MICRO, SMALL AND MEDIUM ENTERPRISES

Since long, we all are waiting for this change. Very few things accelerated due to the present crisis of COVID-19. A long-forgotten debate lost somewhere in history with Notification S.O. 1702(E) dated 1^st June 2020 amending definition of Micro, Small and Medium Enterprises. This is not a change in the Act but a notification to give the effect a related provision. Let us discuss.

[UPDATE: Notification under discussion hereunder was valid from 1st June 2020 till issuance of Notification S.O. 2119(E) dated 26 June 2020 (but never actually effective), however contents of this post are valid for the new notification also. Readers may read this post keeping this in mind]

Section 7(1) defines Micro, Small and Medium Enterprises and position is not changed. Present notification just amends certain criteria given under Section 7(1)(a)  and Section 7(1)(b) applicable respectively to manufacturing and service enterprises. Now, due to unknown but certainly interesting reason manufacturing and service enterprises both are under the same criteria.

ORIGINAL DEFINITION – MSME:

Without discussing Original definition, I am reproducing original definition:

The Central Government may classify any class or classes of enterprises, whether proprietorship, Hindu undivided family, association of persons, co-operative society, partnership firm, company or undertaking, by whatever name called,–

(a) in the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951), as–

(i) a micro enterprise, where the investment in plant and machinery does not exceed twenty five lakh rupees;

(ii) a small enterprise, where the investment in plant and machinery is more than twenty-five lakh rupees but does not exceed five crore rupees; or

(iii) a medium enterprise, where the investment in plant and machinery is more than five crore rupees but does not exceed ten crore rupees;

(b) in the case of the enterprises engaged in providing or rendering of services, as–

(i) a micro enterprise, where the investment in equipment does not exceed ten lakh rupees;

(ii) a small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees; or

(iii) a medium enterprise, where the investment in equipment is more than two crore rupees but does not exceed five crore rupees.

Explanation 1.–For the removal of doubts, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

Explanation 2.–It is clarified that the provisions of section 29B of the Industries (Development and Regulation) Act, 1951 (65 of 1951), shall be applicable to the enterprises specified in sub-clauses (i) and (ii) of clause (a) of sub-section (1) of this section.

AMENDMENT PROCESS

The Central Government may, while classifying any class or classes of enterprises under sub-section (1), vary, from time to time, the criterion of investment and also consider criteria or standards in respect of employment or turnover of the enterprises and include in such classification the micro or tiny enterprises or the village enterprises, as part of small enterprises.

The Central may accordingly:

• amend criterion of investment;
• consider criteria or standards in respect of:
  • Employment;
  • Turnover
• Add certain other classes.

Accordingly, the Central Government may define Village Enterprises, Tiny Enterprises, Micro Enterprises, Small Enterprises, and Medium Enterprises under this Act.

APPLICABILITY OF AMENDED DEFINITION

The present notification makes itself effective with effect from 1^st July 2020. Therefore, the amended definition shall be effective along with 2^nd Quarter of the financial year 2020-21 and 2^nd half of the calendar year 2020.

AMENDED DEFINITION – MSME

I am producing the definition after incorporating the present amendment to the original definition:

The Central Government may classify any class or classes of enterprises, whether proprietorship, Hindu undivided family, association of persons, co-operative society, partnership firm, company or undertaking, by whatever name called,–

• a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;
• a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;
• a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

Explanation 1.–For the removal of doubts, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

Explanation 2.–It is clarified that the provisions of section 29B of the Industries (Development and Regulation) Act, 1951 (65 of 1951), shall be applicable to the enterprises specified in sub-clauses (i) and (ii) of clause (a) of sub-section (1) of this section.

UNDERSTANDING AMENDED DEFINITION – MSME

There will be the same criteria for Manufacturing and Service Enterprises. It will provide ease of interpretation.

For a manufacturing enterprise, plant and machinery excluding pollution control, research and development, industrial safety devices and other specified items as shall be calculated for investment criteria.

For Service enterprises, the cost of all equipment shall be considered for calculation of an investment.

Turnover shall include export turnover unless exempted in future.

To enjoy the status of MSME, an enterprise should comply with both investment and turnover criteria.

Some enterprises like diamond polishing enterprises will be out of MSME status due to turnover criteria.

Same time, heavy machinery enterprises having lesser turnover may not enjoy the status of MSME with their same turnover but fewer investment peers.

SUGGESTIONS

To make the definition more attractive, either investment or turnover criteria, not both should be required. The Term “and” should be replaced by “or”.

All turnover from export and deemed export should be excluded to boost export from MSME sector.

• Aishwarya Mohan Gahrana

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