A bill, redefining the criterion for classifying Micro, Small and Medium Enterprises has been introduced in the Lok Sabha by the government last month. According to the Micro, Small and Medium Enterprises development (Amendment) Bill, the MSMEs will now be classified on the basis of “annual turnover”; earlier the criterion being “investment in plant and machinery or equipment”.
The Minister of State for MSMEs, Giriraj Singh, withdrew the 2015 Bill on the issue followed by the introduction of the new bill, in the Lok Sabha, which would, thereby, amend Section 7 of the Micro, Small and Medium Enterprises Development (MSMED)Act, 2006.
The bill encompassed the amendments that asserted, any unit where the annual turnover does not exceed five crore rupees will be a micro enterprise whereas a small enterprise will be defined as a unit where the annual turnover is between Rs. 5 crore and Rs. 75 crore. Those businesses where the annual turnover is more than seventy five crore rupees but does not exceed Rs. 250 crore would be deemed as medium enterprises.
Also, additionally, the Central Government may, by notification, vary turnover limits, which shall not exceed thrice the limits specified in Section 7 of the MSMED Act, as per the amendments.
The Union Cabinet chaired by the Prime Minister Shri Narendra Modi had earlier approved this proposal for amendment in Feb this year.
At present, the Micro, Small and Medium Enterprises (MSMEs) are defined in terms of investment in plant &machinery and in terms of investment in equipment as in accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006.
The bill was modified in the view that the criterion of investment in plant and machinery or equipment often incentivises the tendency in the promoters of the enterprises to keep the investment size small in a particular business entity in order to retain the benefits associated with micro or small enterprises category and that it entailed physical verification having associated transaction costs, as per the bill.
If the annual turnover is taken as a criterion for classification, the information available with goods and services tax network and other sources can be used for determination of the category of the enterprises, the bill says.
It is worth noting that, the MSMEs Development Act, 2006 was enacted to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises.
However, in its statement of objects and reasons the bill states, “over a period of time, it has been felt necessary to change the criteria for the classification in order to align it with the need of current times and changing business ecosystem.”
Thus, overall, the turnover based classification will promote the ease of doing business and will put in place a non-discretionary, transparent and objective classification system. This will result in consequent growth and will pave the way for increased direct and indirect employment in the MSME sector of the country.