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Micro, Small and Medium Enterprises (MSME) sector in India is a crucial contributor to the economy providing employment to millions of people across the country. Small-scale industries of India witnessed a massive growth in the early 2000s and started growing to bigger corporations. The Government of India realised the need to foster this growth and introduced policies and legal frameworks to empower MSMEs. Thus, the MSME Act was born.

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The importance of MSMED Act 2006

The MSMED Act 2006/Micro, Small and Medium Enterprises Development Act 2006 was the first MSME act in India that was introduced to set up a policy environment for promotion and development of the MSME sector. The act defined the MSME sector and put in place a framework for developing and enhancing competitiveness of MSME enterprises of India.

The act was the government’s way of ensuring flow of credit to the sector, give MSMEs preference in government procurement, addressing the issue of delayed payments, etc. It also advocated the provision of marketing assistance, infrastructural facilities, etc. A separate Ministry of MSME was set up by the government to make these goals a reality.

The Government of India legislated the MSMED Act 2006 on June 16, 2006. It provided the first-ever legal framework to recognise of the concept of “enterprise” and defined the three tiers of these enterprises, namely, micro, small and medium. MSMED Act 2006 classification brought in a clearer and more progressive categorisation of small-scale enterprises. MSMEs are divided into two groups according to the provisions of the MSMED Act 2006:

Manufacturing enterprises:
Companies involved in manufacturing goods for any industries listed in the First Schedule of the Industries (Development and Regulation) Act, 1951 are manufacturing enterprises. The classification of these enterprises is based on the investment in plant and machinery.
Service enterprises:
Businesses that deal with offering services are service enterprises. These are categorized based on investment in equipment.

Definition of MSME as per MSMED Act, 2006

The MSMED Act 2006 defines the manufacturing enterprises as given below:

  • Micro enterprises are businesses where investment does not exceed ₹25 lakh
  • Small enterprises are businesses where investment is more than ₹25 lakh but do not exceed ₹5 crores
  • Medium enterprises are businesses where investment is more than ₹5 crores but does not exceed ₹10 crore

A revised definition – MSME Act, 2020

In 2020, the Government of India decided to change the basis of classifying MSMEs from investment in plant and machinery/equipment to annual turnover. This was done to make the norms of classification growth oriented and align them to the new GST tax regime.

The new classification of MSMEs in India changed the basis of MSME classification to a non-discretionary, transparent and objective criterion and eliminated the need for inspections to determine investment in plant and machinery/equipment. This classification system was deemed to be more progressive and evolutionary and helped overcome the uncertainties associated with the classification based on investment in plant and machinery/equipment.

The new definition of MSME was put into effect from July 1, 2020. The new definition classified MSMEs based on a composite criterion of investment in plant and machinery and turnover. The ministry removed the difference between the definition of manufacturing-based MSMEs and service-based MSMEs with the revised definition.

Take a look at the following table for the revised classification of MSMEs according to the MSME act amendment 2020 pdf published by the Government of India:

 

Category Criteria of classification
Micro enterprise Net investment in plant and machinery or equipment less than or equal to ₹1 crore and net turnover less than or equal to ₹5 crores
Small enterprise

 

Net investment in plant and machinery or equipment less than or equal to ₹10 crores and net turnover less than or equal to ₹50 crores

 

Medium enterprise

 

Net investment in plant and machinery or equipment less than or equal to ₹50 crores and net turnover less than or equal to ₹250 crores

 

Amendment to MSME categorization 2021

The government included retail and wholesale enterprises under the ambit of MSME categorization in 2021.

Retail and wholesale traders faced a severe liquidity crunch after they faced significant losses owing to COVID-19 lockdowns. Considering this, the Ministry of MSME decided to include retail and wholesale companies as MSMEs and extend to them the advantages enjoyed by MSMEs, especially the benefit of priority sector lending under RBI guidelines. Therefore, the Reserve Bank of India (RBI) on July 7, 2021, notified a new definition of MSMEs by adding retail and wholesale trade to this category.

Features of MSMED Act in India

The MSMED Act was legislated to foster the growth of MSMEs and give them credit facilities along with other opportunities. Here are some of the features of MSMED Act:

  • Preference to goods and services provided by MSMEs for government procurement
  • Creation of dedicated funds for the growth and promotion of the MSME like the Credit Guarantee Fund Trust for MSMEs
  • Notification of initiatives and plans to promote the expansion of MSMEs
  • Foster ease of doing business for MSMEs
  • Adoption of modern procedures and policies to apply for MSME loans
  • Dedicated government schemes to promote growth, sales and innovation

Becoming an MSME in India

Any business owner, who wants to register/categorise his/her business officially as an MSME according to the established MSME laws in India is required to do the following:

  • Visit Udyam registration portal and fill in Udyam Registration form online
  • Upon registration, an enterprise referred to as Udyam in the Udyam registration portal will be assigned a permanent identity number to be known as Udyam Registration Number
  • An e-Certificate referred to as the Udyam Registration Certificate will be issued on completion of the registration process

The enterprises eligible for MSME Udyam registration include:

  • Individuals, startups, business owners, and entrepreneurs
  • Private and public limited companies
  • Sole proprietorship
  • Partnership firm
  • Limited Liability Partnerships (LLPs)
  • Self Help Groups (SHGs)
  • Co-operative societies
  • Trusts

Udyam registration is mandatory for MSMEs who wants to apply for government schemes and participate in the government tenders. To know more about MSME sector register your business on Tata nexarc, a B2B growth platform that helps MSMEs find new growth opportunities.

Priyanka Babu

Priyanka is a seasoned content marketing professional with more than 6 years of experience crafting various forms of business and technology sector content. Her insightful writing tackles critical issues faced by small-scale manufacturing businesses. Priyanka’s clear and concise communication empowers businesses to make informed decisions and thrive in today’s dynamic business environment.