For certain sectors, subsectors, and technologies, the MSME loan scheme offers an upfront subsidy of 15% on institutional loans up to Rs. 1 crore (i.e., a subsidy maximum of Rs. 15 lahks).
MSME Classification Explained: Criteria and Tax Benefits
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The Micro, Small, and Medium Enterprises (MSME) sector occupies a pivotal role as a catalyst for economic growth in any country. MSMEs play a major role in India, as they contribute roughly 30% of the country’s GDP and create job possibilities for a large number of people. However, the previous classification system for MSMEs posed challenges, hindering their access to government schemes and support. To address these issues and foster the growth and development of MSMEs, the Indian Government introduced a new MSME classification system in 2020.[Source]
In this article, we will take a deep dive into the features and implications of the revised classification. We will also explore the role of the new classification in facilitating the advancement of MSMEs. Additionally, we will discuss the initiatives taken under the Atmanirbhar Bharat package to bolster economic growth and foster self-reliance in India.
But first, let’s see what an MSME actually mean.
Table of Contents
What is MSME?
MSME stands for Micro, Small, and Medium Enterprises. These enterprises are classified into two divisions as per the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006:
The classification helps distinguish between the different types of businesses falling under the MSME umbrella. This categorisation facilitates targeted policies and support to foster the growth and development of MSMEs.
| Manufacturing enterprises | Service enterprises |
| Engaged in the manufacturing or production of goods in any industry. | Engaged in providing or rendering services. |
New MSME Classification in India
The MSME classification system in India has undergone significant revisions, aiming to streamline operations and reduce the compliance burden for businesses. Unlike the previous system, which relied on plant and machinery investments, the latest classification is based on business turnover. This shift has led to an increase in the turnover limit for each category, offering greater flexibility and inclusivity for MSMEs.
Here is the latest new MSME classification:
| Type of Enterprise | Investment | Turnover | ||
|---|---|---|---|---|
| Current | Revised | Current | Revised | |
| Micro | Rs 1 crore | Rs 2.5 crore | Rs 5 crore | Rs 10 crore |
| Small | Rs 10 crore | Rs 25 crore | Rs 50 crore | Rs 100 crore |
| Medium | Rs 50 crore | Rs 125 crore | Rs 250 crore | Rs 500 crore |
A noteworthy aspect of the revised classification is the substantial increase in turnover limits for micro and small enterprises. The turnover limit for micro-enterprises has expanded nearly fivefold, while for small enterprises, it has grown tenfold.
This change fosters ease of business, encourages growth, and enables the inclusion of a broader range of businesses within the MSME sector.
In addition to aligning the definition of MSMEs, the new classification removes the distinction between manufacturing-based and service-based MSMEs. This modification eliminates barriers and ensures a more comprehensive approach to support businesses across sectors.
The revised MSME classification brings several benefits to enterprises. It allows MSMEs to engage in exports without the risk of losing the advantages associated with being classified as an MSME. By encouraging exports and facilitating a conducive business environment, the government aims to stimulate economic growth and generate more employment opportunities across the country.
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Characteristics of New MSME Classification
- Reduced compliance burden for MSMEs.
- Single registration.
- Businesses with an annual turnover of up to ₹250 Crores are classified as MSMEs.
- Promotes flexibility and inclusivity for a wider range of businesses.
- Access to incentives and subsidies announced for MSMEs.
Promotion of Entrepreneurship
- Encourages development and upgradation of skills.
- Fosters entrepreneurship within the MSME sector.
Government Support to MSMEs for
- Upgradation of technology.
- Development of infrastructure.
- Modernization.
Benefits for Registered MSMEs:
- Lower interest rates.
- Subsidies on patent registration.
- Tax exemption.
- Electricity bill concessions.
- Reimbursement of ISO certification.
- Collateral-free bank loans, and more.
By leveraging these features, MSMEs can unlock growth opportunities, drive innovation, and contribute to the overall economic progress of the nation.
Tax Benefits for MSME
The government recognizes the pivotal role of MSMEs and offers a range of tax benefits and incentives to promote their growth and development.
- MSMEs with a turnover of up to ₹250 Crores are eligible for income tax exemption under Section 80J. The exemption is available for 7 years from the year of incorporation.
- Section 80-IB grants a tax holiday for 5 years from the year of commencement of production, providing MSMEs with a favourable environment to establish themselves.
- MSMEs with a turnover of up to ₹50 Crores can benefit from a reduced tax rate of 25%.
- Section 115BA ensures that MSMEs can retain more capital within their businesses, fueling growth and sustainability.
- MSMEs with an annual turnover of up to ₹1.5 Crores can avail of the Composition Scheme under GST.
- MSMEs investing in plant and machinery can avail of a 15% investment allowance under Section 32AC.
These tax benefits and incentives not only reduce the tax burden on MSMEs but also empower them to invest in their businesses, expand their operations, and compete effectively in the market. By providing a supportive ecosystem and facilitating access to finance, technology, and a skilled workforce, the new MSME classification system aims to accelerate the growth and impact of MSMEs in the Indian economy.
Conclusion
The new MSME classification system in India has brought about significant changes and benefits for Micro, Small, and Medium Enterprises. By shifting from a plant and machinery-based criterion to a turnover-based criterion, the classification system has increased the flexibility and inclusivity of MSMEs, fostering their growth and development.
The revised classification has raised the turnover limits for each category, allowing more businesses to avail themselves of the associated advantages and government schemes.
FAQs
What is the new limit of MSME?
The new MSME definition sets a 250 crore turnover threshold for MSMEs who wish to register under the MSMED Act and take advantage of its provisions.
Who is eligible for MSME 2024?
A proprietorship, partnership firm, company, trust, or society that has an investment of less than Rs. 50 crore and an annual revenue of less than Rs. 250 crore qualifies as an MSME.
What is Section 15 of the MSME Act?
The MSMED Act’s Section 15 addresses the buyer’s late payment to MSMEs. In accordance with this clause, the buyer is required to pay the supplier within 15 days if a payment date has not been agreed upon and up to 45 days when one has.
Who regulates MSMEs?
Office of Development Commissioner (MSME) regulates MSMEs. The policies, different plans, and programmes for providing infrastructure and support services to MSMEs are put into action by the Development Commissionerate.