New definition of MSMEs will be linked to turnover

NEW DELHI: The government is finalising a new definition for micro, small and medium enterprises (MSMEs), which will be linked to turnover and do away with the current system of classifying units based on the capital deployed in plant and machinery.

The MSME ministry, which is finalising the proposal, is seeking to end the difference between the manufacturing and services sector that the current investment-based definition makes. The move requires an amendment to the Micro, Small & Medium Enterprises Development Act, which is being finalised.

Although an amendment had been proposed by the Narendra Modi government during its previous term as well, it had to be dropped due to opposition from outfits like Laghu Udyog Bharti, which is an affiliate of the Rashtriya Swayamsevak Sangh (RSS). But the government has renewed its efforts to amend the law as it sees the current definition to be outdated and prone to misuse, sources told TOI.

According to the proposal, any unit with a turnover of up to Rs 5 crore will be classified as a micro enterprise, while those with up to Rs 75 crore annual revenue will be in the small unit category. Similarly, enterprises with turnover of up to Rs 250 crore will be classified as medium-scale enterprises. Until the 2006 law was enacted, there was only one category of manufacturing that was classified as small scale enterprise, eligible for several benefits, including on payment of excise.

The new definition being discussed is similar to the one that had to be shelved as the last Lok Sabha could not approve the legislation. A section in the government believes that the definition should be de-linked from the law to make it possible to tweak it as and when required.

Service sector outfits will, however, be ineligible for some of the benefits available to MSMEs, such as public procurement to prevent possible misuse. But they can avail of concessional bank finance and some of the other benefits available to small businesses.

With GST, it is now easier to monitor turnover and classify units into various categories, compared to the investment in plant and machinery, which many believe is misused by certain units to get additional benefits available to MSMEs, government officials said.

"The new definition will be more realistic given that the current investment-based classification was decided when the MSME Development Act was enacted 13 years ago. Often, Indian MSMEs are too small to be able to benefit from economies of scale," said a source.

According to the proposal, any unit with a turnover of up to Rs 5 crore will be classified as a micro enterprise, while those with up to Rs 75 crore annual revenue will be in the small unit category. Similarly, enterprises with turnover of up to Rs 250 crore will be classified as medium-scale enterprises. Until the 2006 law was enacted, there was only one category of manufacturing that was classified as small scale enterprise, eligible for several benefits, including on payment of excise.

With GST, it is now easier to monitor turnover and classify units into various categories, compared to the investment in plant and machinery, which many believe is misused by certain units to get additional benefits available to MSMEs, government officials said.

"The new definition will be more realistic given that the current investment-based classification was decided when the MSME Development Act was.