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What are the basis for classification of Micro, Small or Medium Enterprises under the MSME Act? How does the Ministry ensure that Enterprises are reporting correct data?

The Ministry of MSME has been committed towards promoting the MSME sector in India through its MSME Act. This act lays down several procedures for the Ministry to Work with the MSMEs of India in order to strengthen the Indian economy. The Ministry believes that when the MSME sector is strengthened it will lead to better employment opportunities as well as better economic growth for the nation.

In order for the Act to be able to deliver what it promises there is a need to differentiate the business into Micro, Small and Medium Enterprises. The Ministry of MSME has laid down its fundamentals clearly in it’s the MSME Act, 2006. These fundamentals are pivotal when it comes to forming the basis of any policies aimed at providing any kind of support or benefits to businesses in India. After all it will be difficult to understand which business requires what kind of support or assistance without understanding its scale and its ability to absorb those benefits. With constrained economic resources that the government has to work with this can be the basis to reduce over spilling of resources which might be caused by granting more support or benefits that businesses can absorb. It also ensures there is no under assistance being given and a fair practice is at play while providing assistance to so many of the businesses in India.

Even though the Ministry of MSME laid down criteria of classification of Micro, Small or Medium Enterprises in 2006, the same has been had a need of update with the ever changing market and economic conditions of the country in recent times. Considering this need the Ministry of MSME has been carrying required updates to the Act via its notifications released in November 2013 and June 2017. In a recently done revamp to meet the new age requirements of facilitating the Act the ministry has recently released a notification numbered S.O.1702 (E) on 1st June 2020 and the same has been published in the Gazette of India.

Let’s discuss the latest classification of enterprises as Micro, Small or Medium Enterprises as notified by the Ministry of MSME.

Any enterprise shall be primarily classified into Micro, Small or Medium Enterprises based upon the following criteria:

  • An enterprise will be classified as Micro if their investment in plant & machinery or equipment is under Rs. 1 Crore and their turnover is under Rs. 5 Crore.
  • An enterprise will be classified as Small if their investment in plant & machinery or equipment is under Rs. 10 Crore and their turnover is under Rs. 50 Crore.
  • An enterprise will be classified as Medium if their investment in plant & machinery or equipment is under Rs. 50 Crore and their turnover is under Rs. 250 Crore. Any Enterprises which exceed the above mentioned limits will not be allowed to register themselves under the MSME Act and won’t enjoy the benefits and assistance given under the Act.

I am sure you must be wondering as to how Enterprises move between Micro, Small & Medium classifications if their amount of turnover or investment change from year to year and break the ceiling limit of that particular classification in which they are already classified.

The answer is simple, if any enterprise happens to exceed the limit on the amount of either investment or turnover specified in their current classification then they will qualify for the next classification immediately. This isn’t the same in situations where the amount happens to be lower than the specified limit. In that case in order to be qualified in the lower tier the enterprise needs to match both the criteria for investment as well as turnover in order to be shifted into the lower criteria of classification.

An important factor that enterprises need to consider is that even though many enterprises have multiple entities registered under their business, the MSME Act considers any enterprise with multiple GST registered against the same PAN as one entity only. This has been done to avoid under-reporting of actual figures by splitting businesses into different entities just for the sake of misrepresentation.dh

How does the Ministry ensure that enterprises are reporting the correct data when filing for their registrations under these various classifications you may ask? Well, they Ministry has a solution even for that.

While calculating the investment in plant & machinery or equipment it will fetch data in the Income Tax Returns of the previous years filed under the Income Tax Act, 1961. Only in case the enterprise is a new one and has no previously filed ITRs, their information will be collected on a self-declaration basis by the promoter which will then be verified when the enterprise files their ITR after the year ending on March that year.

The same can be asked when it comes to reporting of turnover by the Enterprises. How does the Ministry plan to verify that information is correct?

As PAN is mandatory for every registration, the ministry will fetch data filed in the Income Tax Return as well as GST Returns of the enterprises to verify whether the information entered is as per records. In case of new enterprises, a grace period up to 31st March of the current financial year will be given after which the enterprises will be liable to file their ITR and GST Returns from which information can be verified.

 In order to classify Enterprises into Micro, Small or Medium Enterprises and provide them with necessary benefits the Ministry of MSME has now implemented the process of Udyam Registration. Under this registration enterprises which are new can either self-declare their information or have the system fetch their information from their previously filed ITRs and GST Returns. This new and sophisticated system of Udyam Registration has been introduced with a main purpose of electronically streamlining data reporting and making it easier for the Ministry to verify data entered by the applicants.

If any enterprise intentionally misrepresents or attempts to hide any self-declared facts and figures while applying for their Udyam Registration or updating their existing registration then such an enterprise will be liable to a penalty specified under the section 27 of the MSME Act.