Registrations of entities under Micro, Small and Medium enterprises (“MSME”) is increasing every day due to various benefits being offered by the government for MSMEs such as Loan at subsidies rate of interest, subsidies, secured payment from corporates etc.
Provisions of MSME are prevailing since 2006 and basis of classification of an entity under MSME and other provisions are prevailing since then without any modifications.
Considering the current scenarios, the government has made some changes under MSME Act vide Notification No. [F. No. 21(5)/2019-P&G/Policy (Pt-IV)] dated 26th June, 2020 such as criteria of classifying of an entity under MSME, manner of computation of turnover and investment for classification, process of registration under MSME etc.
Those who have MSME registration prior to 30th June 2020, there MSME registration shall remain valid only up to 31st March, 2021, i.e., after this date it is mandatory for each and every enterprise to register itself on Udyam portal.
In this article, a detailed discussion has been carried out of impact of amendments under MSME Act such as what is the process of change in status of an entity under MSME during the year due to change in criteria of classification, what steps should be followed to change status, consequences of not changing status etc.
Following are the gist of provisions given under notification to be made effective from 1st of July 2020..
1. Amendment in basis of Classification of Enterprises under MSME
Upto 30th June, 2020, different classification criteria were provided for Manufacturing entities and Service entities and also classification was based solely on the quantum of investment made in Plant and machinery.
With effect from 1st July, 2020, differentiation between Manufacturing entities and service entities has been done away and single criteria of classification has been provided for both nature of entities. Further, the basis of classification has been changed solely from the quantum of investment made in Plant and Machinery or equipment and a new criteria of turnover of enterprise has also been added.
Following are the classification of an enterprise based on Investment and Turnover:
| CLassification under MSME | INVESTMENT IN PLANT AND MACHINERY | TURNOVER OF ENTERPRISES |
| Micro Enterprises | Not exceeding INR 1 Crore | Not exceeding INR 5 crores |
| Small Enterprises | Not exceeding INR 10 Crores | Not exceeding INR 50 Crores |
| Medium Enterprises | Not exceeding INR 50 Crores | Not exceeding INR 250 Crores |
2. What is the method of Calculation of Investment in Plant and Machinery or Equipment
Upto 30th June, 2020, while computing value of investment in Plant & Machinery, while computing investment in plant and machinery, “Original Cost” was to be considered, i.e., without reducing depreciation. Further, investment in various machineries were excluded such as Tools, jigs, dies, moulds and spares, pollution control equipment, research and development equipment etc.
However, with effect from 1st July, 2017, following new method is prescribed for computation of investment in plant and machinery:
- For the purpose of Calculation of investment made in plant and machinery (P&M), Income Tax Return filed for earlier years shall be referred under the Income Tax Act, 1961. Therefore, net block (after depreciation) of Plant and machinery as declared in ITR shall be considered as investment made in plant and machinery.
- Considering the basis given for computation of investment, it can be concluded that investment made till closure of earlier year is to be considered for determining status of an enterprise.
- In case of new enterprise, where no Income Tax return is available for earlier year, the investment will be based on self-declaration of the promoter of the enterprise. Such self-declaration shall remain valid till 31st march of the financial year in which it files the first ITR.
- Expression “Plant and machinery or equipment” shall have the same meaning as defined under Income Tax Act,1961 and shall include all tangible assets. However, following assets are not covered:
- Land & building,
- Furniture and
- Fittings.
- In case of newly formed enterprises, where ITR is not available, while computing value of plant and Machinery or Equipment on self-declaration basis, invoice value shall be taken in account excluding GST (Goods and Services Tax).
- Further, for the purpose of calculation of amount of investment in plant and machinery, following components shall not be included, as given under Explanation I to section 7(1) of the Act,:
- Cost of pollution control;
- Research & Development;
- Industrial safety devices,
- such other items as may be specified.
Revised method of computation can cause a major downward shift in status of an enterprise as earlier original cost of P & M was being considered. However, now the depreciated value of assets is to be taken.
3. How to Calculate Turnover for classification of nature of MSME
Value of turnover is the new basis added for classification of an enterprise under MSME. Following is the method of computation of turnover:
- Value of turnover shall be computed based on Information given in Income Tax returns or the Goods and Services Tax (GST) return under all GSTINs.
- If an enterprise has multiple GSTINs listed against the same PAN (Permanent Account Number) then it will be seen as one enterprise and aggregate turnover and investment shall be taken for all GSTINs for the purpose of determining status as micro, small or medium enterprises.
- While computing turnover, the value of Export of goods or services or both shall be excluded. Therefore, if a company is majorly involved in exports then it can still maintain its status under MSME and avail the benefits.
- Enterprises which don’t have PAN then their turnover figures will be taken on the basis of self-declaration for a period up to 31st March 2021. PAN and GSTIN shall be mandatory after 31st March, 2021. In case of non-availability of PAN and GSTIN, registration under MSME shall stand discontinued.
4. What is the effect of change in status of an enterprise due to revised classification rules
Change in criteria of classification and also change in method of computation of investment in plant and machinery may cause major change in status of an enterprise after 1st July, 2020. Following shall be the process of change of status of enterprise:
4.1 Unward change of status of enterprise
If under revised MSME provisions, threshold limit changes upward for either of the criteria, i.e. either for investment in plant & machinery or for Turnover, then such status of enterprise shall be removed from existing category and placed in the next higher category immediately.
e.g.
| Criteria | Investment in Plant & Machinery | Turnover | Status |
| Status as on 30th June, 2020 | – | – | Small Enterprise |
| Situation 1: 1st July, 2020 | INR 12 Crores | INR 48 Crores | Upgraded to the next higher category, i.e., Medium enterprise on 1st July, 2020 itself. |
| Situation-2: 1st July, 2020 | INR 1 Crore | INR 4 Crores | Shall remain under the same category of “Small enterprise” as neither of the threshold limit is exceeded. |
4.2 Downward change of status of enterprise
However, in case of reduction in investment or turnover cause downward change in status of enterprise then an entity shall not be placed in lower category unless it goes below the ceiling limit for both the criteria.
| Criteria | Investment in Plant & Machinery | Turnover | Status |
| Status as on 30th June, 2020 | – | – | Small Enterprise |
| Status as on 1st July, 2020 | INR 1 Crore | INR 25 Crores | Shall remain in same category as it has not gone below the ceiling limit for both the categories |
5. Process of registration under MSME
- Registration under MSME shall be done on “Udyam Registration Portal”- https://udyamregistration.gov.in/Government-India/Ministry-MSME-registration.htm
- For registration, AADHAAR number is a mandatory document. Aadhaar Number of following persons shall be required:
- In case of proprietorship firm: AADHAAR number should be of proprietor
- In case of partnership firm: AADHAAR number is needed of managing partner
- In case of Hindu Undivided Family (HUF): AADHAAR of the Karta.
- In case of company, LLP, Cooperative Society, Society or Trust, PAN and GSTIN is required
- No charges for registration are there.
- All information related to Turnover and investment can be given on a Self-declaration basis without uploading any documents.
- For enterprises which did not have PAN while filing an application for registration, may update information, not furnished earlier, on self-declaration basis.
- The registration on Udyam portal can be done for one time only. However, any number of activities including manufacturing or service or both can be added under single registration itself.
- On completion of registration process, an enterprise shall be referred as “Udyam” and it will be assigned a registration number known as “UDYAM REGISTRATION NUMBER (URN)”.
- E-certificate will be issued after the registration is completed.
- If anyone intentionally attempts to suppress or misrepresents any information or declaration then he shall be liable for penalty as specified under section 27 of the Act.
- In the case of the first conviction, fine which may extend upto INR 1,000; and
- In the case of any second or subsequent conviction, fine which shall not be less than INR 1,000 but may extend to INR 10,000.
6. Registration of Existing Enterprises
- Those who are registered previously under Entrepreneurs Memorandum (EM Part-II) /Udyog Aadhaar Memorandum (UAM) shall register themselves again on the Udyam Registration portal on or after 1st July 2020 as the EM part-II and UAM are not valid after it.
- All enterprises registered till 30th June, 2020, shall be reclassified on the basis of criteria given under this notification.
- Those who have MSME registered prior to 30th June 2020, there registration shall remainvalid only up to 31st March, 2021, i.e., after this date it is mandatory for each and every enterprise to register itself on Udyam portal.
- If any enterprise is already registered with any other organization under the Ministry of Micro, Small and Medium enterprises then it shall also be required to register itself under Udyam Registration.
7. Updating of information and transition period in classification
- Every enterprise having URN shall be required to update its details on Udyam Registration portal regarding date of filing of ITR and GST returns of previous Financial year and other additional information which is required to be updated.
- If any enterprise fails to make necessary updates on Udyam Registration portal within specified time then its registration shall be liable for suspension.
- Classification of enterprises shall be updated based on information gathered from various sources such as ITR or GST return.
- In case an enterprise is placed to higher category or placed to lower category, the communication will be sent to the enterprise about change of status.
- If there is upward change of enterprises due to change in investment or turnover then existing status of the enterprise will be maintained till expiry of one year from the close of the year of registration.
- If there is reverse graduation (sliding down to lower category e.g. any medium enterprise is to be reclassified as a small enterprise) of an enterprise still its current status shall prevail till the closure of the financial year. It will be given the benefit of changed status only with effect from 1st April of the next financial year.
8. Facilitation and grievance redressal of enterprises
- A single window system facility is provided for the registration process and further handholding the micro, small and medium enterprises in all possible manner. These single window systems includes:
- Offices of the Ministry of Micro, Small and Medium Enterprises.
- Champion Control Rooms
- Development Institutes (MSME-DI)
- District Industries Centers (DICs)
- The benefits of these single window system are available to person who is having problem in registering in Udyam Portal for any reason such as who does not have Aadhaar number then he may approach with the following documents:
- Aadhaar Enrolment Identity slip,or
- Copy of Aadhaar enrolment request,
- Bank Photo passbook, or
- Voter ID/ passport/ Driving License.
- The single window system facilitates the process of starting registration in Udhyam.
- If there is any discrepancy or the complaint against any enterprise registered with MSME then the general manager of concerned District Industry authorities shall undertake an enquiry for verification of the details of Udyam Registration.
- Thereafter, he shall forward the matter to the concerned person with the state government after issuing notice to the enterprise.
- After providing an opportunity of being heard to the enterprise, then based on the findings amendment may be suggested in registration details of MSME or its registration can be cancelled.
