EXPLAINED: NEW DEFINITION OF MSMEs


EXPLAINED: NEW DEFINITION OF MSMEs

BY: Aarushi Saxena, Associate at Qui Prior Law Associates 

On 13th May 2020, the Government changed the definition of micro, small and medium enterprises (MSMEs) as part of the Atma Nirbhar Bharat Abhiyan (self-reliant India) economic relief package, announced by Prime Minister Narendra Modi. The Union Finance Minister Nirmala Sitharaman has announced measures to help businesses, including micro, small and medium enterprises (MSMEs), recover from the economic impact of the coronavirus (COVID-19) pandemic.

Under the new definition of MSMEs, the investment criteria for such enterprises have been revised upwards, while an additional criterion of turnover has been introduced. Under the new definition, the distinction between manufacturing and services enterprises has been eliminated.

Before the revision, MSMEs were defined in term of investment in Plant and Machinery/ Equipment, and 14.05.2020 onwards, MSMEs are defined in term of investment in Plant and Machinery/ Equipment “AND” Turnover as below:

 

 

 

MICRO

SMALL

MEDIUM

Manufacturing Enterprises and Service Enterprises

Investment

Up to Rs. 1 Crore

More than Rs. 1 Cr and Less than Rs. 10 Cr

More than Rs. 10 Cr and Less than Rs. 20 Cr

Turnover

Up to Rs. 5 Crore

Up to Rs. 50 Crore

Up to Rs. 100 Crore

The government had quoted that the low threshold in MSME definition had “created a fear among MSMEs of graduating out of the benefits and hence killing the urge to grow,” with a long-pending demand for revisions.

The object behind the decision to move from a definition based on investment in plant and machinery was to encourage entities to modernize without worrying about losing their MSME status, while also easing the process of verification. However, major objections had been received regarding the feasibility of moving to a definition based solely on turnover since it would benefit traders more than manufacturers. To dispel these worries, the government has retained both investment in plant, machinery and equipment as well as turnover.

Specific measures for the MSME sector include collateral-free loans worth Rs 3 lakh crores, subordinate debt provision worth Rs. 20,000 crores inclusive of a partial guarantee support through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), equity infusion of Rs 50,000 crores, revision of the current MSME definition, disallowance of global tenders up to Rs. 200 crores in government procurement tenders and lastly, and payment of outstanding dues to MSMEs, by government/CPSEs within 45 days.

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