How India Defines MSMEs: New Eligibility Rules Come into Effect
On June 26, 2020, the Ministry of Micro, Small and Medium Enterprises notified new investment and turnover criteria for enterprises in India to classify under the category of micro, small and medium enterprises (MSMEs).
The MSME Ministry also notified the procedure of registration via the Udyam Registration Portal, which came in effect July 1, 2020. The official notification dated June 26, 2020 on the changes may be accessed here in Hindi and English. Previous MSME guidelines including those dated June 1, 2020 – will no longer apply.
Moreover, the new classification criteria do not apply to trading companies – only to firms in the manufacturing and services sectors.
How to register as an MSME under the new notification
Besides notifying the threshold levels, the government also announced new registration procedures.
Enterprises that seek to classify under the MSME category need to obtain an Udyam Registration Number (URN) by registering themselves on the Udyam Registration Portal. Each enterprise will be assigned a single URN although they may be engaged in multiple manufacturing or service activities or both.
MSMEs that have registered under the Entrepreneur Memorandum-Part-II or Udyog Aadhaar Memorandum will also need to register again – on the Udyam Registration Portal. The facility is open starting July 1, 2020.
Existing MSMEs (registered till June 30, 2020) will now be re-classified based on the government’s latest threshold criteria.
However, the existing registration of MSME enterprises before June 30, 2020 – will stay valid until March 31, 2021.
Tax calculation and assessment
The new MSME classification will be linked with the income tax return (ITR) and the Goods and Services Tax Identification Number (GSTIN) of the business. The definition of ‘plant and machinery or equipment’ is as per the Income Tax Rules, 1962 under the Income Tax Act, 1961.
It means all tangible assets of the enterprise, with the exception of land, building, furniture, and fittings.
Investment in plant and machinery or equipment will be calculated based on the ITR filed for previous years.
In case of a new enterprise, where no prior tax return has been filed, the investment will be based on the self-declaration of the promoter of the enterprise – for its first financial year only (“such relaxation shall end after March 31 of the financial year in which it files its first ITR”).
The export of goods, services, or both shall be excluded when calculating the MSME’s turnover. Further, the turnover and export earnings of the enterprise will be linked to the IT Act or the Central Goods and Services Act, 2017 and the GSTIN.
It is important to note that if more than one enterprise has listed their GSTIN against the same Permanent Account Number (PAN) – all such enterprises will be treated as one unit when calculating the turnover and investment for MSME eligibility assessment and tax purposes.
Annual compliance – updating the entity’s information every year on the Udyam Portal
A URN-linked enterprise has to update its information every year on the Udyam Registration Portal. The information includes details of the ITR and GST returns filed for the previous financial year and other additional details – on a self-declaration basis.
If the enterprise does not update this information during the specified period – their status as an MSME will get suspended.
What happens if the MSME’s status changes based on investment and/or turnover?
Meanwhile, the government will be able to track any changes in the classification of the enterprise based on their income tax or GST returns. A notification will be accordingly issued if there is any change in the enterprise’ status.
If an upward or downward change has occurred – a transition period will be triggered.
The following transition process is stated in the official notification:
- In case of an upward change in terms of investment in plant and machinery or equipment or turnover or both, and consequent re-classification, an enterprise will maintain its prevailing status for one year – from the close of the year of registration.
- In case of downward changes, whether it is due to re-classification or actual changes in investment in plant and machinery or equipment or turnover or both, the enterprise will continue in its present category till the closure of the financial year. It will be given the benefit of the changed status only with effect from – April 1 of the financial year that follows the year in which such change took place.
Is it mandatory for MSMEs to register on the new Udyam Portal?
No, registering on the Udyam Registration Portal is voluntary. However, if the enterprise wants to avail the benefits and exemptions available to the MSME sector, they are mandated by the MSME Ministry to get registered on the Udyam Registration Portal on or after July 1, 2020.