The Micro, Small And Medium Enterprises Development Act, (MSMED) 2006 – A Law With Large Impact


Micro, Small and Medium Enterprises Act, 2006
The Micro, Small and Medium Enterprises Act, 2006

What are Micro, Small & Medium Enterprises?

Micro, Small & Medium Enterprises often abbreviated as MSME, are small-sized business enterprises defined in terms of their investment. According to the provisions of Micro, Small & Medium Enterprises Development  (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified into two classes.

  1. Manufacturing Enterprises
  2. Service Enterprises

A.  Manufacturing Enterprises:

The Manufacturing Enterprise is defined in terms of investment in Plant & Machinery:

Enterprises Investment in Plant & Machinery
Micro Enterprises It does not exceed Rs. 25 Lakh (Rupees Twenty-five Lakh)
Small Enterprises More than Rs. 25 Lakh (Rupees Twenty-five Lakh)

but does not exceed Rs. 5 Crore (Rupees Five Crore)

Medium Enterprises More than Rs. 5 Crore (Rupees Five Crore)

but does not exceed Rs. 10 Crore (Rupees Ten Crore)

B.  Service Enterprises:

The Service Enterprise is defined in terms of investment in equipment:

Enterprises Investment in Equipment
Micro Enterprises It does not exceed Rs. 10 Lakh (Rupees Ten lakh)
Small Enterprises More than Rs. 10 Lakh (Rupees Ten Lakh)

but does not exceed Rs. 2 Crore (Rupees Two Crore)

Medium Enterprises More than Rs. 2 Crore (Rupees Two Crore)

but does not exceed Rs. 5 Crore (Rupees Five Crore)

 Objective of MSME Act: 

The MSMED Act facilitates the promotion, development and also enhances the competitiveness of micro, small and medium enterprises and for matters connected therewith and incidental thereto.

How to register as an MSME?

In this fast-moving phase of economy and technology-driven processes, things are getting more organized and are paving ways to ease of doing business. The Indian Government too is taking various initiatives to encourage small-sized enterprises to exist and grow efficiently.

To register as an MSME all it takes is to file a web-based online form at the link wherein the applicant is required to have an Aadhaar card along with a linked mobile number to get it certified. The process has been so simplified that the certificate is generated while making an application itself and the fields of the e-form for MSME registration are listed out below:

 19 Easy Steps of registration of MSME through “Udyog Aadhaar”:

  1. Aadhaar Number: Fill 12-digit Aadhaar number issued to the applicant in the appropriate field.
  2. Name of Applicant: Fill the name of the applicant strictly as mentioned on the Aadhaar Card issued by UIDAI.
  3. Social Category: Fill the Social Category (General, Scheduled Caste, Scheduled Tribe or Other Backward Castes (OBC)
  4. Gender: Fill in the gender of the applicant
  5. Physically Handicapped: Select the status from provided options
  6. Name of Enterprise / Business: Fill the name of Business / Enterprise which will get printed on MSME Certificate
  7. Type of Organization: Select the type of organization from the given options which will get printed on the MSME Certificate.
  8. PAN: Fill 10 Digit PAN Number in case of Co-Operative, Private Limited, Public Limited, and Limited Liability Partnership It. Will be optional in the remaining type of Organization.
  9. Location of Plant: Fill the address of the plant. In the case of multiple plant locations, the applicant can click on the add plant button.
  10. Office Address: Fill in the office address, if the office address is different from the plant address.
  11. Date of Commencement of Business: Fill the date of Commencement of Business, the same shall be mentioned in the MSME Certificate.
  12. Previous Registration Details(if any): If Applicant’s enterprise, for which the Udyog Aadhaar is being applied, is already issued a valid EM-I/II by the concerned GM (DIC) as per the MSMED Act 2006 or the SSI registration prevailing prior to the said Act, such number may be mentioned in the appropriate place.
  13. Bank Details: Fill the applicant’s bank account number and bank IFSC Code.
  14. Major Activity: The major activity i.e. either “Manufacturing” or “Service” may be chosen by the enterprise for Udyog Aadhaar.
  15. National Industry Classification Code (NIC Code): Fill in the NIC Code of the business activity.
  16. Person employed: Fill in the total number of persons employed who are directly been paid salary/ wages by the enterprise.
  17. Investment in Plant & Machinery / Equipment: Fill in the total investment made in the plant & Machinery/Equipment.
  18. DIC: The Applicant, based on the location of the Enterprise, has to fill in the location of DIC. This Column will be active and show the option only when there is more than one DIC in the district.
  19. Submit: Click on the submit button and enter the OTP that will be shared on the registered/linked mobile number.

Any Changes in the Investment: If there are any changes in the investment in plant & Machinery or the equipment and the enterprises have already filed Udyog Aadhaar Memorandum (UAM) shall inform the District Industries Centre of the same in writing within three months of the change.

What are the benefits which an MSME derives post registration?

  1. MSME enterprises can get finance facility from Banks without collateral requirements
  2. Preference in procuring Government tenders,
  3. Stamp duty and Octroi benefits,
  4. Concession in electricity bills
  5. Reservation policies to manufacturing/production sector enterprises
  6. Time-bound resolution of disputes with Buyers through conciliation and arbitration
  7. Reimbursement of ISO Certification Expenses

 What is the process for computation of Investment limits in Plant & Machinery or Equipment?

Computation of Investment in Plant & Machinery: As per the Central Government vide notification S.O. 1722(E) dated 5th October 2006:

While calculating the investment in Plant & Machinery the original price is to be taken into count irrespective of whether the Plant & Machinery is new or old. The cost of below mentioned 11 items shall be excluded while computing investment in plant & Machinery:

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

In the case of imported machinery calculations, the following items shall be included: 

  1. Import duty (excluding miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port);
  2. Shipping charges;
  3. Customs clearance charges; and
  4. Sales tax or value-added tax.

 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

Consequences of delayed payments to MSMEs’:

The most important benefit which is available to the enterprises registered under the Act is given in Chapter V of the Act which is mentioned below:

  1. The buyer has to make payment on or before the date agreed on between him and the supplier in writing or, in case of no agreement before the appointed day (Appointed date means the day following immediately after the expiry of a period of 15 days from the date of acceptance or the date of deemed acceptance of the goods and services). Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed 45 days from the date of acceptance or the day of deemed acceptance.
  1. If the buyer fails to make payment of the amount to the supplier, he shall be liable to pay interest at the rate as mentioned in the agreement entered or as per the law in force or be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.
  1. In case of dispute concerning any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government.

As per the provisions of the Act, every buyer is required to get his annual accounts prepared under any law in force and such buyer shall furnish the following additional information in his annual statement of account namely:

  1. The principal amount and the interest due thereon (to be shown separately) remaining unpaid to any seller at the end of each accounting year.
  1. The amount of interest paid by the buyer as per section 16, along with the amount of the payment made to the supplier beyond the appointed date during each accounting year.
  1. The amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed date during the year) but without adding the interest specified under this Act.
  1. The amount of interest accrued and remaining unpaid at the end of each accounting year.
  1. The amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are paid to the small enterprise for disallowance as a deductible expenditure.

In short, if the payment has not been made to the Supplier registered under the MSMED Act, 2006:

  1. The buyer has to disclose the total amount due to the supplier in his annual statement of accounts. If the buyer defaults in disclosing the said amount, then he shall be punishable with a fine which shall not be less than Rs. 10,000.
  1. Further, the supplier can also opt for Micro and Small Enterprise Facilitation Councils to settle the disputed amount. Any reference of the dispute to the council shall be settled within 90 days from the date of referring.

As per the provisions of Section 23 of the MSMED Act, 2006 the amount of interest payable or paid by the buyer under the provisions of this Act shall not be allowed as a deduction for computation of income under Income Tax Act, 1961.

Filing Form MSME-1 with the Ministry of Corporate Affairs [MCA]

The Ministry of Corporate Affairs [MCA] has introduced a new e- Form ‘MSME I ‘vide Companies (Furnishing of information about payment to micro small enterprise suppliers) Order, 2019 Notification dated 22th Jan 2019.

All Companies who have outstanding dues to micro or small enterprises more than 45 days from the date of acceptance or the date of deemed acceptance of the goods or services shall report the same by filing e-form MSME I wherein they shall mention the amount of payment that is due to the MSME, the reason for such delay along with the particulars of suppliers details.

Form MSME I is a simple Form to be uploaded by companies Firstly Initially and then half-yearly. It is a small step by the Ministry of Corporate Affairs towards the protection of small and medium enterprises and improves their competitiveness which is one of the Objectives of the MSME Act, 2006.

Consequences of Non- Filing of e-form MSME -I: Non-filing of e-form will lead to punishment and penalty under the provision of Section 405 (4) of the Companies Act, 2013 which states:

If any company fails to comply with an order or knowingly furnishes any information or statistics which is incorrect or incomplete in any material respect, the company shall be punishable with fine which may extend to Rs. 25,000 (Rupees Twenty-five thousand) and every officer of the company who is in default, shall be punishable with imprisonment for a term which may extend to 6 (Six) months or with fine which shall not be less than Rs. 25,000 (Rupees Twenty-five thousand) but which may extend to Rs.3,00,000(Rupees Three lakh) -or with both.

What are the Major Highlights of MSMEs’?

Over the past five decades, Micro, Small and Medium Enterprises (MSME) has contributed enormously to the socio-economic development of the country. MSME has a got major share of jobs, production, and exports. They contribute nearly 8 %( percent) of the country’s GDP, 45 %(percent) of the manufacturing output and 40% (percent) of the exports. They provide the largest share of employment after agriculture. It’s the primary responsibility of the State Government to promote and develop MSMEs’.

As per the reports of the Ministry of Micro Small and Medium Enterprises, Government of India; the MSME sector is serving numerous benefits towards the inclusive growth of the Indian economy. Major contribution of MSMEs is as follows:

  1. It provides opportunities at comparatively lower cost;
  2. It helps in the industrialization of rural and backward areas;
  3. Reduce Regional imbalances through the optimum utilization of their resources;
  4. More equitable distribution of national income and wealth;
  5. Major partner in the process of inclusive growth.


The entire contents of this document have been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.


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