What is the limit of investment in small scale businesses?

The micro and small scale industries (SSI) are key contributors to India’s GDP, employment generation, and exports. Considering their potential, contribution and challenges, the government has introduced several policies and schemes to enable their growth. And to make the distinction clear between micro, small and medium enterprises (MSME), there’s a limit of investment in small scale businesses. Popularly known as the MSME classification or investment limit in MSMEs, this defines the maximum amount of capital small businesses can invest in their business.

In the next section, we take a look at the investment limit for small business, turnover limit, and other details that enables businesses to classify as micro, small or medium enterprises and leverage the benefits that comes with it.

What is the maximum limit of investment for small scale businesses?

The MSMED Act 2006 was the first to introduce the concept of MSMEs in India. However, with changing times, under the Aatmanirbhar Bharat Abhiyan (1 June 2020 notification), a more composite definition has been adopted that will apply to both manufacturing and services sector.

The maximum limit of investment for small scale industries as of 2023 therefore stands at a maximum of ₹10 crore in plant and machinery/equipment.

Why is it important to have an investment limit for small businesses?

The industrial and business landscape in India has witnessed significant changes in the last two decades. Entrepreneurship skyrocketed and startups and new enterprises were emerging rapidly. With the change in the number, size and scope of new businesses, the importance of small businesses couldn’t be overlooked. As such, the government raised the investment threshold for each category and introduced turnover to classify businesses to foster a conducive business environment and encourage economic growth.

Some of the reasons why a minimum-maximum investment and threshold limit for SMEs was set are:

• Risk mitigation – Most SMEs lack the financial resilience of large-scale industry businesses to withstand unforeseen challenges and economic downturns. The investment threshold acts as a safeguard to protect SMEs from over-spending and prevent debt or bankruptcy. It allows SMEs to take calculated risks, avoid reckless financial decisions, and build a sustainable business.
• Resource allocation – The government introduced the annual turnover component to investment limits for small-scale businesses to strategically direct capital resources towards a sector that aligns with the nation’s broader economic growth plan. There are several initiatives and funding schemes that are offered to SMEs to maintain a balanced and diversified economic landscape (e.g., SFURTI Yojana to encourage traditional industries, PMEGP scheme to offer new entrepreneurs subsidies, etc.).
• Fair competitive landscape – For the growth of MSMEs, it’s vital to provide them with a fair competitive landscape. Having set a threshold for SME investment allows policymakers to set parameters and provide them with a level field where they can thrive and innovate without being overshadowed by large conglomerates.

What is the maximum turnover allowed for SSIs?

As per the new definition of MSMEs in India, the maximum turnover limit for small scale industries is ₹50 crores, that is, the net annual turnover should not exceed ₹50 crores.

The annual turnover threshold for small-scale industry businesses serves as a vital tool to classify businesses and provide tailored support as per the scale of the business. It also enables the government to simplify regulatory compliances, promote financial stability and facilitate fiscal management.

Moreover, it allows the government to identify businesses that are eligible for tax incentives or preferential tax rates. This aids the calculation of tax revenues as businesses are liable to pay taxes as per the tax bracket they fall under, based on their annual turnover (e.g., GST registration limit is set at ₹40 lakhs annually).

Are MSMEs and SSIs the same?

Yes. With the MSMED Act, the definition and scope of SSIs was expanded and included in the definition of MSME.

Earlier, small-scale industries (SSIs) referred to businesses that manufactured, produced or provided services with a limited workforce and machinery. The maximum investment in SSI was also limited to ₹1 crore. Businesses could get the SSI Registration to reap the benefits that came with it.

However, since May 2007, following an amendment, SSIs are included under the Ministry of MSME.

Also read: Small company definition – Meaning, relaxations, benefits in India

What are some examples of small-scale industries?

The list of businesses under MSMEs is expanding. Considering the limit of investment in small scale businesses, these are usually businesses that require less investment and can be carried out with semi-skilled or unskilled workforce. Some examples of SSIs are:

• Manufacturing business – Leather products, small toys, stationery items, ceramic manufacturing, etc.
• Service based business – Training institutions, laundry and dry cleaning, etc.
• Ancillary business – Bicycle parts, auto parts, food processing, etc.
• Handicraft, village and cottage industry – Textiles, coir industry, paper bags, clay products, etc.

Also read: Small business ideas in Mumbai and also profit-making business ideas in Delhi

How to register a small business?

Based on the nature of business you start, there are some essential small business registration certificates you will need. Popular ones are:

• Udyog Aadhaar (Udyam) registration – Udyog Aadhaar or Udyam registration has several benefits for MSMEs. It can be done for free with only PAN and Aadhaar to generate a MSME certificate which acknowledges the business entity and enables it to benefit subsidies, exemption, and concessions.
• Trademark registration – A trademark registration protects your intellectual property and assets from copy and misuse by other parties. You can get a trademark registration done online or offline for your logo, product, brand name or any other. It also differentiates your brand from competitors and build reputation. It comes with a nominal trademark registration fee of ₹4,500 (e-filing for MSMEs). Note – Trademark registration requires renewal after expiry.
• Import Export Code – This is required for businesses looking at importing specific products or exporting their products globally. Considering that exports make up a significant portion of MSME contribution to India’s GDP (i.e., above 40%), it is recommended to get the IE Code for running a small business.
• ESIC Registration – This enables SMEs to provide better financial benefits to their employees. Once a small business employs 20 employees it can register for ESIC for protection from medical expenses and social security.