[FAQs] New Definition & Classification of Micro, Small and Medium Enterprises (MSMEs)

MSME stands for Micro, Small, and Medium Enterprises.

MSE stands for Micro and Small Enterprises.

SME stands for Small and Medium Enterprises. In some countries SME is more frequently in use.

The terms “Micro Enterprises”, “Small Enterprises” and “Medium Enterprises” are defined in the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The MSMED Act came into force on 02.10.2006. As per its long title, the avowed objects of the MSMED Act is to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and matters connected there with or incidental thereto.

Section 2(h) of MSMED Act defines “micro enterprise” to mean an enterprise classified as such under sub-section (1) of section 7.

Section 2(m) of MSMED Act defines “small enterprise” to mean an enterprise classified as such under sub-section (1) of section 7.

Section 2(g) of MSMED Act defines “medium enterprise” to mean an enterprise classified as such under sub-section (1) of section 7.

The old definition and classification of Micro, Small and Medium Enterprises (MSMEs), applicable from 02.10.2006 to 30.06.2020, was based on ceilings on investment in plant and machinery for enterprises in the manufacturing sector and on ceilings on investment in equipment in services sector. The investment ceilings were fixed way back in 2006 and were not adjusted for inflation. These outdated investment ceilings not adjusted for inflation discouraged MSMEs from undertaking new investments in plant and machinery or equipment for fear of losing the MSME status due to investment limits being exceeded. Government of India has notified new definitions and classification criteria of MSMEs vide Notification No. S.O. 2119(E), dated 26.06.2020 (hereafter referred to as the “New MSME Notification” or simply as ‘NMN’ for brevity sake).

The new definition of MSME, applicable with effect from 01.07.2020, is based on the composite criteria of turnover limits and limits of investment in plant and machinery or equipment. The same limits apply to both manufacturing enterprises and service enterprises.

The following Table shows the classification of MSMEs into micro, small and medium categories based on various combinations of situations as regards net investment in plant and machinery or investment and net turnover:

Notes:

1. In the above table, cell No. 1 represents a situation where net investment in plant and machinery or equipment of an enterprise does not exceed `1 crore and net turnover does not exceed `5 crores and so on.
2. Investment in plant and machinery or equipment means “the net investment in plant and machinery or equipment” (net of depreciation as per IT Act and IT Rules) and not original cost or book value.
3. Net Turnover means Total turnover less export turnover.
4. 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 shall be placed in the next higher category. An enterprise shall continue to avail of all non-tax benefits of the category (micro or small or medium) it was in before the re-classification, for the period of 3 years from the date of such upward change.
5. 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. The enterprise will continue in its present category till the closure of the financial years and it will be given the benefit of the chuffed status only with effect from 1st April of the following financial year.
6. 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.

Summary:

Para 2 of the NMN deals with “becoming a micro, small or medium enterprise” and provides as under:

1. Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal (www.udyamregistration.gov.in). Filing is on self-declaration basis. There is no requirement to upload documents, papers, certificates or proof.
2. On registration, an enterprise (referred to as “Udyam” in the Udyam Registration portal) will be assigned a Permanent Identity Number to be known as “Udyam Registration Number”.
3. An e-certificate, named “Udyam Registration Certificate” will be issued on completion of the registration process.

Para 6 of the NMN deals with registration process and provides as under:

• The form for registration shall be as provided in the Udyam Registration portal.
• There will be no fee for filing Udyam Registration.
• Aadhaar number shall be required for Udyam Registration.
• The Aadhaar number shall be:

1. 1. of the proprietor in the case of a proprietorship firm,
   2. of the managing partner in the case of a partnership firm and
   3. of a karta in the case of a Hindu Undivided Family (HUF).

• 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.
• In case an enterprise is duly registered as an Udyam with PAN, any deficiency of information for previous years when it did not have PAN shall be filled up on self-declaration basis.
• 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.
• Whoever intentionally misrepresents or attempts to suppress the self-declared facts and figures appearing in the Udyam Registration or updation process shall be liable to such penalty as specified under section 27 of the MSMED Act.
• In case of any proprietorship enterprise not registered under any Act or Rules of the Central Government or the State Government, the proprietor may use his or her PAN for registration of the enterprise in the Udyam Registration portal and for all other types of enterprises PAN shall be mandatory.

Para 7 of the NMN deals with registration of existing enterprises and provides as under:

1. All existing enterprises registered under EM±Part-II or UAM shall register again on the Udyam Registration portal on or after the 1st day of July, 2020. The deadline for migration from EM-II/UAM to Udyam is 30.06.2022. [If EM-II and UAM enterprises do not migrate to Udyam on or before 30.06.2022, they would be treated as unregistered till they file Udyam Registration.]
2. All enterprises registered till 30th June, 2020, shall be re-classified in accordance with this notification.
3. The existing enterprises registered prior to 30th June, 2020, shall continue to be valid only for a period up to 30.06.2022.
4. An enterprise registered with any other organisation under the Ministry of Micro, Small and Medium Enterprises shall register itself under Udyam Registration.

From a conjoint reading of Paras 2, 6 and 7 of the NMN, it is clear that merely satisfying the above composite criteria of investment and turnover is NOT sufficient to qualify as MSME and avail the benefits under the MSMED Act. The heading of Para 2 “Becoming a micro, small or medium enterprise” seems to indicate that filing of Udyam Registration is essential for MSME enterprise to be recognised as such under the MSMED Act and to avail benefits under that Act.

The Central Government has clarified that

“Udyam Registration (UR) is mandatory for availing all the schemes/benefits of this office including benefits under delayed payment provisions.”

The new definition applies to existing enterprises as on 30.06.2020 also. If existing enterprises are registered under Udyog Aadhaar or EM Part II, the same will be reclassified as per the new definition. The UAM/EM registration shall remain valid only till 30.06.2022. All existing enterprises registered under UAM/EM-II as on 30.06.2020 need to re-register under Udyam on or after 01.07.2020 before their UAM/EM registration expires on 30.06.2022.

If they do not migrate to Udyam on or before 30-06-2022, they would be treated as unregistered until they file Udyam Registration.

Section 8(1) of MSMED Act makes it compulsory for medium enterprises to file information memorandum (Udyam Registration). If a medium enterprise registered under UAM or EM fails to migrate to Udyam Registration on or before 30.06.2022 or if an enterprise which was out of MSME fold prior to 01.07.2020 and qualified as medium enterprise under NMN fails to file Udyam and before 30.06.2022, the contravention may attract fine under section 27(1) of the MSMED Act. Section 27(1) provides that whoever intentionally contravenes or attempts to contravene or abets the contravention of any of the provisions contained in sub-section (1) of section 8 or sub-section (2) of section 26 shall be punishable—

• 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.

Unfortunately, No.

The new definition of MSMEs (micro, small and medium enterprises) as per the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as ‘the MSMED Act’) is based on composite criteria of investment limits and turnover limits. The new definition is applicable with effect from 01.07.2020. This definition stipulates a turnover limit of ` 250 crores for MSMEs eligible to register under MSMED Act and avail benefits under that Act. The old definition under the MSMED Act applicable upto 30.6.2020 did not stipulate any turnover limit. It only stipulated limits on investment in plant and machinery for manufacturing enterprises and limits on investment in equipment for service enterprises.

The small business universe or SME universe is vast and diverse ranging from street vendors to startups. They exist in formal sector as well as informal sector. Those existing in informal sectors do have some of the trappings of formal sector like street vendors or carts accepting payments through cashless means like PhonePe or Paytm. The universe of small businesses is not exhausted by the enterprises registered under the MSMED Act or eligible to register under that Act as per the definitions under that Act. Only manufacturing enterprises and service enterprises are eligible to be registered under that Act and avail benefits under that Act. There are activities which are neither manufacture nor services.

Start-ups are a special segment of the small and medium businesses sector defined under DPIIT notification as partnership firms, LLPs and private limited companies which are

1. DPIIT Recognised
2. having turnover not exceeding ` 100 cr and
3. not completed 10 years from date of incorporation. Irrespective of whether they register under the MSMED Act or not, DPIIT-recognised startups are entitled to benefits under the Startup India scheme. DPIIT-recognised startups which are LLPs or private limited companies are also entitled to various tax benefits under the Income-tax Act, 1961.

Then, there are benefits available to small companies under the Companies Act, 2013 by way of relaxations in the compliance regime. Turnover limit for small company definition in Companies Act is ` 40 crores.

It may be noted that, while turnover limit for MSMEs has been increased to ` 250 cr for MSMED Act purposes, there has been no increase in turnover limit of ` 100 cr in DPIIT policy for startups.

Small and Medium Companies are entitled to a concessional tax rate of 25% after enjoying all tax benefits. The turnover limit for availing this benefit is ` 400 crores and is available to SMEs irrespective of registration under MSMED Act. Likewise, enterprises with turnover up to ` 10 crores are entitled to exemption from mandatory tax audit under section 44AB if they transact 95% or more of their payments and receipts by cashless means. Small businesses are also entitled to opt for presumptive tax regime under section 44AD or 44ADA or 44AE of Income-tax Act and if they declare specified amount of profits they need not maintain accounts and get them audited under section 44AB of the Income-tax Act.

Not only are turnover limits across laws but also the method of calculation of turnover limits differ. For the purposes of MSMED Act, turnover excludes export turnover for computing turnover limits of ` 5 cr, ` 50 cr and ` 250 cr. However, export turnover is not excluded for computing the turnover limits of ` 100 cr in DPIIT startup notification or turnover limit of ` 40 crores for small company definition in section 2(85) of the Companies Act or the ` 400 cr turnover limit for lower income-tax rates for small and medium companies or the ` 10 cr limit for exemption from tax audit under section 44AB of the Income-tax Act.

The definition of turnover also differs.

For DPIIT notification and small company definition, turnover as per profit and loss account is to be taken.

Turnover limit for section 44AB of Income-tax Act is to be reckoned as per section 145A(ii) of the Income-tax Act, 1961 and as per Income computation and Disclosure Standards.

No. There is no particular form of legal organisation to be adopted to be eligible for benefits under the MSMED Act. Benefits under MSMED Act will be available so long as the enterprise satisfies the investment and turnover limits as above and has filed Udyam Registration. It does not matter whether the enterprise is a proprietorship or partnership firm or a limited liability partnership (LLP) or a company or Hindu undivided family (HUF).

According to Notification No. SO 1642(E), dated 29-9-2006, an enterprise may be:

• proprietorship,
• Hindu undivided family,
• association of persons,
• co-operative society,
• partnership firm,
• company,
• undertaking, or
• any other legal entity

The term ‘any other legal entity’ used in Notification No. 1642 (E) is wide enough to cover limited liability partnership and formed and registered under the Limited Liability Partnership Act, 2008. Even Self-Help Groups can be considered as “enterprises”.

However, if MSME is a start up, it must be a partnership firm or LLP or a private limited company to avail benefits under DPIIT’s Start up Notification No. GSR 127(E), dated 19.02.2019 [hereinafter referred to as Latest Startup Notification (LSN)]

Street vendors, whether urban or rural, can register as retail traders on Udyam Registration (UR) portal. The benefits of Retail and Wholesale Trade MSMEs are to be restricted to priority sector lending only [OM 16/17/2020-P&G-Policy (E-19421), dated 9-8-2021, issued by Ministry of MSME, GOI].

An individual service provider without an undertaking or establishment or concern is not an “enterprise” as defined in MSMED Act.

Thus, a CA firm or a CA having an office shall be an “enterprise”. An individual CA practising as such and not having any establishment will not be a “service enterprise”. A photography studio is a service enterprise. An individual professional photographer is not a service enterprise. It appears that cobblers, puncture wallahs, road-side tea vendors can register on Udyam portal as Retail Trade MSMEs.

All Business activities – Services and Manufacturing are covered in MSME sector except activities as mentioned in O.M. 5/2(1)/2020-P&G/Policy dated 17.07.2020.

As per para 5(3) of the Notification No. S.O. 2119(E), dated 26.06.2020, with effect from 01.04.2021, PAN and GSTIN shall be mandatory. As per para 5(4), the exemption from requirement of GSTIN shall be as per the provisions of the Central Goods and Services Tax Act, 2017 (CGST Act, 2017)

The Government has received various representations and it has been decided to include Retail and wholesale trades as MSMEs and they are allowed to be registered on Udyam Registration Portal. However, benefits to Retail and Wholesale trade MSMEs are to be restricted to Priority Sector Lending only. Accordingly, the list of eligible additional activities under NIC Code 45, 46 and 47 are as under:

• 45 Wholesale and retail trade and repair of motor vehicle and motorcycles
• 46 Wholesale trade except of motor vehicles and motor cycles
• 47 Retail Trade Except of Motor Vehicles and motor cycles

The Udyam Registration is allowed for above three NIC Codes and activities mentioned against them.

The Enterprises having Udyog Aadhaar Memorandum (UAM) under above three NIC Codes are now allowed to migrate to Udyam Registration Portal or they can file Udyam.