MSMEs – The New Champions of Economic Growth
“Post-corona pandemic and the resultant worldwide lockdown, the entire world economies have plunged into an unprecedented recession. Besides, the unwarranted and unrelenting border skirmishes have posed another threat for India. In this emergent situation, India is endeavoring to find an opportunity to build a new self-reliant India. The recent announcement of Atmanirbhar Bharat Abhiyan giving an enormous package to stimulate the economy has assigned a pivotal role for the MSMEs in the country, both as a support-industry for the large enterprises as well as by providing a major market for them. Various initiatives taken for the growth and development of MSMEs which are expected to uplift the domestic industry, boost the country’s economy and make India even stronger than before, have been comprehensively deliberated upon in this article. Read on...”
MSMEs have always been the backbone of Indian industry and have always enjoyed special privileges and incentives in all strategies adopted to boost industrial growth. Be it the first generation reforms which started with the new Industrial Policy document of 1991 or the second generation reforms constituting MSME as a separate focus area with an independent legal framework under the Micro Small and Medium Enterprises Development Act, 2006. Recently, Prime Minister has launched the Atmanirbhar Bharat Abhiyan, giving a humongous stimulus package whereunder MSMEs have been given the lion’s share besides several relaxations and privileges. The classification of MSMEs has been revised in order to include more enterprises under the MSME. Besides, the package announced for MSMEs is expected to have a sizeable bearing on the viability and operations of MSMEs. MSMEs are therefore bound to emerge as the largest contributor in India’s economic growth and the champions of self-reliant India.
MSMEs – New Classification
As per Section 7(1) of the MSME Development Act, 2006, any class or classes of enterprises may be classified as micro, small or medium enterprises by a notification issued in this behalf. However, the classification shall be based on investment in plant and machinery (in case of manufacturing enterprises) and investment in equipment (in case of service enterprises).
The revised classification as notified vide Ministry of MSME Notification no. S.O. 2119(E) dated 26.6.2020 is based on composite criteria of investment and turnover. Under the new criteria, the thresholds have been revised significantly upwards. This is expected to help the MSME sector to grow robustly. The new classification effective from 1.7.2020 is depicted in the chart below:
|
ENTERPRISES (i.e. industrial undertaking or a business concern or any other establishment) |
||
|---|---|---|
| Classification Tier | Engaged in Manufacture or Production of goods | Engaged in providing any service or services |
| MICRO Enterprises |
Investment in Plant and Machinery* ≤ Rs. 1 crore and Turnover ≤ Rs. 5 crore |
Investment in Equipment ≤ Rs. 1 crore and Turnover ≤ Rs. 5 crore |
| SMALL Enterprises |
Investment in Plant and Machinery* ≤ Rs. 10 crore and Turnover ≤ Rs. 50 crore |
Investment in Equipment ≤ Rs. 10 crore and Turnover ≤ Rs. 50 crore |
| MEDIUM Enterprises |
Investment in Plant and Machinery* ≤ Rs. 50 crore and Turnover ≤ Rs. 250 crore |
Investment in Equipment ≤ Rs. 50 crore and Turnover ≤ Rs. 250 crore |
*Excluding cost of pollution control, research and development, industrial safety devices and other notified items.
Enterprise – Meaning of
The term ‘enterprise’ has been defined under section 2(e) of the MSMED Act, 2006 so as to mean ‘any industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services.
Further, as per section 7(1) of the Act, enterprises shall include proprietorship, Hindu undivided family, association of persons, cooperative society, partnership firm, company or undertaking, by whatever name called.
It may be clarified that enterprises engaged exclusively in trading of goods are not included in the above definition, and hence are not covered under MSMEs.
Application of Composite Criteria of Investment and Turnover
Under the revised classification effective from 1.7.2020, a composite criteria of investment and turnover has been prescribed for classification of enterprises as micro, small or medium, as depicted above.
Upscaling of Enterprises:
If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to be classified in that category and shall be upscaled in the next higher category. For example, in case of a micro enterprise, while its investment remains below Rs. 1 crore, if its turnover surpasses Rs. 5 crore it will be upscaled as a small enterprise.
Downscaling of Enterprises:
However, an enterprise shall not be placed in a lower category unless it goes below the ceiling limits specified for both investment and turnover for its present category. For example, if in case of a medium enterprise, while its investment in plant and machinery remains above Rs. 10 crore (but upto Rs. 50 crore) and its turnover falls below Rs. 50 crore, it will not be downscaled to a lower category. However, in case its investment in plant and machinery also comes down below Rs. 10 crore, it will be reclassified as a small enterprise.
Consolidated Turnover and Investment of all units to be considered:
If an enterprise (with one PAN) has different units (with separate GSTIN) then they shall be collectively treated as one enterprise and their consolidated turnover and investment shall be considered for the purpose of classification criteria.
Computation of Investment in Plant and Machinery or Equipment
For computation of the investment in plant and machinery or equipment, following principles have to be followed:
1) Scope as per Income Tax Rules: The expression plant and machinery or equipment shall have the same meaning as assigned to plant and machinery in the Income Tax Rules, 1962 and shall include all tangible assets (other than land and building, furniture and fittings).
2) Linking with Income Tax Return: The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous year’s filed under the Income Tax Act, 1961. In case of a new enterprise, where no prior ITR has been filed, the investment will be based on self-declaration by the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year for which it files its first ITR. Thus, once the enterprise files its first ITR, the investment in plant and machinery or equipment, as declared therein, shall be reckoned for the purpose of classification.
3) Valuation to be based on Original Cost: In case of a new enterprise (without any ITR), while calculating the investment in plant and machinery, the original price thereof excluding GST amount, irrespective of whether the plant and machinery are new or second hand, shall be reckoned on self-declaration basis.
4) Items to be Excluded: Cost of following items is to be excluded:
(A) Pollution control, research and development and industrial safety devices, and
(B) Other items as may be notified. Earlier certain items were notified vide notification no. S.O.1722(E), dated 5.10.2006 which has been superseded.
Computation of Turnover
For the purposes of classification criteria, in calculating the turnover of an enterprise the value of exports of goods or services or both shall be excluded. This will significantly benefit MSMEs as they will continue to avail the benefits and privileges extended to MSMEs despite having large export turnover.
The information relating to turnover and exports turnover of an enterprise will be linked with its ITR or GST return. In case of new enterprises which do not have a PAN, turnover related figures shall be accepted on self-declaration basis up to 31.3.2021 and thereafter, PAN and GSTIN shall be mandatory.
Udyam Registration
Any person who intends to register a micro, small or medium enterprise may file Udyam Registration online on the Udyam Registration portal (udyamregistration.gov.in). The registration is on self-declaration basis and no documents, papers, certificate or proofs are required to be uploaded. The registration is free and no fee is required to be paid.
The entrepreneur is only required to furnish his Aadhaar number (Aadhaar card is not to be uploaded). In case of a proprietorship firm its proprietor, in case of a partnership firm its managing partner and in case of a HUF its karta has to give his Aadhaar number. In case of a company or a Limited Liability Partnership or a Cooperative Society or a society or a Trust, the organization or its authorized signatory shall provide its GSTIN and PAN alongwith its Aadhaar number.
In case an enterprise does not have PAN or GSTIN or both, it can be furnished later on, but not beyond 31.3.2021. W.e.f. 1.4.2021, all registered MSMEs must possess PAN and GSTIN.
An enterprise can obtain only one Udyam Registration for any number of units/activities including manufacturing or service or both.
In case an enterprise is already registered as an Udyam with PAN, any deficiency of information for previous years when it did not have PAN shall be furnished and accepted on self-declaration basis.
Whoever intentionally misrepresents or attempts to suppress the self-declared facts and figures appearing in the Udyam Registration or updation process shall be liable to such penalty as specified under section 27 of the Act.
On successful registration, the enterprise shall be assigned a permanent identity number called ‘Udyam Registration Number’. Thereafter, the details furnished by the enterprise shall be verified and validated with PAN and GSTIN details. On completion of registration process, the enterprise shall be issued an e-certificate called ‘Udyam Registration Certificate’ which can be downloaded from the portal.
Registration of Existing Enterprises
All existing enterprises registered under EM-Part II or UAM shall also be required to obtain Udyam Registration up to 31.3.2021, whereafter the existing registration shall lapse. Enterprises registered with any other organization under Ministry of MSME shall also be required to obtain Udyam Registration.
All existing enterprises registered till 30.6.2020 shall be re-classified in accordance with revised criteria w.e.f. 1.7.2020.
Updation of Information on Udyam Registration Portal
An enterprise having Udyam Registration Number shall be required to update its information on the portal, including the details of the ITR and the GST Return for the previous financial year and such other details as may be required, on self-declaration basis. Failure to do so within the period specified in the online Udyam Registration portal shall render the enterprise liable for suspension of its status.
Re-classification and its Effect
On the basis of information furnished or gathered from the ITR or GST Return furnished by an enterprise, its classification shall be updated. In case of graduation/upscaling (from lower to higher category) or reverse-graduation /downscaling (from higher to lower category) of an enterprise, an intimation thereof shall be sent to the enterprise about the change in the status.
In case of graduation/upscaling, an enterprise will maintain its prevailing status till expiry of one year from the close of the year of registration.
In case of reverse-graduation / downscaling, the enterprise will continue in its present category for the ensuing financial year and the changed status will be effective from the next financial year.
Privileges offered to MSMEs under the Act
The MSMED Act, 2006 confers following privileges to MSMEs:
1) Buyer’s Liability to make Timely Payment for Goods and Services
In order to ensure timely receipt of payment for their goods and services by MSMEs, section 15 casts an obligation upon the buyer of any goods or services, to make payment to the supplier MSME, by the specified date as under:
- (a) Where there is an agreement in writing: On or before the date agreed upon between them, which shall, in no case, exceed 45 days from the day of acceptance or the day of deemed acceptance.
- (b) Where there is no agreement: Before the day following immediately after the expiry of 15 days from the day of acceptance or day of deemed acceptance.
For this purpose, ‘day of acceptance’ means—
- (i) the day of actual delivery of goods or rendering of services, or
- (ii) where the buyer makes an objection (in writing) within 15 days from the delivery of goods or rendering of services, the day on which the supplier removes such objection.
Further, ‘day of deemed acceptance’ means the day of actual delivery of goods or rendering of services, where the buyer makes no written objection within 15 days from such day.
2) Interest on Delayed Payment
In terms of section 16, in case a buyer fails to make payment by the specified date as required under Section 15, he shall be liable to pay interest on the impugned amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, for the period of delay at a rate three times the bank rate compounded monthly, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force.
Besides, as per section 23, any such interest paid or payable by the buyer shall not be treated as a deductible expenditure in computing his taxable income for the purposes of Income Tax Act, notwithstanding anything contained in the Income-tax Act, 1961.
3) Dispute Resolution
As per section 18, any dispute relating to amount payable for any goods or services, and/or any interest thereon, may be referred by any party to the Micro and Small Enterprises Facilitation Council for conciliation in the matter. The Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such a dispute as if the conciliation was initiated under Part III of that Act. If conciliation process fails, the Council shall take up the dispute for arbitration either itself or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act. The dispute should be resolved within a maximum period of 90 days from the date of its reference.
Notwithstanding anything contained in any other law for the time being in force, the Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.
4) Other Promotional Measures
Sections 9 to 14 of the Act, cast an obligation upon the Central Government, State Government and the Reserve Bank of India to undertake measures for promotion, development and enhancement of competitiveness of MSMEs. These measures may relate to facilitating skill development, provisioning for technological upgradation, marketing assistance, credit facilities, preferential procurement of goods and services from MSMEs, constitution of special fund etc. The important measures taken in this regard are briefly discussed below:
(a) Public Procurement Policy for the Micro and Small Enterprises (MSEs) Order, 2012
This order which came into force w.e.f. 1.4.2012, provides for following measures:
- Mandatory procurement of goods and services from micro and small enterprises, of minimum 25% of total annual purchases, by every Central Ministry/Department or Public Sector Undertaking.
- A sub-target of 20% (i.e. 5% out of 25%) shall be earmarked for procurement from the MSEs owned by the Scheduled Caste or Scheduled Tribe entrepreneurs.
- Out of the 25% target procurement, 3% shall be earmarked for procurement from MSEs owned by women.
- In case of tenders, where L1 price is from someone other than a MSE, participating MSEs quoting price within price band of L1+15% shall also be allowed to supply at least 25% of the total tendered value at L1 price.
- Central Ministries/Departments or PSUs shall organize Vendor Development Programmes, or Buyer-Seller Meets or enter into Rate Contracts with MSEs for a specified period in respect of periodic requirements.
- Annual Plan for procurement from MSEs to be uploaded on official websites by Ministries/Departments or PSUs.
- To reduce transaction cost of doing business, MSEs to be provided tender sets free of cost and exempted from payment of earnest money.
- Reservation of 358 items for exclusive procurement from MSEs.
- In order to encourage Startup MSEs (startups recognized by Department for Promotion of Industry & Internal Trade), condition of prior turnover and prior experience with respect to MSEs may be relaxed subject to meeting of quality and technical specifications. [Min. of MSME, Policy Circular No. 1(2)(1)/2016-MA, dated 10.3.2016 read with M.F. Letter no. F. 18/14/2020-PPD, dated 29.6.2020]
However, the Policy does not cover any trading activities by MSEs. Besides, an MSE unit will not get purchase preference over another MSE unit.
[Min. of MSME Order No. S.O.581(E),dated 23.3.2012 as amended up to S.O. No. 5670(E), dated 9.11.2018]
(b) Extending Non-Tax Benefits of Original Category
If any MSME graduates to a higher category from its original category or beyond the purview of the Act, it shall continue to avail all non-tax benefits of its original category for a period of three years from the date of such graduation.
[Min. of MSME Notification No. S.O.3322(E), dated 1.11.2013]
(c) MSME Fund
MSME Fund set up by the Central Government, to be utilized exclusively for the measures facilitating MSMEs.
[Min. of MSME Notification No. S.O.3356(E), dated 28.10.2016]
(d) Trade Receivables Discounting System (TReDS) Platform
All companies registered under the Companies Act, 2013 having a turnover of more than Rs. 500 crores and all Central Public Sector Enterprises have been instructed to get themselves onboarded on the Trade Receivables Discounting System platform set up as per the notification of the RBI. The TReDS platform facilitates quick access to the financing/discounting of trade receivables of MSMEs through multiple financiers (i.e. banks, NBFC-Factors and other financial institutions). MSMEs may onboard TReDS platform without payment of any fee.
[Min. of MSME Notification No. S.O.5621(E), dated 2.11.2018]
(e) Return of Delayed Payments
All companies making payments to micro and small enterprises for supplies of goods or services, beyond 45 days from the date of acceptance or the deemed date of acceptance of goods or services, are required to furnish a half-yearly return to the Ministry of Corporate Affairs giving details of amounts of payments due and the reason for the delay.
[Min. of MSME Notification No. S.O.5622(E), dated 2.11.2018]
New Facilitation Measures
Under the Atmanirbhar Bharat package announced by the Government, several new initiatives have been taken to promote the MSME sector. These are briefly as under:
(1) Guarantee free and collateral free loans: Guarantee free and collateral free loans amounting to Rs. 3.00 lakh crores with a moratorium of 12 months on payment of principal, is expected to benefit about 45 lakh MSME units. This will help in resumption of business activity and safeguard the employment of people.
(2) Disallowance of Global Tender Enquiries up to Rs. 200 Crores: In all Government procurement, there would be no global tender enquiry for procurements up to Rs. 200 crores. Necessary amendments in the General Financial Rules, 2017 have been made for this purpose. This will help domestic companies in general and the MSMEs in particular, as these units find difficult to withstand the pressure of undue competition from foreign companies.
(3) E-Marketing Linkages: Since physical trade fairs and exhibitions would be difficult in the present circumstances, promoting e-marketing linkages would go a long way in helping the MSME sector.
(4) Settlement of Receivables within 45 Days: All Government Departments and the CPSEs have been directed to pay the receivables to MSMEs within 45 days, thereby easing the working capital situation of the MSMEs.
(5) Mandatory GeM Payment within 10 Days & 1% Penal Interest: For all government procurements under rule 149 of General Financial Rules, 2017, that is, on Government e-Marketplace (GeM), government buyers are mandated to make payments within 10 calendar days after generation (including auto generation) of Consignee Receipt and Acceptance Certificate (CRAC) on GeM. In case payment is delayed beyond the prescribed timeline, the buyer organization will be required to pay penal interest @ 1% p.m. for the delayed payment period. [M.F. O.M. no. F. 6/18/2019-PPD, dated 3.7.2020]
(6) Restructuring of Standard MSME Loans up to Rs. 25 Crores: Restructuring of existing loans to MSMEs classified as ‘standard’ (as on 1.3.2020), has been allowed without a downgrade in the asset classification, subject to specified conditions including, inter alia, that the aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower does not exceed Rs. 25 crore (as on 1.3.2020) and the restructuring is implemented by 31.3.2021. [RBI Cir. No. DOR.No.BP.BC/4/21.04.048/2020-21, dated 6.8.2020]
(7) 25% Reduction in TDS/TCS Rates & Immediate Refunds: Reduction in TDS/TCS rates by 25% and immediate release of refunds will also improve the liquidity position of MSMEs. Besides, extension of various income-tax compliance dates will allow MSMEs to peacefully focus on their business and productivity for atleast few months.
(8) Champions Control Rooms as Single Window Systems: The Champions Control Rooms functioning in various offices of the Ministry of MSME including Development Institutes (MSME-DI) and District Industries Centres shall act as Single Window Systems for facilitating the registration process (including obtaining Aadhaar Number and Udyam Registration) and further handholding the MSMEs in every possible manner.
Conclusion
The existing as well as the new facilitation measures announced for the MSMEs, envisage to extend both policy and procedural support for the MSMEs enabling them to adopt newer technologies and innovations, to withstand competition both at domestic and global level, to achieve higher productivity and to contribute in a significant way in the evolvement of new self-reliant and vibrant India.
MSMEs are bound to emerge as the largest contributor in India’s economic growth and the champions of self-reliant India.