Micro, Small and Medium Enterprises (“MSME”s) have always been in focus as they contribute about 29% in the GDP of India. With Government of India (“GoI”) focussing on self-reliance, the Ministry of Micro, Small and Medium Enterprises notified on 26th June 2020 (“Notification”), a comprehensive document laying down classification criteria and form & procedure for registration of enterprises in the micro, small and medium enterprises categories.
Classification criteria
The Notification does away with the distinction between manufacturing sector and services sector, and a composite criteria taking into account both investment in plant and machinery and turnover has been introduced.
The table below depicts the classification criteria.
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Composite criteria for manufacturing and services sector |
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Both these conditions to be satisfied |
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Classification |
Investment in Plant & Machinery/equipment |
Turnover |
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Micro Enterprise |
≤ Rs. 1 crores/10 million |
≤ Rs. 5 crores/ 50 million |
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Small Enterprise |
≤ Rs. 10 crores/100 million |
≤ Rs. 50 crores/500 million |
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Medium Enterprise |
≤ Rs. 50 crores/500 million |
≤ 250 crores/2500 million |
Computation of investment in plant and machinery or equipment and turnover
The Notification read with the provisions of the Micro, Small and Medium Enterprises Act, 2006, explains what is to be taken and not be taken for computing the amount of investment in plant & machinery / equipment, and aligns the meaning of the term plant & machinery to the Income-tax Rules. It is the Income-tax Act, 1961, that defines the term “Plant”, and there is no definition found in the Income-tax Rules for the term “plant and machinery” or even “machinery”. Whether this would lead to any litigation, one would have to wait to see them.
Having said this, the Notification is clear on the inclusions and exclusions while computing the total investment in plant & machinery/equipment. The cost of all tangible assets (other than land and building and furniture and fittings) are to be included, and the amount of taxes/GST paid on the asset, cost of pollution control equipment, research and development, industrial safety devices are to be excluded.
Also, the investment amount would be determined based on the gross block that is shown in the books of accounts of the enterprise as had been clarified by the Ministry of MSME, by its Office Memorandum (OM) F. No. 12(4)/2017-SME dated March 8, 2017. So, it would not be the written down value of the plant and machinery/equipment at the end of each year, but only their original cost that will be taken into account for the computation.
Also, for the purpose of determining turnover, only domestic sales is to be taken into account and the export turnover is to be excluded.
Udyam (hindi term for “enterprise”) registration of enterprises
Unlike the earlier change in the year 2015 introducing Udyog Aadhar Memorandum (“UAM”), when it was not necessary for those enterprises that were registered under the Entrepreneurship Memorandum-II (“EM-II”), under the present Notification, it is necessary for all existing enterprises that have registered under EM-II and UAM to once again register on the portal www.udyogaadhaar.gov.in. This registration can be done from the 1st July 2020. [The portal is not accessible as this piece is being written and is being readied for the new udhayam registration].
So all existing registered enterprises are required to once again register themselves on this portal, and their present registration will be valid only till 31st March 2021. Hence, it is advised that all existing registered MSMEs register themselves, once the portal is available.
Registrations to start with will be based on self-certification basis and going forward the eligibility for an enterprise to remain in its category will be determined by data analytics.
Use of big data
Since, the classification of an enterprise as micro, small or medium is based on the investment the enterprise has made in plant and machinery/equipment, and also the turnover it generates, both being dynamic, the information of gross block of plant and machinery furnished by it in its income-tax return (“ITR”), and turnover in the return filed under the Goods and Services Tax Act, will be used for determining the enterprises’ eligibility to continue in the category, by linking these return to Udyam registration.
Income-tax return and GST returns
While existing enterprises when they register afresh on the portal, are required to furnish details of their ITR and also GST returns for the previous financial year, new enterprises that do not have prior ITR, the computation of their investment in plant and machinery/equipment will be based on self-declaration. The self-declared information will be valid till the enterprise files its first income tax return, after which the same will be linked to the income tax return and GST return filed by the enterprise.
Intimation of change in category
An enterprise that crosses the limits under either criterion will then be placed in the next higher category of enterprise, but for it to be able to move down, then it would have to satisfy both the criteria. This computation will be based on the ITR and also GST returns. When there is a change in status of the enterprise based on its returns, then a communication will be sent to the enterprise about their change in status. The change from one category to the other will be only after the end of the financial year, and even in case of crossing of either of the limits during the year, the enterprise gets to maintain its category, till the end of that year.
Determination of export turnover
Since, export turnover is not taken into account for computation of turnover, the ITR / GST returns will provide information to GoI for computation purposes.
Conclusion
Electronic filing of information and returns to GoI commenced when the Ministry of Corporate Affairs introduced MCA21, which was sometime in the year 2006. Over a period of time, e-filing initiative has been stepped up and GoI is now using data analytics of information filed with different authorities in order to determine status of enterprises.
Also, since there are many benefits that are being given to MSMEs, with data getting linked to ITRs and GST returns, to avail these benefits, an enterprise needs to be compliant on both these statues and it should not come as a surprise, when information from these returns will be provided on a `need-to-know basis’ to lenders and other financial institutions as presently financial information from MCA21 is limited to corporate form of organisations and does not include proprietorships and partnerships.
