New MSME tag to rely on both investment and turnover, Bill being reworked

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Published: May 8, 2020 2:30:56 AM

According to the current definition, a micro unit is one where the investment does not exceed Rs 25 lakh, while a small enterprise is one where the investment is between Rs 25 lakh and Rs 5 crore.

The Micro, Small and Medium Enterprises Act, 2006, which is still relevant, defines MSMEs engaged in manufacturing on the basis of their investment in plant and machinery.The Micro, Small and Medium Enterprises Act, 2006, which is still relevant, defines MSMEs engaged in manufacturing on the basis of their investment in plant and machinery.

The government is reworking a Bill to define micro, small and medium enterprises (MSMEs) on the basis of both investment and turnover, after its bid to grant the MSME status based only on turnover was resisted by small manufacturers, who feared traders would usurp official benefits meant for them.

The Centre is also considering trimming the annual turnover limit for a unit to qualify as a medium enterprise to Rs 100 crore from Rs 250 crore, which was proposed in the MSME Amendment Bill, 2018, sources told FE. The reduction in the upper limit will ensure that large traders don’t make it to the MSME category, said one of the sources.

The MSME status brings businesses certain assorted benefits―including mandatory 25% official procurement and loans under the priority sector lending scheme ― apart from periodic government and regulatory relief. Promoters of MSMEs who are not wilful defaulters can bid for their stressed assets under the insolvency law, while those of large companies can’t. Given that the Covid-19 crisis will continue to weigh on the economy for a long period, an appropriate definition of MSMEs will be key for assured benefits to them.

The Micro, Small and Medium Enterprises Act, 2006, which is still relevant, defines MSMEs engaged in manufacturing on the basis of their investment in plant and machinery. However, the MSME (Amendment) Bill 2018, sought to reclassify all MSMEs, whether in manufacturing or services, based on their annual turnover. The idea was to bring in greater transparency in classification, as the government can easily verify their turnover using the GST data.

According to the current definition, a micro unit is one where the investment does not exceed Rs 25 lakh, while a small enterprise is one where the investment is between Rs 25 lakh and Rs 5 crore. A medium one can have investment of between Rs 5 crore and Rs 10 crore. In case of services, a micro enterprise must invest up to Rs 10 lakh in equipment. A small enterprise will have to invest between Rs 10 lakh and Rs 2 crore, while those investing from Rs 2 crore to Rs 5 crore will qualify as medium services enterprises.

However, as per the 2018 Bill, a unit will qualify as a micro one if its annual turnover is up to Rs 5 crore. A small enterprise would have a turnover ranging from Rs 5 crore to Rs 75 crore, while the turnover of a medium enterprise would be between Rs 75 crore and Rs 250 crore.

However, MSMEs engaged in manufacturing have opposed this move, arguing that any definition based only on turnover, instead of investments, will allow traders to claim the MSME status. Traders will also import cheap products from countries like China and sell here, thus boosting their turnovers, to enjoy the benefits granted to MSMEs. This will raise competition for ‘genuine MSMEs’ in government procurement programmes.

The 2018 Bill was introduced in Parliament in July, but it lapsed, with the dissolution of the last Lok Sabha, as it was not pushed through vigorously following opposition. The government is now working on a new Bill for parliamentary clearance.

The 2018 Bill says: “It has been considered appropriate that if the annual turnover is taken as a criterion for classification, the information available with goods and services tax network and other sources can be used for determination of the category of the enterprises. Overall, the turnover-based classification will promote the ease of doing business and will put in place a non-discretionary, transparent and objective classification system.” In December 2018, a parliamentary standing committee also endorsed the turnover-based definition for MSMEs.

In its FY19 annual report, the MSME ministry said these businesses had created 11.10 crore jobs in FY16. MSMEs also made up for 29% of the GDP.

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