Classification of Micro, Small and Medium Enterprises (MSMEs) and its associated benefits

– CA Smreti Agrawal

Union Ministry of Micro, Small and Medium Enterprises has issued a Gazette notification to pave way for implementation of the upward revision in the definition and criteria of MSMEs in the country. The new definition and criterion will come into effect from 1st July, 2020.

The Finance Minister said the definition is being changed because the low threshold limit in the old definition of MSMEs created a “fear” among them that if they expand further, they may lose the benefits that MSMEs enjoy. She said this has been “killing the urge to grow” among the MSMEs, adding that this has been a long-pending demand from the sector.

Existing and Revised Definition of MSMEs

Existing MSME Classification
Criteria : Investment in Plant & Machinery or Equipment
ClassificationMicroSmallMedium
Mfg. EnterprisesInvestment<Rs. 25 LacsInvestment<Rs. 5 CroresInvestment<Rs. 10 Crores
Service EnterpriseInvestment<Rs. 10 LacsInvestment<Rs. 2 CroresInvestment<Rs. 5 Crores
Revised MSME Classification
Composite Criteria : Investment And Annual Turnover
ClassificationMicroSmallMedium
Manufacturing & ServicesInvestment<Rs. 1 Crores And Turnover<Rs. 5 CroresInvestment<Rs. 10 Crores And Turnover<Rs. 50 CroresInvestment<Rs. 50 Crores And Turnover<Rs. 250 Crores

With this change in scope of definition of MSME units, more units are offered coverage under MSME Act, and can avail various monetary and non-monetary benefits available to such units:

  1. Priority Lending:

Whether you’re the proud owner of a cutting-edge technology business or a small scale enterprise employing rural women, credit and loan is something that your business will inevitably require for long- and short-term financing. Banks, by virtue of the directions issued by the Reserve Bank of India, have certain earmarked funds that have to mandatorily be given to MSME businesses.  Producing MSME certificate helps one to avail such loans on a priority basis with fewer hassles.

  1. Lesser Interest rates and Credit Linked Guarantee Scheme:

To meet the financing needs of MSME units, banks are specifically instructed to offer loans at interest rates lower than usual. Also, The Government of India has made collateral-free credit available to small and micro business sectors. This initiative facilitates funding to micro and small sector enterprises, even if they are not in a position to offer adequate collateral security. Such loans are guaranteed and covered by a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

  1. Market assistance from the government and Export Promotion

The marketing assistance scheme provides assistance to MSMEs for the following activities:

a)            Organisation of exhibitions abroad and participation in international exhibitions / trade fairs;
b)            Co-sponsoring of exhibitions organised by other organisations/industry associations/ agencies;
c)             Organising buyer-seller meets, intensive campaigns and marketing promotion activities.

  1. Subsidy on Patent or Trademark Registration

A hefty 50% subsidy is given to the Enterprise that has the certificate of registration granted by MSME. This subsidy can be availed for patent registration by giving application to respective ministry.

  1. Protection against delayed payments

Section 16 of the MSMED Act, states the buyer is liable to pay interest with the monthly rests to the supplier in case of non-payment or delayed payment. The interest is compounded at three times the bank rate notified by RBI.

The government has now allowed electronic filing of such applications / complaints.

  1. Government Stores Purchase Programme

In order to provide assistance and support to Micro & Small Enterprises (MSEs) for marketing their products, Government of India has been extending various facilities to the MSEs registered with National Small Industries Corporation (NSIC) under its Single Point Registration Scheme. They Include:

(i) Issue of tender sets free of cost;

(ii) Exemption from payment of Earnest Money;

(iii) Waiver of Security Deposit upto the Monetary Limit for which at the unit is registered;

(iv) Price Preference upto 15% over the quotation of large-scale units

In addition to the above facilities, 358 items are also reserved for exclusive purchase from MSE sector.

  1. Technology and quality up-gradation support to MSMEs

In order to enhance the cost-effectiveness and promote clean energy use in manufacturing, the government reimburses project costs towards these goals for MSME sector units and also expenditure incurred for the implementation of clean technology, preparation of audit report and subsidies for licensing products according to national and international standards.

Is an MSME Registration mandatory if you meet the threshold?

Although it is ideal to have an MSME registration which makes it easier to apply for government incentives, subsidies and tax rebates, it is not compulsory to apply for one. However, in the absence of this certificate, you are likely to lose out on monetary advantages like reimbursement of expenses in infrastructure development, availing priority sector lending from banks and also non-monetary benefits such as access to trade exhibitions abroad, promoting entrepreneurship development, etc.

Hence, it is always advisable for an eligible entity to obtain MSME registration.

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About the Author: CA Smreti Agrawal is a Chartered Accountant specializing in budgeting and analyzing operational costs for leading MNCs. She is also a Cost and Management Accountant.

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