The MSME new definition was first announced when the pandemic hit and ruined the entire economy of India. While the relatively larger businesses somehow managed to get through the difficult times, it was the micro, small, and medium enterprises that completely crashed in financial terms. Most small businesses had to shut down due to a lack of investment, sales, income, and profits. Post-pandemic, such businesses were in dire need of support from the government and private investors alike. As a result, the reforms in the MSME sector, due a long time ago, were one of the first changes that were made immediately after the pandemic. The decision for reforms was also significant for the recovery of the health of the national economy, as it is the MSME sector that duly drives the GDP growth in India.
What is MSME?
Micro, Small, and Medium Enterprises (MSMEs) are businesses defined by their investment in equipment and annual turnover limits, as outlined by the Government of India. MSMEs play a vital role in economic development, generating employment and fostering innovation across sectors like manufacturing, services, and trade. The MSME Development (MSMED) Act of 2006 categorizes these enterprises into micro, small, and medium businesses based on specific investment and turnover limit criteria.
What is the New Definition of MSME under the MSMED Act?
As effective from 1st July 2020, an MSME new definition India has been drawn for businesses based on their net turnover, and net investment limits in plant, machinery, and other equipment. This new MSME definition applies to both goods-based and service-based MSMEs. Before digging deeper into the definition and revised limits, let’s first understand what net investment and net turnover mean!
- Net Investment: Difference between investments in pollution control, research and development, and the installation of safety devices, from the total investment in plant and machinery
- Net Turnover: Difference between export turnover from the total turnover of the MSME
These definitions are considered while classifying businesses into micro, small and medium enterprise as per the revised limits mentioned in the table below. Note that these limits apply similarly to goods and service-based enterprises, as well as those operating in the retail, wholesale, and manufacturing sectors.
| Types of Enterprises | Revised MSME Limits |
|---|---|
| Micro Enterprises | Net investment in plant and machinery or equipment up to Rs.1 crore and net turnover ≤ Rs.5 crores |
| Small Enterprises | Net investment in plant and machinery or equipment ≤ Rs.10 crores and net turnover ≤ Rs.50 crores |
| Medium Enterprises | Net investment in plant and machinery or equipment ≤ Rs.50 crores and net turnover ≤ Rs.250 crores |
MSME New Definition vs MSME Old Definition
| Old Definition of MSME | New Definition of MSME |
|---|---|
| Different threshold limits for manufacturing and service sectors | Uniform threshold limits for manufacturing and service sectors |
| Excluded retail and wholesale sectors | Includes retail and wholesale sectors |
| Threshold limits not adjusted for inflation | Threshold limits adjusted for inflation |
| Cost of equipment not adjusted for depreciation | Cost of equipment adjusted for depreciation |
| Depreciated cost calculated as per commercial rates | Depreciated cost calculated as per IT rules |
| Upward limits of turnovers and investments were too low | Upward limits of turnovers and investments have been raised |
| Export turnover included in total turnover | Export turnover excluded from total turnover |
FAQs
What is the revised definition of MSME?
The revised definition of MSME in India, as per the new Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 (amended in 2020), categorizes MSMEs based on their annual turnover and investment in plant and machinery/equipment. The new classification is as follows:
| Type of Enterprise | Investment (in Plant & Machinery) | Turnover (Annual) |
|---|---|---|
| Micro Enterprises | Up to ₹1 crore | Up to ₹5 crore |
| Small Enterprises | ₹1 crore to ₹10 crore | ₹5 crore to ₹50 crore |
| Medium Enterprises | ₹10 crore to ₹50 crore | ₹50 crore to ₹250 crore |
Why was the MSME classification revised?
The revision of the MSME definition was introduced to:
- Provide greater flexibility for small businesses to scale up without losing their MSME status.
- Enable businesses to access more government schemes and financial support.
- Align India’s MSME classification with global standards to boost international trade and investment.
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