The Ministry of Micro, Small and Medium Enterprises, vide a notification dated June 26, 2020, notified certain criteria for classifying the enterprises as micro, small and medium enterprises and specifies the form and procedure for filing the memorandum, with effect from July 1, 2020 (“Notification”). The Notification provides for the reclassification of MSMEs and requires the MSMEs to register/ re-register with the Ministry- referred to as Udyam Registration. Udyam in Hindi language means “enterprise”.
CLASSIFICATION
Under the Notification, an enterprise shall be classified as:
- “micro enterprise” where the investment in plant and machinery or equipment does not exceed Rs 10,000,000 (approx. USD 133,333) and turnover does not exceed Rs. 50,000,000 (approx. USD 666,667);
- a “small enterprise”, where the investment in plant and machinery or equipment does not exceed Rs 100,000,000 (approx. USD 1,333,333) rupees and turnover does not exceed Rs 500,000,000 (approx. USD 66,66,667);
- a “medium enterprise”, where the investment in plant and machinery or equipment does not exceed Rs 500,000,000 (approx. USD 66,66,667) and turnover does not exceed Rs 2,500,000,000. (approx. USD 33.33 million)
CRITERION FOR CLASSIFICATION
The Notification provides for a composite criterion of investment and turnover that shall apply for classification of an enterprise as micro, small or medium.
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.
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.
- Calculation of investment in plant and machinery[1] or equipment
- Will be linked to the Income Tax Return (ITR) of the previous years filed under the Income Tax Act, 1961;
- 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;
- The purchase 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;
- The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 shall be excluded from the calculation of the amount of investment in plant and machinery, which includes the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, vide any notification.
- Calculation of Turnover
- 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.
- 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.
- 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.
REGISTRATION
All new and also existing MSMEs need to register under the Udyam registration portal. The Notification provides that all enterprises registered till 30th June, 2020, shall be re-classified in accordance with the Notification. Further upon registration, an enterprise in required to update its information, such the details of the ITR and the GST returns for previous years, on a self-declaration basis.
The Notification further provides facilities for grievance redressal of enterprises.
Considering the current pandemic, and as the same was a long-term demand of the MSMEs, the thresholds defining MSMEs have been significantly expanded. The thresholds have been further magnified, as under the Notification, exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise The objective behind the move is to shift from a definition based on investment in plant and machinery was to incentivize entities to modernize without worrying about losing their MSME status, while also easing the process of verification.
The Notification introduces the additional criteria of turnover, and further eliminates the distinction between the manufacturing and services sector and introduces a composite criterion (of investment and annual turnover) for the classification of the MSMEs.
The steps taken above will help the MSMEs to expand their business, and perhaps, under the current difficult times also provide opportunities of trade and business.
[1] 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)
