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New Criteria for Classification of Micro, Small and Medium Enterprises

September 28, 2020

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New criteria for classification of MSMEs

New criteria for classification of MSMEs

The Ministry of Micro, Small and Medium Enterprises (MSME) has issued a notification dated the 1st June 2020 revising the criteria for classification of Micro, Small and Medium Enterprises. The changes have been made in the MSME definition by virtue of Aatmanirbhar Bharat Package on 13th May 2020. The new definitions and criteria will come into effect from 1st July 2020. Link of the aforesaid notification issued by the government which has been published in the official gazette is as follows https://msme.gov.in/sites/default/files/MSME_gazette_of_india_0.pdf

 

There are many benefits of MSME registration in India, which can be only availed if the business had registered itself as MSME/SSI under the MSME Act. As per the new notification, the Micro Enterprises would be those with investment in Plant & Machinery upto Rs. 1 crore and turnover upto Rs. 5 crore. The limit for Small Enterprises has been increased to Rs. 10 crore of investment and Rs 50 crore of turnover and the limit for Medium Enterprises has been increased to Rs. 50 crore of investment and Rs. 250 crore of turnover.

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

As per revised definition, an enterprise that shall be classified as a Micro, Small or Medium Enterprise on the basis of the following criteria, namely:

S No. Enterprises Investment in and Turnover Limit
(i) Micro Enterprises Investment in plant and machinery or equipment Does not exceed One Crore rupees(<Rs. 1 Crore)
And
Turnover Does not exceed Five Crore rupees(<Rs. 5 Crore)
(ii) Small Enterprise Investment in plant and machinery or equipment Does not exceed Ten Crore rupees(<Rs. 10 Crore)
And
Turnover Does not exceed Fifty Crore rupees(<Rs. 50 Crore)
(iii) Medium Enterprise Investment in plant and machinery or equipment Does not exceed Fifty Crore rupees(<Rs. 50 Crore)
And
Turnover Does not exceed Two Hundred and Fifty Crore rupees(<Rs. 250 Crore)

 

The Ministry of MSME has not only notified the criteria for classifying the enterprises as Micro, Small or Medium Enterprises but has also specified the form and the procedure for obtaining registration or migrating under new registration norms by filing the memorandum (herein to be known as “Udyam Registration” with effect from the 1st  day of July ,2020 via notification no. S.O. 2119(E) dated 26th June 2020 [http://www.dcmsme.gov.in/IndianGazzate_0.pdf]

Frequently Asked Questions for MSME’s:

1. How can a Micro, Small or Medium Enterprise be established?

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.

  1. 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”.
  2. An e-certificate, namely, “Udyam Registration Certificate” shall be issued on completion of the registration process.

2. What shall be the Composite criteria of investment and turnover for classification?

  1. A composite criterion of investment and turnover shall apply for classification of an enterprise as Micro, Small or Medium.
  2. 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.
  3. 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.

3. How is calculation of investment in plant and machinery or equipment done?

  1. The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years filed under the Income Tax Act, 1961.
  2. 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.
  3. The expression “plant and machinery or equipment” of the enterprise, shall have the same meaning as assigned 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).
  4. 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.
  5. 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.

4. How is Calculation of turnover done?

  1. Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise whether Micro, Small or Medium, for the purposes of classification.
  2. 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.
  3. The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory.

5. What is the process of Registration?

Step: 1 The form for registration shall be as provided in the Udyam Registration portal
Step: 2 There will be no fee for filing Udyam Registration.
Step: 3 Aadhaar number shall be required for Udyam RegistrationThe Aadhaar number shall be of the proprietor in the case of a proprietorship firm, of the managing partner in the case of a partnership firm and 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: Provided that 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 updations process shall be liable to such penalty as specified under section 27 of the Act.MSME Registration is free, paperless and based on self- declaration:

  • MSME registration process is fully online, paperless and based on self-declaration.
  • No documents or proof are required to be uploaded for registering an MSME.
  • Only Adhaar Number will be enough for registration.
  • PAN & GST linked details on investment and turnover of enterprises will be taken automatically from Government data bases.
  • Our online system will be fully integrated with Income Tax and GSTIN systems.
  • Having PAN & GST number is mandatory from 01.04.2021.
  • Those who have EM-II or UAM registration or any other registration issued by any authority under the Ministry of MSME, will have to re-register themselves.
  • No enterprise shall file more than one Udyam Registration. However, any number of activities including manufacturing or service or both may be specified or added in one Registration.

6. How can the existing MSMEs get themselves registered under Udyam registration?

  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.
  2. All enterprises registered till 30th June, 2020, shall be reclassified 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 the 31st  day of March, 2021.
  4. An enterprise registered with any other organisation under the Ministry of Micro, Small and Medium Enterprises shall register itself under Udyam Registration

 7. If there are any updations of information and transition period in classification, what shall be done?

  1. An enterprise having Udyam Registration Number shall update its information online in the Udyam Registration portal, including the details of the ITR and the GST Return for the previous financial year and such other additional information as may be required, on self-declaration basis.
  2. Failure to update the relevant information within the period specified in the online Udyam Registration portal will render the enterprise liable for suspension of its status.
  3. Based on the information furnished or gathered from Government’s sources including ITR or GST return, the classification of the enterprise will be updated.
  4. In case of graduation (from a lower to a higher category) or reverse-graduation (sliding down to lower category) of an enterprise, a communication will be sent to the enterprise about the change in the status.
  5. In case of an upward change in terms of investment in plant and machinery or equipment or turnover or both, and consequent re-classification, an enterprise will maintain its prevailing status till expiry of one year from the close of the year of registration.
  6. In case of reverse-graduation of an enterprise, whether as a result of re-classification or due to actual changes in investment in plant and machinery or equipment or turnover or both, and whether the enterprise is registered under the Act or not, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1st April of the financial year following the year in which such change took place.

8. Whom to approach in case facilitation and grievance redressal support is required for an  enterprises?

  1. The Champions Control Rooms functioning in various institutions and offices of the Ministry of Micro, Small and Medium Enterprises including the Development Institutes (MSME-DI) shall act as Single Window Systems for facilitating the registration process and further handholding the Micro, Small and Medium enterprises in all possible manners.
  2. The District Industries Centres (DICs) will also act as Single Window facilitation Systems in their Districts.
  3. Any person who is not able to file the Udyam Registration for any reason including for lack of Aadhaar number, may approach any of the above Single Window Systems for Udyam Registration purposes with his Aadhaar enrolment identity slip or copy of Aadhaar enrolment request or bank photo pass book or voter identity card or passport or driving licence and the Single Window Systems will facilitate the process including getting an Aadhaar number and thereafter in the further process of Udyam Registration.
  4. In case of any discrepancy or complaint, the General Manager of the District Industries Centre of the concerned District shall undertake an enquiry for verification of the details of Udyam Registration submitted by the enterprise and thereafter forward the matter with necessary remarks to the Director or Commissioner or Industry Secretary concerned of the State Government who after issuing a notice to the enterprise and after giving an opportunity to present its case and based on the findings, may amend the details or recommend to the Ministry of Micro, Small or Medium Enterprises, Government of India, for cancellation of the Udyam Registration Certificate.

Practical - Frequently Asked Questions [FAQs] on MSME’s:

The Ministry of Corporate Affairs (MCA) vide its order dated 22nd January, 2019 directed all companies, who get supplies of goods or services from Micro and Small enterprises ((hereafter referred to as “ Vendor”) and whose payments to Micro and Small enterprise suppliers exceed forty five days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) (hereafter referred to as “Specified Company/Company”), to  submit a half yearly return in Form MSME to the Ministry of Corporate Affairs stating the following:

(a) the amount of payment due and

(b) the reasons of the delay

If a Company/Specified Company is dealing with a Vendor for supply of goods or services who was already registered with MSME, then some of the practical questions that the Company may want to know with regard to the information to be reported in Form MSME are listed below:

  1. Will a Vendor’s old registration cease or continue to exist post this new definition becomes effective?

The notification may not affect the existing registration for the Vendors who meet both the criteria as per the revised definition (Investment &Turnover). It offers an opportunity for new businesses falling under the new (enhanced) criteria to seek registration.

Further all the 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 and all enterprises registered till 30th  June, 2020, shall be re-classified in accordance with this notification. The existing enterprises registered prior to 30th June, 2020, shall continue to be valid only for a period up to the 31st day of March, 2021.

2. If the Vendor fails to fulfill any one condition of investment or Annual turnover, will it be out of the purview of MSME. How do we interpret the same?

 Yes, both the criteria have to be satisfied for a Vendor to enjoy MSME status

3. Should the Specified Company reach out to its existing Vendors to check their MSME status after the notification of the new definition or it would be the Vendors responsibility to notify the change to Company?

It is in the Specified Company’s interest to reach out to Vendors to check if they still continue to be MSME. Most of the Vendors will continue to be MSME but their category may change from Small/Medium/Micro.

4. Is the Company liable to pay interest that has arised, on account of the delay in notifying the MSME status from Vendor’s end? For instance, if the Vendor has notified the Company in December, 2020 inspite of it being an MSME since July 2020, will the Company have to pay interest on delayed payments between July 2020 to November 2020?

The Company should send a communication to all its Vendor prior to July 01, 2020 asking them to confirm their MSME status as per the revised definition.  If the Company does not receive any response to its communication from Vendors,  then the Company can consider not to pay interest for such period.

5. Will the Vendor have to re-apply for the MSME registration again if both the criteria for investment and turnover are met and were meeting prior to this new definition?

The Vendor will not have to reapply for MSME Registration if they meet both investment and turnover criteria. There is nothing provided in the notification requiring re-registration. They may have to update their certificate.

6. What if one of the criteria of the new definition of MSME is not met assuming that turnover criteria doesn’t meet but the investment criterion is met (Assuming the Vendor was a MSME Vendor on the basis of the old definition). Would the existing MSME registration cease and be notified to the Company?

 The Vendor loses MSME status (due to the non-fulfillment of turnover criteria). It is therefore  Company’s interest to renegotiate the credit period beyond 45 days for the Vendor who ceases to be MSME.  It would be good practice on the part of the Company to take declaration from existing Vendors confirming that they continue to meet the criteria under new definition as well.

7. Does interest liability for MSME become effective from 1st July 2020 service period or Invoice period?

For Vendors who qualify to be MSME as per new definition, the Company should accrue interest for delayed payments for services received on or after 1st July, 2020. If there are any payments due for the services rendered prior to 1st July 2020, Company will not be liable to accrue/pay interest on such invoices.

8. Can the Company send communication to the Vendors with a definitive end date to respond whether they fall within the new criteria. If they fail to respond- we assume they are not MSMEs?

Yes, the Company can send communication to the Vendors with a definitive end date to confirm their MSME status.  If they fail to respond, we can assume that they are not MSMEs, but however two things should be kept in mind:

  1. a) Email communications are sent on the correct email Id of the Vendors
  2. b) Vendor should be provided sufficient time to respond

Once the Vendor confirms the MSME registration status and shares the certificate, the Company will have to start accruing interest on payments due.

9. Is it mandatory to make payments or accruing Interest is enough?

As per the Act, payment has to be made to the Vendors within 45 days, if delayed, payment should be made with interest.

10. Can subsidiaries of foreign company’s register themselves as MSME’s and draw the benefits?

Yes, foreign companies and non-Indian Firms can register themselves under the MSME category. This is happening because of the lacunae in registration wherein the Foreign Firms in India are being treated as Indian firms though they are wholly owned subsidiaries of foreign companies. However, the intent of the act is actually to benefit Indian entities.

Conclusion:

The new definition being changed is done in the favour of MSMEs. There has always been this fear, among successful MSMEs also, that if they outgrow the size of what has been defined as an MSME, they will lose their entitled benefits. This is why MSMEs like to remain within the definition rather than grow. With the revised definitions of MSMEs, they will not have to worry about growing their size and can still avail benefits

Disclaimer:

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 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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