Micro, Small, and Medium Enterprises in India – An Explainer

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(For the latest government notification on MSME classification and tax assessment and compliance, please read our article here, dated July 3, 2020.)

India’s Micro, Small, and Medium Enterprises (MSMEs) base is the largest in the world after China.

The sector provides a wide range of services and is engaged in the manufacturing of over 6,000 products – ranging from traditional to hi-tech items.

Given the government of India’s ‘Make in India’ push, along with a push to attract greater FDI, the Indian MSMEs sector is poised for rapid growth and integration with major global value chains.

As per the official estimates, there are about 63.05 million micro industries, 0.33 million small, and about 5,000 medium enterprises in the country.

The state of Uttar Pradesh has the largest number of estimated MSMEs with a share of 14.20 percent of the total MSMEs in the country. West Bengal comes as close second with a share of 14 percent, followed by Tamil Nadu and Maharashtra at eight percent.

The spread of COVID-19 in India and consequent lockdown has stressed national economic growth and put financial pressure on businesses. In light of this, the government has announced changes to the way it will categorize MSMEs.

How do you qualify as an MSME in India?

The definition of who qualifies as a micro, small, and medium-sized enterprise (MSME) in India has changed based on investment and turnover. The new definition will apply to both manufacturing and services MSMEs in India.

This was announced in the first tranche of Finance Minister Nirmala Sitharaman’s COVID-19 special economic packageAtmanirbhar Bharat Abhiyan or Self-Reliant India on May 13, 2020

The new definition expands the types of businesses who can now avail MSME status and enjoy linked benefits.

Revision to definition announced on May 13, 2020

  • Enterprises with investment up to INR 10 million (US$132,521), turnover up to INR 50 million (US$662,715) are defined as micro units. 
  • Enterprises with investment up to INR 100 million (US$1.3 million), turnover up to INR 500 million (US$6.62 million) are defined as small units. 
  • Enterprises can qualify as medium-sized units if they have investment up to INR 200 million (US$2.6 million), turnover up to INR 1 billion (US$13.24 million). 

Uptil now The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, had governed the coverage and investment ceiling of MSMEs in India and the Act recognized two categories of MSMEs – manufacturing and services. Details on how the latest changes will be reflected in legal amendments is now awaited.

MSME-India-Classification-May-2020

COVID-19 special relief announced in first tranche of economic package on May 13, 2020: Measures that will help MSMEs

As the finance minister, Nirmala Sitharaman, is expected to announce other aspects of the economic package this week, foreign investors should track announcements released on the websites of the corporate affairs ministry, MSME ministry, and the finance ministry to stay updated. Consult with our India offices so we can help your business navigate the new changes and avail of incentive schemes and regulatory relaxations.

  • Collateral free loan of INR 3 trillion (US$39.84 billion) for MSMEs with a turnover up to INR 1 billion (US$13.24 million). This will benefit 4.5 million units so that they can resume work and save jobs. This scheme can be availed till October 31, 2020.
  • For stressed MSMEs, subordinate debt provision of INR 200 billion (US$2.65 billion) has been announced for 200,000 MSMEs. 
  • Equity infusion worth INR 500 billion (US$6.6 billion) through special fund for MSMES that have viable operations but need handholding due to COVID-19. 
  • A fund of funds with corpus of INR 100 billion (US$1.3 billion) will be set aside to assist the capacity expansion of these units, including enabling them to get listed on the market should they choose that. 
  • Global tenders not allowed for government procurement of up to INR 2 billion (US$26.5 million).
  • To compensate for cancelled trade fairs, the Indian government will set up online market linkages.
  • A reduction of 25 percent on the Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) from May 14, 2020 to March 31, 2021. 
  • The deadline for all income tax return filings will be extended from July 31, 2020 to November 30, 2020. 
  • The Vivaad se Vishwas scheme, addressing disputes on indirect tax payments, has been extended till December 31, 2020. 
  • All pending refunds to charitable trusts and non-corporate businesses and professions, including proprietorship, partnership, LLP and co-operatives to be issued immediately.
  • Statutory provident fund contributions for all private sector organizations and their employees covered by the EPFO will be reduced to 10 percent from 12 percent.
  • Tax audit deadline from September 30, 2020 to October 31, 2020.

What are the opportunity areas for MSMEs in India?

Telecommunications

  • Domestic manufacturing of low-cost mobile phones, handsets, and devices;
  • Manufacturing of telecom networking equipment, including routers and switches;
  • Manufacture of base transceiver station equipment;
  • Mobile customer data analytics – services oriented toward analytical solutions; and
  • Development of value-added services

Healthcare

  • Manufacturing of personal protective equipment (PPE) and face masks, as the COVID-19 pandemic has fundamentally changed social behavior, public health and hospital needs, and created new demand;
  • Manufacturing of low-cost medical devices, and medical accessories such as surgical gloves, scrubs, and syringes;
  • Low-cost surgical procedures to reduce the cost of healthcare;
  • Telemedicine; and
  • Diagnostic labs.

Electronics

  • Domestic manufacturing of low-cost consumer electronics, consumer durables;
  • Nano-electronics and microelectronics;
  • Electronic Systems Design and Manufacturing including semiconductor design, electronic components design and hi-tech manufacturing under India’s ‘National Electronics Mission; and
  • Strategic electronics, as the government is keen on encouraging the domestic manufacturing of products needed by the security forces.

Other areas that offer opportunities for MSMEs include information technology, pharmaceutical, chemical, automotive, renewables, gems and jewelry, textile, and food and agriculture.

What are the benefits available?

The federal government of India has initiated various schemes and measures to allow MSMEs easier access to funds, to modernize the sector, and make it more competitive in the global market.

These include schemes ensuring the quality of products, especially those meant for exports, technology up-gradation, incubation, credit-linked capital subsidy, and UID linked schemes which facilitate ease of receiving a subsidy.

Some of the other concessions available to the MSMEs are listed below:

  • Collateral free loans from banks;
  • 50 percent subsidy on patent registration;
  • 1 percent exemption on the interest rate on overdraft;
  • Concession on power utility bills;
  • Eligible for industrial promotion subsidy;
  • Protection against delayed payments; and
  • Reimbursement of ISO certification charges.

How to register as an MSME in India?

To encourage MSME registration in India, the ministry of MSME has notified a simple one-page registration form called ‘Udyog Aadhaar Memorandum’.

The entrepreneurs in the MSME sector can file the form online, and instantly get a unique Udyog Aadhaar Number (UAN). The information sought includes personal Aadhar number, industry name, address of the business, bank account details, and other general information. Applicants can provide this information on a self-certification basis and do not need any supporting documents.

Businesses must note that they must deregister their MSME if:

  • The investment limit increases more than the limit prescribed under the Act; or
  • If the registered enterprise starts manufacturing any new item or items that require an industrial license or another kind of statutory license.

Background

In 2019, the Union Cabinet of India approved changes in the classification of MSMEs, which were also invoked in the 2020 Union Budget. According to the revisions, both manufacturing and services sectors would be classified based on the amount of annual turnover instead of the investment limits.

The newly announced changes as of May 13, 2020 deviate from those proposals and includes both investment and turnover criteria. It also ensures that the classification thresholds are the same regardless if the business is in the manufacturing or services sector.

Readers may write to india@dezshira.com for business support in India. 

Editor’s note: This article was first published on November 1, 2018, amended on September 4, 2019, and revised on May 14, 2020 in keeping with the latest developments.


About Us

India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for business support in India.

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