On October 18, 2022, a MoMSME Amendment modification was issue to a notice that provided specific standards for MSME registration. Additionally, it provided detailed documents and processes for submitting the memorandum. The updated notice addresses alterations in the criteria for enterprise classification, emphasising that in case of an increase in investment in plant and machinery/equipment or turnover, or both, resulting in reclassification, the business should retain the non-tax benefits of its original category for a duration of three years from the date of such upward adjustment. In this blog, we will explore the specifics of the MoMSME Amendment modification, with a focus on the Criteria for Being an SME.
Classification of Enterprise as per MoMSME Amendment Modification
Enterprises are classified into MSME as follows:
Small Enterprise Criteria:
- Investment in plant & machinery/equipment doesn’t exceed Rs. 10 crores.
- Turnover doesn’t exceed Rs. 50 crores.
Micro Enterprise Criteria:
- Investment in plant & machinery/equipment doesn’t exceed Rs. 1 crore.
- Turnover doesn’t exceed Rs. 5 crores.
Medium Enterprise Criteria:
- Investment in plant & machinery/equipment doesn’t exceed Rs. 50 crores.
- Turnover doesn’t exceed Rs. 250 crores.
Composition of Investment & Turnover for Classification of Enterprises – MSME Criteria
The given MoMSME Amendment modification delineate the details of this classification:
- Composite Criterion:
- The categorisation of an enterprise as Micro, Small, or Medium is based on a composite criterion of both investment and turnover.
- Collective Treatment of Units:
- All units with GSTIN listed against the same PAN will be collectively treated as one enterprise.
- The turnover and investment figures for all entities or companies under the same PAN will be aggregated, and only the total value will be considered for determining the MSME category.
- Upward Movement in Categories:
- If an enterprise surpasses the specified ceiling or upper limits for its current category in either the investment or turnover criteria, it will move to the next higher category.
- An enterprise will not be downgraded to a lower category unless it falls below the upper limits specified for its current category in both investment and turnover criteria.
Calculation of Investment in Plant & Machinery/Equipment – MSME Criteria
To categorise MSMEs as per MoMSME Amendment modification, the investment in plant and equipment require these criteria:
- New Enterprise Criteria:
- In the absence of prior Income Tax Return for a new enterprise, the investment is based on the enterprise promoter’s self-declaration.
- This relaxation is applicable until the 31st March of the Financial Year in which the enterprise files its first Income Tax Return as per MoMSME Amendment modification.
- Inclusion of Purchase Value:
- The purchase (invoice) value of plant & machinery/equipment, whether acquired first-hand or second-hand, is considered, excluding GST, on a self-disclosure basis for new enterprises without any ITR.
- Definition of Plant as well as Machinery/Equipment:
- The term “Plant & Machinery/Equipment” aligns with the definition in the Income Tax Rules (IT Rules), 1962, framed under the IT Act, 1961.
- It encompasses all vital tangible assets, excluding land, building, furniture, and fittings.
- Exclusion of Certain Products:
- The cost of specific products mentioned in Explanation I to sub-section (1) (Section 7 of the Act) is excluded from the calculation of the investment amount in Plant & Machinery.
- Association with ITR:
- The calculation of investment in Plant & Machinery/equipment is linked to the Income Tax Return of the previous or last year filed under the IT Act, 1961.
Calculation of Turnover – MSME Criteria
Determining the turnover of an enterprise involves specific considerations as per MoMSME Amendment modification:
- Exclusion of Exports:
- Exports of goods/services are excluded when estimating the turnover for any enterprise, irrespective of its Micro, Small, or Medium classification.
- Documentation and Mandatory Requirements:
- Details related to turnover and exports turnover are linked to the IT Act or the CGST Act and the Goods and Services Tax Identification Number.
- For enterprises without a PAN until March 31, 2021, turnover figures are deemed on a self-declaration basis. Subsequently, both GSTIN and PAN become mandatory.
Updation of Details & Transition Period in MSME Classification – New MoMSME Amendment Modification
The recent MoMSME Amendment modification introduces specific procedures for the updation of details and the transition period in the classification of enterprises under the Micro, Small, and Medium category.
- Udyam Registration Number Requirements:
Enterprises with URN or Udyam Registration Number must update their details on the Udyam Registration website, including GST Return, ITR for the previous Financial Year, and other necessary information on a self-declaration basis.
- Consequences of Failure to Update:
Failure to update details within the stipulated period will result in the suspension of the enterprise’s status.
- Categorisation Based on Government Sources:
The categorisation of enterprises will be updated based on the details provided or collected from government sources, including ITR or GST Return.
- Communication of Status Change:
Enterprises experiencing graduation or reverse graduation will receive communication regarding the change in their status.
- Transition Period for Upward Change:
In the case of an upward change in terms of investment in plant & machinery or equipment/turnover or both, and consequent reclassification, an enterprise can continue to avail non-tax advantages of its previous category (Micro/Small/Medium) for three years from the date of such upward change. This is a significant extension compared to the previous MoMSME Amendment modification in 2020.
- Reverse Graduation Handling:
In the event of reverse graduation, whether due to reclassification or actual changes in investment in plant & machinery/equipment or turnover, the enterprise or company will remain in its current category from April 1st of the Financial Year. This applies regardless of whether the enterprise is registered under the Act or not.
Final Thoughts
The MoMSME Amendment Notification introduces crucial changes to the criteria for classifying enterprises under Micro, Small, and Medium categories. The emphasis on online updation of Udyam Registration details, including GST Return and ITR, enhances transparency. Failure to comply within the stipulated period leads to status suspension. The communication of status changes, especially regarding graduation or reverse graduation, ensures enterprises are well-informed. Notably, the extended three-year transition period for non-tax advantages following an upward change in classification provides businesses with stability. This amendment signifies a progressive step in streamlining MSME categorisation, aligning with the evolving business landscape.
