What is an MSME? A rather frequently asked question considering the important role they play in the Indian economy. The meaning of MSME however has changed over the years. And considering the rise in the number of MSMEs in India, the new classification of MSMEs has also changed.
It is natural for one to ask as to why have a classification for MSMEs? This is because, over the years, the scale and nature of micro, small, and medium businesses have changed, many new start-ups have emerged, and entrepreneurship is at an all time. This change in the economic and business ecosystem required better understanding of the nature, type and scale of businesses for the government to support with the right financial aid schemes, subsidies, and exemptions.
For instance, Udyam was launched as a single platform for MSME registration. By registering as a MSME on the Udyam portal, businesses can reap various benefits of Udyam registration that non-MSMEs cannot avail. Similarly, there are loans offered to women entrepreneurs, MSMEs, and start-ups to empower and boost their business growth.
The Micro, Small, and Medium Enterprises (MSME) has been instrumental to India’s socio-economic journey and contributes to its GDP, exports, and employment generation opportunities. The revised MSME sector classification is based on their annual turnover, and not only the investments made.
On that note, let us take a closer look the new definition of MSME in India for 2023 and beyond.
The new MSME classification based on turnover (and investment)
2020 was a difficult year for businesses across the globe. For emerging and small businesses, the situation was critical, and many went out of business.
With the aim to increase the number of businesses that could benefit from the aid and support the government offered, the definition of MSME was revised with new additions to the list of MSME businesses in India.
The old definition of MSME applied to businesses in manufacturing (i.e., goods production in any industry) and services (i.e., providing services) and was based on the investment made by the firm in the plant and machinery. This naturally raised many questions particularly because there were differences in the definition of investments made for manufacturing and service-based businesses.
This led to many businesses restricting growth and scaling slowly to avoid losing the MSME tag and the benefits it offered.
However, under the Aatmanirbhar Bharat Abhiyan, (1 June, 2020 notification) the ministry revised the definition of MSMEs. The new classification of MSMEs in India now focused on turnover instead of investments only and is be based on:
- Annual turnover generated
- Investment made in plant and machinery and equipment
Moreover, this is a composite definition and will apply to all businesses across manufacturing and services sector to bring parity.
Latest MSME classification based on turnover w.e.f. 1 July, 2020
The concept of MSME was first introduced in the Micro, Small and Medium Enterprises Development Act (MSMED), 2006. The goal of this Act was to review existing policies and multiple other factors that affect MSME growth for better solutions.
The new MSME classification on turnover is an attempt to ensure that the sector is properly assisted for ease of going business and growth.
|For Manufacturing and Service sector businesses, composite MSME classification based on investment in plant and machinery/equipment and annual turnover|
|Business type||Investment and Turnover as per new definition|
For more details, please visit the MSME website: msme.gov.in
Updates to the MSME categorisation: July, 2021
In 2021, there was further update made to the meaning of MSMEs – this time to include retailers and wholesale traders under MSMEs. This change allows almost 2.5 crore retailers and wholesale traders to now register as MSMEs on Udyam and avail priority sector lending benefits as per RBI guidelines.
Wholesale traders and retailers were among the many greatly affected by the impact of the pandemic. Owning to the nature of their business they faced severe shortage in liquidity and funds during the lockdown period, losing to online businesses, and global players. This not only affected their business but also impacted the economic situation.
To enable them to recover from their losses and keep businesses afloat, the ministry decided to include them under the definition of MSMEs and extend specific financial support to them as well (primarily priority sector lending).
On July, 2021, a new definition of MSME was announced that included retailers and wholesale traders to the list of Indian MSMEs.
It is expected for all these businesses to get MSME Udyam benefits by completing the online registration process.
#1 FAQ – What happens if the MSME’s turnover/investment increases or decreases over the years?
If the annual turnover or investment made in plant/machinery increases and reaches the upper threshold, then the MSME naturally moves to the next grade of classification, i.e., from Micro to Small, from Small to Medium.
On the other hand, downward movement happens only if the annual turnover and investment in plant/machinery decreases and reaches the lower threshold, then the MSME will be moved to the lower grade.
Reasons for change in MSME definition
It is fair to ask, why change the definition of MSMEs in India? Or how does the new category of MSMEs benefit the sector? The latest MSME classification has been made to address the diverse changes in the business environment.
The reasoning moreover is simple and practical. As per the old definition of MSME (based on investment made in plant and machinery), it was often difficult to calculate the actual investments made. There could be discrepancies, ambiguity, and proper detailing was required to assess the level of investment made.
Moreover, the investment-based classification was separate for manufacturing and service sector businesses, which further made the calculations complex and ambiguous.
Old definition of MSME by investment made in plant and machinery
|Micro||Not exceeding ₹25 lakh||Not exceeding ₹10 lakh|
|Small||₹25 lakh – ₹ 5 crore||₹10 lakh – ₹ 2 crore|
|Medium||₹ 5 – ₹10 crore||₹ 2 – ₹ 5 crore|
The composite MSME classification based on turnover and investment eliminates this challenge. It considers all businesses with the same PAN as one entity and fetches the previous year’s ITR data to calculate investment made in plant/machinery and turnover. This naturally removes ambiguity and keeps the business GST compliant.
To facilitate this change, the MSME registration process on Udyam is completely online based on Aadhaar number. The portal is integrated with GSTIN and Income Tax systems and all details related to investment and turnover (PAN and GST linked) is gathered from the relevant platforms. This naturally reduces the scope of error, misrepresentation and ambiguity as businesses can only apply for Udyam registration only once with their Aadhaar numbers.
This will also not require any physical verification of documents and keep the process quick, transparent and less complex.
An overview of the MSME sector in India and the way ahead
The MSME sector in India has been pivotal in the country’s growth. It provides employment to over 113 million people especially in rural India, contributes 40% to exports, and almost 30% to the country’s GDP. It also contributes almost 45% to the country’s manufacturing, making them vital in India’s growth trajectory. (Source: Business Today, February 2023)
The sector is also a live example of resilience, self-sustenance, and innovation. Though MSMEs are faced with multiple challenges and obstacles the sector has always fought back and kept moving forward.
The idea is to keep moving forward. The government with its range of loan schemes, exemptions, subsidies, tendering opportunities and more is driving change, enabling more MSMEs reap the benefits of this new categorisation.