Guide to the MSME Act in India

MSMED Act in India was enacted to set up a policy environment for the promotion and development of the MSME sector. This act allows emerging businesses to enjoy the benefits of MSME centric government schemes and policies to boost growth and profitability. The MSMED Act was initially incorporated in 2006, but has undergone changes over the years, for better classification of MSMEs in India based on turnover and investments made.

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. 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.

The importance of MSMED Act 2006

The MSMED Act 2006 was the first MSME act in India that was introduced to set up a policy environment for promotion and development of the MSME sector. The act defined the MSME sector and put in place a framework for developing and enhancing competitiveness of MSME enterprises of India.

The act was the government’s way of ensuring flow of credit to the sector, give MSMEs preference in government procurement, addressing the issue of delayed payments, etc. It also advocated the provision of marketing assistance, infrastructural facilities, etc. A separate Ministry of MSME was set up by the government to make these goals a reality.

The Government of India legislated the MSMED Act 2006 on June 16, 2006. It provided the first-ever legal framework to recognise of the concept of “enterprise” and defined the three tiers of these enterprises, namely, micro, small and medium. MSMED Act 2006 classification brought in a clearer and more progressive categorisation of small-scale enterprises. MSMEs are divided into two groups according to the provisions of the MSMED Act 2006 –

Manufacturing enterprises:
Companies involved in manufacturing goods for any industries listed in the First Schedule of the Industries (Development and Regulation) Act, 1951 are manufacturing enterprises. The classification of these enterprises is based on the investment in plant and machinery.
Service enterprises:
Businesses that deal with offering services are service enterprises. These are categorized based on investment in equipment

A revised definition – MSME Act, 2020

In 2020, the Government of India decided to change the basis of classifying MSMEs from investment in plant and machinery/equipment to annual turnover. This was done to make the norms of classification growth oriented and align them to the new GST tax regime.

The new classification of MSMEs in India changed the basis of MSME classification to a non-discretionary, transparent and objective criterion and eliminated the need for inspections to determine investment in plant and machinery/equipment. This classification system was deemed to be more progressive and evolutionary and helped overcome the uncertainties associated with the classification based on investment in plant and machinery/equipment.

The new definition of MSME was put into effect from July 1, 2020. The new definition classified MSMEs based on a composite criterion of investment in plant and machinery and turnover. The ministry removed the difference between the definition of manufacturing-based MSMEs and service-based MSMEs with the revised definition.

Take a look at the following table for the revised classification of MSMEs according to the MSME act amendment 2020 pdf published by the Government of India:

Category	Criteria of classification
Micro enterprise	Net investment in plant and machinery or equipment less than or equal to ₹1 crore and net turnover less than or equal to ₹5 crores
Small enterprise	Net investment in plant and machinery or equipment less than or equal to ₹10 crores and net turnover less than or equal to ₹50 crores
Medium enterprise	Net investment in plant and machinery or equipment less than or equal to ₹50 crores and net turnover less than or equal to ₹250 crores

Amendment to MSME categorization 2021

The government included retail and wholesale enterprises under the ambit of MSME categorization in 2021.

Retail and wholesale traders faced a severe liquidity crunch after they faced significant losses owing to COVID-19 lockdowns. Considering this, the Ministry of MSME decided to include retail and wholesale companies as MSMEs and extend to them the advantages enjoyed by MSMEs, especially the benefit of priority sector lending under RBI guidelines. Therefore, the Reserve Bank of India (RBI) on July 7, 2021, notified a new definition of MSMEs by adding retail and wholesale trade to this category.

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.

Features of MSMED Act in India

The MSMED Act was legislated to foster the growth of MSMEs and give them credit facilities along with other opportunities. Here are some of the features of MSMED Act:

Preference to goods and services provided by MSMEs for government procurement
Creation of dedicated funds for the growth and promotion of the MSME like the Credit Guarantee Fund Trust for MSMEs
Notification of initiatives and plans to promote the expansion of MSMEs
Foster ease of doing business for MSMEs
Adoption of modern procedures and policies to apply for MSME loans
Dedicated government schemes to promote growth, sales and innovation

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:

Proprietorship
Hindu undivided family
Association of persons
Co-operative society
Partnership firm
Company
Undertaking
Any other legal entity

FAQS

The legal difference between an MSME and a start-up?

Sr. No.	MSME	Start-up
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.

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.

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