India: En Route To Becoming Atmanirbhar

On October 02, 2006, the Government of India brought into effect, the Micro, Small and Medium Enterprises Development Act, 2006 ("Act") for facilitating the promotion, development and enhancing the competitiveness of micro small and medium enterprises. Through Section 7 of the Act, the criteria of micro, small and medium enterprises was defined. Section 7 stipulated that enterprises engaged in the manufacture or production of goods or enterprises engaged in providing or rendering services, would require an investment up to a certain amount which would define whether that enterprise would be recognized as a micro, small or a medium enterprise ("MSME").

Micro Enterprises

An enterprise engaged in the manufacture or production of goods would only be recognized as a micro enterprise if the investment in plant and machinery would not exceed more than Rs. 25 lakhs¹. Whereas if the enterprise was engaged in providing or rendering services, then it would require an investment not exceeding more than Rs. 10 lakhs², to qualify as a micro enterprise.

Small Enterprises

An enterprise engaged in the manufacture or production of goods to be defined as a small enterprise would require an investment in plant and machinery of more than Rs. 25 lakhs but less than Rs. 5 crores³. On the other hand if such an enterprise was engaged in providing or rendering services then the investment would have to be more than Rs. 10 lakhs but not exceeding Rs. 2 crores⁴.

Medium Enterprises

A medium enterprise engaged in the manufacture or production of goods was statutorily required to have an investment in plant and machinery of more than Rs. 5 crores but less than Rs. 10 crores⁵, however if this medium enterprise was engaged in providing or rendering services then the investment would have to be more than Rs. 2 crores but less than Rs. 5 crores⁶.

Changing times resulting in a change of classification

With the outbreak of the pandemic Covid-19, there has not only been a dramatic impact on each of our lives, but also on enterprises. All enterprises have been faced with unprecedented challenges as the effects of the pandemic on the global economy continues. To address these difficulties caused by the pandemic the Government of India, announced a Rs. 20 lakh crore package that would be released in 2020 for making India "atmanirbhar" or self-sufficient. In addition to announcing collateral-free automatic loans for business including MSMEs, the Finance Minister announced new criterions for enterprises to be defined as micro, small or medium on May 13, 2020.

The announcement of amending the definition of these enterprises as micro, small and medium has been seen as long overdue. The low threshold in the existing definition was adjudged to have created a fear amongst these enterprises of graduating out of the benefits that resulted from being a micro, small or a medium enterprise. This particular fear has been curtailing growth amongst these enterprises. The announcement introduced an additional criteria of turnover and eliminated the distinction created by the Act between enterprises engaged in manufacturing or production of goods and enterprises engaged in providing or rendering services. Enterprises engaged in either manufacturing goods or rendering services, would be treated at par as per the Revised Definitions (as defined hereinafter).

As per the announcement, for an enterprise to be recognized as a micro enterprise, it will now be required to have an investment up to Rs. 1 crore and a turnover less than Rs. 5 crores. A small enterprise on the other hand is now required to have an investment up to Rs. 10 crores and a turnover up to Rs. 50 crores. Meanwhile a medium enterprise is now recognized as one that has an investment of up to Rs. 20 crores and a turnover under Rs. 100 crores ("Announcement").

The Announcement is seen by many as one bringing about greater transparency, as it is considered easier for the government to verify an enterprise's turnover as compared to verifying the investment in plant and machinery.

  Subsequent to the Announcement, the minister for MSME and Road Transport and Highways on May 19, 2020 had announced that the Government had again decided to revise the definitions of MSMEs by enhancing the criteria for medium enterprises by enhancing the investment and turnover limits⁷. This decision of the Government was finally confirmed vide notification dated June 01, 2020 whereby the Central Government notified the revised criteria for medium enterprises.

As per the revised definitions notified by the Central Government, for an enterprise to be recognized as a micro enterprise, the investment in plant and machinery or equipment should not exceed Rs. 1 crore and the turnover should be less than Rs. 5 crores. A small enterprise on the other hand is required to have an investment in plant and machinery or equipment of up to Rs. 10 crores and a turnover up to Rs. 50 crores. Meanwhile a medium enterprise is now recognized as one that has an investment in plant and machinery or equipment of up to Rs. 50 crores and a turnover under Rs. 250 crores. ("Revised Definitions"). The Revised Definitions will come into effect from July 1, 2020.

For the ease of convenience please find below a table comparing the previous definitions with the definitions made in the Announcement and the Revised Definitions: 

Footnotes

1 Section 7 (a) (i) of the Micro, Small and Medium Enterprises Development Act, 2006

2 Section 7 (b) (i) of the Micro, Small and Medium Enterprises Development Act, 2006

3 Section 7 (a) (ii) of the Micro, Small and Medium Enterprises Development Act, 2006

4 Section 7 (b) (ii) of the Micro, Small and Medium Enterprises Development Act, 2006

5 Section 7 (a) (iii) of the Micro, Small and Medium Enterprises Development Act, 2006

6 Section 7 (b) (iii) of the Micro, Small and Medium Enterprises Development Act, 2006

7 https://www.firstpost.com/business/govt-to-further-revise-criteria-for-classifying-medium-enterprises-under-msme-definition-nitin-gadkari-8383751.html

Originally published May 15, 2020.

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