Definitions of Micro, Small & Medium Enterprises (MSMEs)

The definition of MSMEs revised from July 1, 2020, Please read the following post for latest amendment.

New criteria for the classification of MSME effective from July 1, 2020

The new criteria supersede the following article (You may refer following article only for reference to old date details).

The MSMED Act 2006 classifies Micro, Small & Medium Enterprises (MSMEs) in two categories viz. Manufacturing Enterprises and Service Enterprises. Manufacturing enterprises are those who are engaged in manufacture or production of goods pertaining to any industry listed in first schedule to the Industries (Development and Regulation) Act 1951 or an enterprise employing plant and machinery in the process of value addition to the final product having a distinct name or character or use. The Service enterprises are the units engaged in providing or rendering of services.

These manufacturing and service enterprises are defined into Micro, Small or Medium Enterprises in terms of investment in Plant and Machinery or equipment. In the case of Manufacturing Enterprises, investments in plant and machinery are the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries. Similarly, in the case of Service Enterprises, the investment in equipment is the original cost excluding land and building and furniture, fittings, and other items not directly related to the service rendered or as may be notified under the MSMED Act,2006.

Documents to rely upon investments in machinery and equipment

While calculating the investment in plant and machinery, the original price thereof, shall be taken into account, irrespective of whether the plant and machinery are new or second-hand. The original cost means the purchase value of the plant and machinery and not the book value (Purchase value minus depreciation).  As per clarification provided by the MSME ministry vide their memorandum no. F. No. 12(4)/2017-SME dated March 8, 2017, while ascertaining the investment in plant and machinery for classification of enterprises as Micro, Small and Medium, the following documents could be relied upon.

(i) A copy of the invoice of the purchase of plant and machinery; or

(ii) Gross block for investment in plant and machinery as shown in the audited accounts; or

(iii) A certificate issued by a Chartered Accountant regarding purchase price of plant and machinery.

The above provisions would be applicable for both enterprises engaged in the manufacturing of goods and rendering of services.

Proposed amendment to MSMED Act

The definition of the micro, small, and medium enterprises (MSME) sector might be revised by raising the ceiling for investment in each segment, as the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2015, was introduced in the Lok Sabha on 20 April 2015. It would mean investing a larger sum, than prescribed under the current definition, would keep the enterprises in the MSME fold when the amendment becomes an act.

Definition of MSME (Manufacturing Sector) as per existing law:

Micro Enterprises (Manufacturing sector): An enterprise is called micro enterprise where the original investment in Plant & Machinery does not exceed twenty five lakh rupees. (The upper limit proposed in amendment is fifty lakh rupees)

Small Enterprises (Manufacturing sector): An enterprise is called Small enterprise where the original investment in Plant & Machinery, more than twenty five lakh rupees but does not exceed five crore rupees. (The revised limit proposed in the amendment is more than fifty lakh rupees but does not exceed ten crore rupees).

Medium Enterprises (Manufacturing sector): An enterprise is called medium enterprise where the original investment in Plant & Machinery, more than five crore rupees but does not exceed ten crore rupees. (The revised limit proposed in the amendment is more than ten Crore but does not exceed thirty crore rupees).

Definition of MSME ( Service Sector) as per existing law:

Micro Enterprises (Service sector): An enterprise is called micro enterprise where the original Investment in equipment does not exceed ten lakh rupees. The upper limit proposed in amendment is twenty lakh rupees)

Small Enterprises (Service sector): An enterprise is called Small enterprise where the original Investment in equipment, more than ten lakh rupees but does not exceed two crore rupees. (The revised limit proposed in the amendment is more than twenty lakh rupees but does not exceed Five crore rupees).

Medium Enterprises (Service sector): An enterprise is called medium enterprise where the original Investment in equipment, more than two crore rupees but does not exceed five core rupees. (The revised limit proposed in the amendment is more than five crore rupees but does not exceed Fifteen Crore rupees).

As provided under Section 7(9) of the MSMED Act, 2006, the Government, while classifying any class or classes of enterprises under sub-section 7(1) of this Act, may adopt (in the amendments) any criteria e.g. investment, employment or turnover of the enterprises and include in such classification the micro or tiny enterprises or the village enterprises, as part of small enterprises.

Priority Sector Lending:

As per extant priority sector policy, certain targets have been prescribed for banks for lending to the Micro and Small enterprise (MSE) sector. Banks have been advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises, a 10 per cent annual growth in the number of micro enterprise accounts and 60% of total lending to MSE sector as on preceding March 31st to Micro enterprises.

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