The Chartered Accountant•September 2020•pp. 72–77 (Journal pp. 344–349)
CA. Naresh Kumar Kabra
The author is a member of the Institute. He can be reached at eboard@icai.in.
“Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly growing and dynamic sector of the Indian economy over the last decade. India has more than 6 crore units falling under MSME categories which contribute approximately 29% to the country’s GDP. These enterprises not only play a crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialisation of rural and backward areas, thereby, reducing regional imbalances, and assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country. Read on…”
Legislative Background & Atmanirbhar Bharat
The Micro, Small and Medium Enterprises Development (MSMED) Act was notified in 2006 to address policy issues affecting MSMEs as well as the coverage and investment ceiling of the sector.
In 2015, the Modi Government introduced the new Udyog Aadhaar Scheme under the campaign of ‘Make in India’ to make the process of registration easy with the single requirement of one Aadhaar for one enterprise.
Then, after 14 years, the much-expected change in the definition of MSME was brought to reality by the Modi Government under the “Atmanirbhar Bharat Package”. Also, a new procedure of Udyam Registration was introduced which actuated the reclassification for all MSME enterprises existing on 30th June 2020.
The article discusses and compares the changes which have been made through the Notification S.O. 2119(E) dated 26th June, 2020 in the MSMED Act, 2006 and also explains the new composite method of classification of enterprises.
A. Role of MSMEs in the Indian Economy
I. Total Number of Registered Enterprises (Source: Annual Report of MSME FY2019)
Total No. of Registered Enterprises
Micro Enterprises
Small Enterprises
Medium Enterprises
6.33 Crores
6.30 Crores (99.40%)
3.31 Lakhs (0.52%)
0.05 Lakhs (0.007%)
II. Total Number of Registrations Done in FY2020 (Source: Data Shared by Mr. Nitin Gadkari)
Total Registrations
Micro Enterprises
Small Enterprises
Medium Enterprises
25.12 Lakhs
22.06 Lakhs (87.82%)
2.95 Lakhs (11.74%)
0.11 Lakhs (0.44%)
III. Employment Generation
Over 11.10 Crores Indians were employed in micro, small or medium businesses across India in financial year 2019. (Source: Annual Report of MSME FY2019)
IV. Contribution in Exports
The share of MSME related products in total exports from India during FY 2018-19 was 48.10%.
B. Statutory & Economic Benefits to Registered MSMEs
Binding Payment Timelines: Binds the buyer to pay the SME supplier within the statutory due date.
Penal Interest on Delayed Payment: Provides for penal interest statutorily in case the buyer defaults in making payment and provides an efficient statutory mechanism for expeditious resolution of supply and payment related disputes.
75% Recovery Pre-Deposit: Ensures SME supplier can recover at least 75% of the due amount along with interest for disbursal of finance to keep it viable in case the buyer appeals in court.
Collateral-Free Credit: The Government of India has made collateral-free credit available to all small and micro business sectors up to certain limits.
Exclusive Government Tenders: Certain Government tenders are reserved exclusively for MSMEs.
50% Patent Subsidy: 50% subsidy to enterprises registered as MSME for patent registration on application to the respective ministry.
Overdraft Interest Concession: Registered MSMEs can avail an interest benefit of 1% on Over Draft (OD) facilities (subject to individual bank policy).
Electricity Concession: Registered MSMEs can avail concessions on their electricity bills.
Specific and One-time Relief Measures due to COVID-19:
₹ 3 Lakh Crores: Collateral-free automatic loans for businesses, including MSMEs.
₹ 20,000 Crores: Subordinate debt for stressed MSMEs.
₹ 50,000 Crores: Equity infusion for MSMEs through Fund of Funds (FoF).
C. Change in Definition of MSME: Comparative Overview
Previous MSME Classification (Criteria: Investment in Plant & Machinery or Equipment)
Classification
Micro
Small
Medium
Manufacturing Enterprise
Investment < ₹ 25 Lakhs
Investment < ₹ 5 Cr.
Investment < ₹ 10 Cr.
Service Enterprise
Investment < ₹ 10 Lakhs
Investment < ₹ 2 Cr.
Investment < ₹ 5 Cr.
Revised MSME Classification (Updated up to 28-06-2020 – Composite Criteria)
Classification
Micro
Small
Medium
Manufacturing & Services (Unified)
Investment < ₹ 1 Cr. AND Turnover < ₹ 5 Cr.
Investment < ₹ 10 Cr. AND Turnover < ₹ 50 Cr.
Investment < ₹ 50 Cr. AND Turnover < ₹ 250 Cr.
D. Now there will be no “Udyog Aadhaar Registration”. The same is replaced by “Udyam Registration” w.e.f. 1st July 2020.
Change in Method of Calculation of Value of Investment in Plant & Machinery
Particulars
Previous Manner of Calculation
New Manner of Calculation
Related Notification
S.O. 1722(E) dated October 5, 2006
S.O. 2119(E) dated June 26, 2020
Meaning of Plant & Machinery or Equipment
No such clear meaning provided earlier.
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). (Expands scope: vehicles, computers and peripherals, books etc. are considered as P&M under Income Tax Rules).
Value to be Taken From
Documents relied upon:
(1) Copy of purchase invoice; or
(2) Gross block in audited accounts; or
(3) CA Certificate regarding purchase price. (As per RBI Notification RBI/2017-18/21)
Existing Enterprises: Value taken directly from ITR of previous years filed under the Income Tax Act, 1961 (Written Down Value – WDV).
New Enterprises (no prior ITR): Value based on self-declaration of promoter (ends after 31st March of FY in which it files first ITR). *Purchase (invoice) value, first hand or second hand, excluding Goods and Services Tax (GST).
Exclusions from Value
Cost of items specified in Explanation I to Section 7(1) as per S.O. 1722(E) dt. October 5, 2006.
Cost of items specified in Explanation I to Section 7(1) excluded: Pollution Control, Research & Development, Industrial Safety Devices & such other items as may be specified. (Old notification S.O. 1722(E) is superseded).
Basis of Criteria of Enterprises
One Udyog Aadhaar Registration was available to one PAN.
All units with GSTIN listed against the same PAN shall be collectively treated as one enterprise. Turnover and investment figures for all such entities shall be aggregated to decide classification.
E. New Criteria: Calculation of Turnover of the Enterprise
Previous method: Calculation of turnover was not required in previous MSME categorisation. New manner of Calculation: Turnover is calculated as follows:
Particulars
In case of Existing Enterprises
In case of New Enterprises
Value of Turnover Taken From
ITR and GST Returns
Self-declaration Basis (upto 31st March, 2021; thereafter PAN and GSTIN mandatory).
Exclusions from Turnover
Export of Goods or services or both
Export of Goods or services or both
F. Validity of Enterprises (Udyog Aadhaar) Registered till 30th June 2020
Validity Period: All existing Enterprises registered prior to 30th June 2020 remain valid till 31st March 2021.
All existing enterprises registered under EM Part-II or UAM shall register again on the Udyam Registration portal on or after the 1st day of July, 2020 which will be reclassified according to this notification.
G. Udyam Registration Process
The form for registration shall be as provided on the Udyam Registration portal.
There will be no fee for filing Udyam Registration.
Aadhaar number shall be mandatory for Udyam Registration.
Nature of Concern
Document Required
A proprietorship firm
Aadhaar Number of Proprietor
A partnership firm
Aadhaar Number of Managing Partner
A Hindu Undivided Family (HUF)
Aadhaar Number of Karta
A Company / LLP / Cooperative Society / Society / Trust
GSTIN and PAN along with Aadhaar number of the Concern itself
In case an enterprise is duly registered as an Udyam with PAN, any deficiency of information for previous years when it did not have PAN shall be filled up on self-declaration basis.
Only One Registration: No enterprise shall file more than one Udyam Registration, provided that any number of activities including manufacturing or service or both may be specified or added in one Udyam Registration.
H. Updation of Information on Portal & Reclassification
An enterprise having Udyam Registration Number shall update its information online in the Udyam Registration portal, including the details of the ITR and the GST Return for the previous financial year and such other additional information as may be required, on self-declaration basis.
Failure to update the relevant information within the period specified in the online Udyam Registration portal will render the enterprise liable for suspension of its status.
Based on the information furnished or gathered from Government sources including ITR or GST return, the classification of the enterprise will be updated.
In case of graduation (from a lower to a higher category) or reverse-graduation (sliding down to lower category) of an enterprise, a communication will be sent to the enterprise about the change in status.
I. Validity of Old Category and Applicability of Reclassified Category
Particulars
Details
Validity of Old Category
New Category Effective
Graduation (Upward Classification, e.g. Small to Medium)
Due to change in terms of investment in P&M or equipment or turnover or both (e.g. Turnover exceeding ₹ 50 crore).
Till expiry of one year from the end of the year of registration (31st December 2021).
From subsequent Year after expiry of one year from close of year of registration (1st January 2022).
Reverse Graduation (Downward Classification, e.g. Small to Micro)
Due to change in terms of investment in P&M or equipment or turnover or both (e.g. Investment < ₹ 1 Cr. and Turnover < ₹ 5 Cr.).
Closure of the Financial Year in which change took place (31st March 2021).
From 1st April of the financial year following the year in which change took place (1st April 2021).
Frequently Asked Questions (FAQs)
Question / Doubt
Answer / Clarification
Applicability of New Udyam Registration
On or after 01.07.2020
Validity of Udyog Aadhaar
Till 31.03.2021
How value of Plant & Machinery will be taken – Cost or WDV?
WDV (Written Down Value)
Exclusions from Plant & Machinery
As per Section 7(1) of MSMED Act, the following will be excluded:
• Pollution control,
• Research and development, and
• Industrial safety devices,
• As specified by notification (Previous notification S.O. 1722(E) dt. October 5, 2006 not in force).
Inclusions in Plant & Machinery
As per the latest notification of MSME, the Income Tax Rules, 1962 has to be referred for the meaning of P&M. Due to this, components like First Insurance, Freight, Installation Charges, Bank Charges etc. will now be part of the cost which were earlier excluded under S.O. 1722(E).
How value of Plant & Machinery will be linked with ITR?
It will be done through feeding of data on portal for getting new Udyam Registration.
How Turnover will be calculated?
Turnover (from GST returns) of all GSTIN linked with one PAN has to be aggregated and also linked with turnover as per ITR.
Is Trader eligible to be MSME?
No. Trading activity is neither a manufacturing activity nor a service activity, hence cannot be registered as MSME.
Our Role w.r.t. these new MSME changes (Chartered Accountants)
• Internal Audit cum consultancy services
• Bank Audit
• Tax Auditors
• Form MSME – Filing with MCA on Half-Yearly Basis – Verification of status of vendors
Allowability of Interest paid by Buyer to Seller (MSME) under IT
Not allowed as expenses under the Income Tax Act, 1961. Also, the same has to be reported under the Tax Audit Report (As per section 23 of MSMED Act, 2006).
