The MSME sector is the backbone of India’s bustling economy. According to the Confederation of Indian Industry, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output. They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from India.
Recently, the current MSME minister Nitin Gadkari stated that MSMEs would contribute 50% to GDP in next 5 years and would create 5 Crore additional jobs at the same time.
In 2006, the government of India created a ministry dedicated to the sector of MSMEs and enacted the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006. The Act defines MSMEs in India. Since the government places a lot of importance on the development of this sector, defining the enterprises of MSME sector is of utmost importance so that the benefits and incentives reach them in a proper manner.
According to the older classification system, there were two sets of definitions of MSMEs, depending on whether the MSME was involved in the manufacturing or service sector. The enterprises involved in the manufacturing or production of goods were the manufacturing enterprises. These were defined in terms of investment in plant and machinery. MSMEs of the manufacturing sector were classified as follows:
- Micro enterprise: Investment in plant and machinery does not exceed 25 lakhs
- Small enterprise: Investment in plant and machinery is more than 25 lakhs but less than 5 crores
- Medium enterprise: Investment in plant and machinery is more than 5 crores but less than 10 crores
The enterprises involved in the rendering or providing of services were service enterprises. These were defined in terms of investment in equipment. MSMEs of the service sector were classified as follows:
- Micro enterprise: Investment in equipment does not exceed 10 lakhs
- Small enterprise: Investment in equipment is more than 10 lakhs but less than 2 crores
- Medium enterprise: Investment in equipment is more than 2 crores but less than 5 crores
In 2018, a bill was introduced by the then Minister of MSME, Giriraj Singh, proposing changes to the definition of MSMEs in the existing MSMED Act 2006. According to the Micro, Small and Medium Enterprises Development (Amendment) Bill, the criterion for classification of MSMEs was changed from the existing based on ‘investment in plant and machinery/equipment’ to ‘annual turnover’ of the enterprise. The distinction between manufacturing and service sector enterprises was also removed.
According to the new definition, the following classification system will be followed:
- Micro Enterprise: Enterprises having an annual turnover less than or equal to Rs. 5 crores.
- Small Enterprise: Enterprises having annual turnover between Rs. 5 and Rs. 75 crores.
- Medium Enterprise: Enterprises having annual turnover between Rs. 75 and Rs. 250 crores.
The government has stated that the older classification system based on the criterion of investment in plant and machinery or equipment entails physical verification having associated transaction costs. It encourages the promoters of various enterprises to keep the investments small and limited to keep availing the benefits of the MSME category. This new system is being said to make the norms of classification growth-oriented and aligned to the new tax regime which revolves around GST.
The information available with the Goods and Services Tax Network (GSTN) and other reliable sources can be used to determine the category of the various enterprises. Globally, MSMEs are defined in terms of turnover and number of employees. The turnover based definition is a move towards a harmonised classification. The move is also said to improve ease of doing business.
Now, you are aware of the new classification system of MSMEs and the benefits that come with it. You must also be aware that MSMEs get a host of benefits from the government and banks and financial institutions when it comes to SME loans. No matter what type of an MSME you are, you can always grow your enterprise with the help of an SME loan. Whether you are looking to invest money in your machinery or equipment or increasing your turnover by expanding your business, an SME loan is an excellent way to move ahead. At ZipLoan, you get a loan for your MSME with minimum paperwork, no hassles, and short 3-day processing time.