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03 August 2020
On 26 June 2020 the Ministry of Micro, Small and Medium Enterprises notified certain criteria for classifying enterprises as micro, small and medium enterprises (MSMEs) and specified the form and procedure for filing the applicable memorandum (the Udyam registration), with effect from 1 July 2020. The change in the classification of MSMEs is a part of the relief package offered to the MSME sector amid the COVID-19 outbreak. This reclassification has been well received across sectors as it will help MSMEs to increase in size without losing their entitled benefits.
Classification of enterprises
MSMEs are classified as follows:
An MSME may be established by filing an Udyam registration via the Udyam online registration portal based on the self-declaration of the person establishing the MSME, with no requirement to upload documents, certificates or proof. On registration, an enterprise (referred to as an 'udyam' in the Udyam registration portal) will be assigned a permanent identity number (ie, the Udyam registration number). An e-certificate (ie, the Udyam registration certificate) will be issued on completion of the registration process.
Composite criteria of investment and turnover for classification
A composite criterion of investment and turnover will apply for the classification of an enterprise as micro, small or medium. If an enterprise crosses the ceiling limits specified for its present category with respect to either investment or turnover, it will cease to exist in that category and be placed in the next higher category; however, no enterprise will be placed in the lower category unless it falls below the ceiling limits specified for its present category with respect to both investment and turnover. All units with goods and services tax identification numbers (GSTINs) listed against the same permanent account numbers (PANs) will be collectively treated as one enterprise and the turnover and investment figures for all such entities will be viewed together, with only the aggregate values considered for categorising the enterprise as micro, small or medium.
Calculation of investment in plant and machinery or equipment
The calculation of investment in plant and machinery or equipment will be linked to the entity's income tax returns (ITRs) for the previous years filed under the Income Tax Act 1961. For a new enterprise, where no prior ITR is available, the investment will be based on the self-declaration of the promoter of the enterprise; such relaxation will end after 31 March of the financial year in which it files its first ITR.
Calculation of turnover
For the purpose of classification, exports of goods or services (or both) will be excluded while calculating the turnover of any enterprise (whether micro, small or medium). Information with regard to an enterprise's turnover and export turnover will be linked to the Income Tax Act or the Central Goods and Services Act and the GSTIN. The turnover-related figures of such enterprise which has no PAN will be considered on a self-declaration basis for a period up to 31 March 2021; thereafter, a PAN and GSTIN will be mandatory.
The form for registration will be as provided in the Udyam registration portal and there will be no fee for filing an Udyam registration. An Aadhaar number will be required for Udyam registration. In case of a company, limited liability partnership, cooperative society, society or trust, the organisation or its authorised signatory must provide its GSTIN and PAN along with its Aadhaar number. If an enterprise is duly registered as an Udyam with a PAN, any deficiency of information for previous years when it did not have a PAN must be remedied on a self-declaration basis. If any person intentionally misrepresents or attempts to suppress the self-declared facts and figures appearing in the Udyam registration or updated information, such person will be liable to penalties as specified under Section 27 of the Micro, Small and Medium Enterprises Development Act 2006.
Updated information and classification transition period
An enterprise with an Udyam registration number must update its information on the Udyam online registration portal, including the details of its ITR and goods and services tax return for the previous financial year and such other additional information as may be required on a self-declaration basis. Failure to update the relevant information within the period specified on the online portal will render the enterprise liable for suspension of its status. In case of an enterprise's graduation (from a lower to a higher category) or reverse-graduation (from a higher to a lower category), a communication will be sent to the enterprise regarding its change in status. In case of an upward change in the terms of investment in plant and machinery or equipment, turnover or both, and the enterprise's consequent reclassification, such enterprise will maintain its prevailing status for one year from the end of the year of registration.
Facilitation and grievance redressal of enterprises
The Champions Control Rooms functioning in various institutions and offices of the Ministry of Micro, Small and Medium Enterprises, including the MSME development institutes, will act as single-window systems for facilitating the registration process and further helping MSMEs in all matters. The district industry centres will also act as single-window facilitation systems in their districts.
In light of this new classification criteria and definition of an MSME, all MSMEs in India will now be known as an 'udyam' since that term aligns more closely with the meaning of an enterprise. The new definition of an MSME has resulted in the enhancement of the investment and turnover limits, which in turn has led to the reversal of the traditional policy bias in favour of units staying small in order to qualify for benefits.
At a time when India's economy is experiencing unprecedented effects due to months of a nationwide lockdown to prevent the spread of COVID-19, the new definition of MSME is a major step towards recovery on both the domestic and export fronts.
For further information on this topic please contact Vasudha Luniya at Clasis Law by telephone (+91 11 4213 0000) or email (firstname.lastname@example.org). The Clasis Law website can be accessed at www.clasislaw.com.
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