Re-Defining MSME’s

The Ministry of Micro, Small and Medium Enterprises (“Ministry”) has re-defined micro, small and medium enterprises under the Micro, Small and Medium Enterprises Development Act, 2006 (“Act”) through a notification dated June 1, 2020 and this would be effective from July 1, 2020. The Ministry has reclassified the micro, small and medium enterprises according to an entity’s turnover vis-à-vis the earlier criterion of classification per the investment. Old Classification of MSMECriteria: Investment in Plant and Machinery or EquipmentClassificationMicro SmallMediumManufacturing Enterprises Investment < Rs. 25 lakhInvestment <  Rs. 5 croreInvestment < Rs. 10 croreServices Enterprise Investment < Rs. 10 lakhInvestment < Rs. 2 croreInvestment < Rs. 5 crore

New Classification of MSMECriteria: Investment in Plant and Machinery or Equipment and Annual TurnoverClassificationMicro SmallMediumNone Investment < Rs. 1 crore  and

Turnover < Rs. 5 croreInvestment < Rs. 10 crore and Turnover < Rs. 50 croreInvestment < Rs. 30 crore

and Turnover < Rs. 100 crore

The notification has done away with the differentiation between manufacturing and services.

There have been long-standing deliberations in the past for a change in the criteria including through the tabling of the MSME Development (Amendment) Bill, 2018. The COVID19 pandemic has clearly given the necessary impetus to get this going allowing for a wider ambit of companies to fall within the purview of the Act. These companies would be able to therefore avail benefits in relation to inter alia priority lending, taxes, and protection against delayed payments.

The European Union uses three factors: employee strength, enterprise turnover and the balance sheet size. In the USA, the classification and metrics are a function of the sector that the SME is a part of. In the Indian context, adding another dimension to the definition is indeed a welcome note but something that needs constant review and possible fine-tuning in the years to come.

Note: the above criteria was amended soon after by the Ministry vide a notification on June 26, 2020. Hence please refer to the link for the latest classification.