Guide to the MSME Act in India
Guide to the MSME Act in India
The Government of India legislated and enacted the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, on June 16, 2006. With the passing of the Micro, Small, and Medium Enterprises Development Act 2006, a standard shift has taken place to include services in the definition of Micro, Small, and Medium Enterprises and simultaneously extend the capacity to support Medium Enterprises.
The old definition and classification of Micro, Small, and Medium Enterprises (MSMEs), applicable from 02.10.2006 to 30.06.2020, was based on ceilings on investment in plants and machinery for enterprises in the manufacturing sector and on ceilings on investment in equipment in the services sector.
The government of India has notified new definitions, and classification criteria of MSMEs vide Notification, dated 26.06.2020.
Definition of MSME as per MSMED Act, 2006
The Micro, Small and Medium Enterprises Development Act, 2006 defines the Micro, Small, and Medium Enterprises based on:
- Investment in plant and machinery for those engaged in fields of manufacturing or production, the processing/preservation of goods, and
- Investment in equipment for enterprises involved in the provision or rendering of services.
The Micro, Small, and Medium Enterprises Development Act, 2006, advocates the provision of marketing assistance, infrastructural facilities, and backward as well as forward linkages to all Micro, Small, and Medium enterprises.
Know more about the Benefits of MSME registration
According to the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 the investment made in plant and machinery is based on the original cost while excluding land and building, and other items as specified by the Ministry of Small Scale Industries. Click here to know about the MSME eligibility criteria.
A new definition for MSMEs under the MSME Act 2020
The new definition of MSME, applicable with effect from 01.07.2020, is based on the composite criteria of turnover limits and limits of investment in plant and machinery or equipment. The same limits apply to both manufacturing enterprises and service enterprises.
The following Table shows the classification of MSMEs into micro, small, and medium categories based on various combinations of situations as regards net investment in plant and m achinery or investment and net turnover:
|Category of MSME enterprise||
|New composite classification criteria of investment and turnover applicable with effect from 01.07.2020|
|Micro Enterprise||Manufacturing||Net investment in plant and machinery or equipment ≤ Rs. 1 crore and net turnover ≤ Rs. 5 Crores|
|Small Enterprise||Manufacturing||Net investment in plant and machinery or equipment ≤ Rs. 10 Crores and net turnover ≤ Rs. 50 Crores|
|Medium Enterprise||Manufacturing||Net investment in plant and machinery or equipment ≤ Rs. 50 Crores and net turnover ≤ Rs. 250 Crores|
|Micro Enterprise||Services||Net investment in plant and machinery or equipment ≤ Rs. 1 crore and net turnover ≤ Rs. 5 Crores|
|Small Enterprise||Services||Net investment in plant and machinery or equipment ≤ Rs. 10 Crores and net turnover ≤ Rs. 50 Crores|
|Medium Enterprise||Services||Net investment in plant and machinery or equipment ≤ Rs. 50 Crores and net turnover ≤ Rs. 250 Crores|
Note: The new definition applies to existing enterprises as of 30.06.2020 also. If existing enterprises are registered under Udyog Aadhaar or EM Part II, the same will be reclassified as per the new definition.
MSME Udyam Registration under MSME Act
Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal. Filing is on a self-declaration basis. There is no requirement to upload documents, papers, certificates, or proof.
- On registration, an enterprise (referred to as “Udyam” in the Udyam Registration portal) will be assigned a Permanent Identity Number to be known as “Udyam Registration Number”.
- An e-certificate, named “Udyam Registration Certificate” will be issued on completion of the registration process.
Form of Legal Organization under MSME Act
There is no particular form of legal organization to be adopted to be eligible under the MSMED Act. Benefits under MSME Act will be available so long as the enterprise satisfies the investment and turnover limits as above and has filed Udyam Registration. According to the Notification dated 29-9-2006, the following type of enterprise may register as MSME:
- Hindu undivided family
- Association of persons
- Co-operative society
- Partnership firm
- Any other legal entity
Inclusion of Urban Street Vendors in the MSME Category
MSME has announced a revised definition for MSMEs with the Inclusion of urban street vendors in the MSME category. With the revised guidelines, the street vendors will now be allowed to register on Udyam Registration Portal. Under the revised guidelines, street vendors will also benefit from priority sector lending under the Reserve Bank of India (RBI) guidelines.
Tax holiday under the Income-tax Act for MSME
MSMEs are entitled to tax holiday under section 80-IAC of the Income-tax Act, 1961, only if they are start-ups as defined in the DPIIT notification and satisfy the conditions stipulated in section 80-IAC1. For non-start-up MSMEs, no tax holiday is available under the Income-tax Act.
The legal difference between an MSME and a start-up
Only partnership firms, LLPs, and Companies can have the statuses of “MSME” under MSMED Act and start-up under the latest DPIIT. They will be regarded as MSMEs provided they satisfy the investment limits in the definitions of MSME under the MSMED Act. The MSMED Act defines MSME. Start-up is determined by the DPIIT’s Start-up Notification No. dated 19.02.2019. The distinction between MSME and start-up is summed up as under:
|1.||Defined under the MSMED Act||Defined by DPIIT|
|2.||Investment limits and turnover limits should both be satisfied to be regarded as MSMEs.||Only turnover limit of Rs. One hundred crores are applicable with no investment limits in the definition of start-up.|
|3.||The turnover limit for MSME recognition is in terms of net turnover, i.e., less export turnover.||The turnover limit for DPIIT purposes is gross turnover without reducing exports.|
|4.||MSME status will exist as long as investment and turnover limits are not exceeded.||Start-up status will last till turnover exceeds Rs. 100 crores or ten years from the date of incorporation completed, whichever is earlier.|
|5.||The turnover limit for MSME Status is the net turnover of Rs. 250 crores||The turnover limit for Start-up Status is the gross turnover of Rs. 100 crores|
|6.||The investment ceiling for MSME status is Rs. 50 crores. If that is exceeded, the enterprise ceases to be MSME.||No investment ceilings to be regarded as a start-up|
|7.||Enterprise can enjoy MSME status for any time after its incorporation so long as its investment in plant and machinery or equipment does not exceed Rs.50 crores and turnover does not exceed Rs.250 crores.||Start-up status is only for ten years from the date of incorporation.|
|8.||To be recognized as MSME, the enterprise must file Udyam Registration||To be recognized as a start-up, the enterprise must file an application for DPIIT Recognition|
|9.||If the investment limit of Fifty crores is not exceeded, and the turnover limit of One hundred crores is not exceeded, but ten years have elapsed since incorporation; then, the enterprise will be MSME but not a start-up.||If the investment limit of Fifty crores is exceeded, but the turnover limit of Rs. One hundred crores are not exceeded, and ten years have not elapsed from the date of incorporation; the enterprise will not be regarded as MSME but will be considered a start-up.|
|10.||MSME enterprise can have any legal form of organization||Only partnership firms, LLPs, and private limited companies will be eligible for start-up status.|
|11.||An organization can follow any business model to qualify as MSME.||To qualify as a start-up, the business model must work towards innovation, development, or improvement of products or services. The business model must be scalable with a high potential for employment or wealth creation.|
|12.||An organization will be an MSME, even if it is formed by splitting up or reconstructing a business already in existence.||An entity will not qualify as a start-up if it is formed by splitting up or reconstructing an existing business.|
|13.||MSME private limited companies which do not qualify as start-ups are liable to angel tax on shares issued at a premium if the issue price is higher than Fair Market Value.||Start-up private limited companies are exempted from angel tax if investments made or to be made by all investors including family and friends do not exceed Rs. 25 crores.|
|14.||No tax holiday will be available for an MSME unless it qualifies as a start-up and is a private company/LLP, which satisfies conditions of section 80-IAC.||Tax holiday under section 80-IAC of the Income-tax Act is available for a start-up which is an LLP or a private limited company.|
|15.||No tax exemption to capital gains from sale of residential property of promoter if the same is invested into a private limited company which is an MSME but does not qualify as a start-up.||Tax exemption under section 54GB1 to capital gains from sale of residential property of promoter if the same is invested into a private limited company which is a start-up.|
|16.||Benefits under the MSMED Act are available to MSMEs. However, benefits under Startup India Scheme will not be available unless the firm satisfies the definition of ‘start-up’ and gets DPIIT recognition.||Benefits under the MSME Act are not available to start-ups unless they qualify as MSMEs by satisfying the definition’s investment limits and filing Udyam Registration.|
IndiaFilings can help you get UDYAM registration and LEDGERS Accounting Software for providing estimates, invoices, tracking purchases, filing GST returns, and generating GST eWay bills.