards and additionally criteria of turnover being introduced. Distinction between manufacturing and service sector to be eliminated. (Amendment in Act is awaited). Clarification from Government would be required on, whether Investment and Turnover Criteria to be read as “AND” or “OR” as this will impact lots of MSME and whether Trading is also included in definition of MSME.

Revised Classification: (Composite Criteria: Investment and Annual Turnover)

Classification Micro Small Medium
Manufacturing and Service Investment< Rs. 1 cr.

and

Turnover < Rs.5 cr.

Investment< Rs. 10 cr.

and

Turnover < Rs.50 cr.

Investment< Rs. 20 cr.

and

Turnover < Rs.100 cr.

Computation of Investment limit in Plants & Machineries or in Equipment’s for the purpose of MSMED Act, 2006

As per Ministry of Small Scale industries notification dated 5th day of October, 20063, the investment in Plant and Machinery referred to in respective limits is the Original Price, irrespective of whether the plant and machinery are new or second handed, shall be taken into account provided that in the case of imported machinery, the following shall be included in calculating the value, namely;

  • Import duty (excluding miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port);
  • Shipping charges;
  • Customs clearance charges;
  • Sales tax or value added tax (know Good and Service Tax).

Further, as per the said notification, the following are excluded while calculating the investment in Plant and Machinery

  • Equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and the cost of consumables stores;
  • Installation of plant and machinery;
  • Research and development equipment and pollution controlled equipment
  • Power generation set and extra transformer installed by the enterprise as per regulations of the State Electricity Board;
  • Bank charges and service charges paid to the National Small Industries Corporation or the State Small Industries Corporation;
  • Procurement or installation of cables, wiring, bus bars, electrical control panels (not mounded on individual machines), oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the plant and machinery or for safety measures;
  • Gas producers plants;
  • Transportation charges (excluding sales-tax or value added tax and excise duty) for indigenous machinery from the place of the manufacture to the site of the enterprise;
  • Charges paid for technical know-how for erection of plant and machinery;
  • Such storage tanks which store raw material and finished produces and are not linked with the manufacturing process; and
  • Firefighting equipment.

Further, investment in Land, Building, Vehicles, Furniture and fixtures, Office Equipment etc. shall not be considered in determining the threshold limit of plant and machinery or Equipment as the case may be.

Reference : 

1. Earlier, Small Industries were defined under Industries (Development and Regulation) Act, 1951

2.  S.O. 1642(E) dtd.30-09-2006 : Classification of Enterprises

3. Notification No.S.O.1722 (E) dated 06.10.06 Items to be excluded for the purpose of calculations of investment in Plant & Machinery of MSMEs.

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