New Regime For MSME’s

The government recently revised the definition of the MSME through the notification dated 1st June, 2020 which shall come into effect from 1st July, 2020. However, in the supersession of this notification and other notifications issued on 30th June, 2017, 1st November, 2013 and 5th October, 2006 respectively, Ministry of MICRO, SMALL AND MEDIUM ENTERPRISES on 26th June, 2020 came up with the new notification.

The notification covers the following provisions related to MSMEs.

1. Criteria for classification of an enterprise as Micro, Small, and Medium Enterprise.

2. How to become MSME.

3. Concept of composite criteria.

4. Calculation of investment in plant and machinery.

5. Calculation of turnover.

6. Registration Process for new enterprise as MSMEs

7. Registration of existing enterprise.

8. Updation of information and transition period in classification

9. Establishing the facilitation centre and grievance redressal mechanism.

CRITERIA FOR THE CLASSIFICATION OF THE ENTERPRISE AS MICRO, SMALL, AND MEDIUM ENTERPRISE AND CONCEPT OF COMPOSITE CRITERIA

As per the rule, the enterprise will be considered Micro, Small, or medium based on following criteria and incase they breach any of the criteria they will be reclassified.

Classification	Micro	Small	Medium
Manufacturing Services	Investment <= Rs. 1 cr. and	Investment <= Rs. 10 cr. And	Investment <= Rs. 20 cr. And
	Turnover <= Rs. 5 cr.	Turnover <= Rs. 50 cr.	Turnover <= 100 cr.

The new rule also brings with the concept of “Composite Criteria” i.e. for being classified as Micro, Small or Medium Enterprise, as the case may be, one needs to fulfil both the criteria i.e. Turnover and investment.

So for example, If the A Ltd. having an investment of less than 1 cr. and Turnover of less than 5 cr. Then it is a Micro enterprise. However, if the A Ltd investment is less than 1 cr. and turnover is 6 cr. then it is a small enterprise.

Since any person has only one PAN but can have multiple GST Number, so all the GST Number associated with the same PAN will be taken as a single enterprise and their turnover and investment will be clubbed together to ascertain whether they are Micro, Small, or Medium enterprise. For example, A Ltd. having two branches one in Mumbai and other being in Delhi with different GST Registration, in case investment in Delhi and Mumbai Branch will be clubbed and Turnover of both the branch will also be clubbed to determine its classification.

ESTABLISHING AS MSME

If any person wants to establish the Micro, Small, or Medium enterprise, as the case may be, he shall apply to the portal know as “Udyam Registration Portal” and after registration, the enterprise will be allotted with Udyan Registration Number and Certificate.

CALCULATION OF INVESTMENT IN PLANT AND MACHINERY EQUIPMENT

The calculation will be based on the Income Tax Return of the previous year. However, for the newly established enterprise where no prior ITR is available, the calculation to be done based on data provided by the enterprise on self-declaration basis for the first financial year i.e. up to the 31^st March, of that year.

Plant and Machinery here will have the same meaning as assigned under Income Tax Rule, 1962 and it will include the entire tangible asset except for land, building, furniture, and fitting. Plant and Machinery will be valued at invoice value exclusive of GST. The value will be taken from the ITR and for a new enterprise which does not have ITR, on a self-declaration basis.

Following will be excluded from the calculation from the investment in machinery. Explanation-1 to Section 7 provides that- For the removal of doubts, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

Further, through a notification dated 5^th October, 2006, the following items shall be excluded while calculating the investment in plant and machinery;

i. equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and the cost of consumables stores;

ii. installation of plant and machinery;

iii. research and development equipment and pollution controlled equipment

iv. power generation set and extra transformer installed by the enterprise as per regulations of the State Electricity Board;

v. bank charges and service charges paid to the National Small Industries Corporation or the State Small Industries Corporation;

vi. 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;

vii. gas producers plants;

viii. 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;

ix. charges paid for technical know-how for erection of plant and machinery;

x. such storage tanks which store raw material and finished product and are not linked with the manufacturing process; and

xi. fire-fighting equipment.

This notification has been issued in the supersession of the notification issued on 5^th October, 2006 and since this notification provides that:-

“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.”

And explanation itself provides that all those prescribed in the notification issued in this regard will also be exempted, hence, all the above investment in plant and machinery will not be considered while calculating the investment.

CALCULATION OF TURNOVER

Turnover will be calculated either based on Income Tax Act or CGST Act; however, turnover will not include the export of goods and services. In case the enterprise doesn’t have PAN or GSTIN, self-declaration will be sufficient, however, after March 31^st 2021 PAN and GST Number will be mandatory.

REGISTRATION PROCESS

1. Login to the portal

2. Aadhar Number will be required of the following in these cases

• Proprietor in case of Proprietorship concern
• Managing Partner in case of Partnership concern
• Karta in case of HUF

3. In following cases, GST Number and PAN along with Aadhar Number of Authorized Person will be required

• Company
• LLP
• Co-operative Society
• Society
• Trust

4. Each enterprise to have on only one registration for all kind of activity it undertakes to do.

5. In case of any deficiency in information related to past years when the enterprise doesn’t have PAN may be filled up based on self-declaration.

6. Misrepresentation or omission of fact will be liable for penalty as per Section 27 of the MSME Regulation Act, 2006.

• in the case of the first conviction, with fine which may extend to rupees one thousand; and
• in the case of second or subsequent conviction, with fine which shall not be less than rupees one thousand but may extend to rupees ten thousand.

REGISTRATION FOR EXISTING ENTERPRISES

All the existing registered MSME has to re-register itself based on new classification, however, existing registration or registration done till 30^th June, 2020 will be valid up-to-the 31^st March, 2021.

ANNUAL UPADATION OF THE INFORMATION

1. INFORMATION BY MSME:Registered enterprise has to update its previous year ITR, GST Return detail and such other information on self-declaration basis, as may be required, however, it is not clear whether such information is to be updated on annual basis or it is the one-time filing of the information.

2. AUTOMATIC UPDATION OF CLASSIFICATION: Based on the information provided by the enterprises on an annual basis the system will classify it as Micro, Small or Medium enterprise.

3. COMMUNICATION OF RE-CLASSIFICATION: In case there is a change in the status of the enterprise in either way that is from lower to higher or higher to lower the same will be communicated to the enterprise.

4. CHANGE IN CLASSIFICATION: Any change in classification will be effective from the next financial year. For example, A Ltd was Micro enterprise in June 2020, however, its turnover crossed the threshold limit in July 2020. The changed classification will be applicable form the 1^stApril, 2021 that is from Financial Year 2021-2022.

SINGLE WINDOW CLEARANCE SYSTEM

The single-window clearance system is going established from centre to district level in order to facilitate the enterprises for registering as MSMEs and to provide handholding facility to the MSMEs.

CS. Nishant Mishra
Associate Company Secretary
E-mail ID- nishantmishra008@gmail.com/csnishantmishra@yahoo.com