Classification and Registration of Micro, Small and Medium Enterprises in India

The provisions for the classification and registration of Micro, Small and Medium Enterprises (MSMEs) are provided under sections 7 and 8 respectively of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).

Current criteria for classification and registration of MSMEs:

The Ministry of Micro, Small and Medium Enterprises, Government of India vide Notification S.O. 2119(E) dated 26th June 2020 issued under sections sub-section (1) read with sub-section (9) of section 7 and sub-section (2) read with sub-section (3) of section 8, of the MSMED Act has provided for the current criteria for classification of enterprises in to micro, small or medium and also for the filing of memorandum i.e. “Udyam Registration” with effect from 1st July, 2020.

The notification provides for the following:

A] Classification of MSMEs:

1. The new classification criteria does not distinguish between a Manufacturing and a Service enterprise.  A composite criterion of investment and turnover is applied for classification of an enterprise as micro, small or medium as below:

2. All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) are collectively treated as one enterprise and the turnover and investment figures for all of such entities are seen together and only the aggregate values are considered for deciding the category as micro, small or medium enterprise.

B] Calculation of Investment in Plant and Machinery: 

1. The calculation of investment in plant and machinery or equipment is linked to the Income Tax Return (ITR) of the previous years filed under the Income Tax Act, 1961. 
2. In case of a new enterprise, where no prior ITR is available, the investment is based on self-declaration of the promoter of the enterprise and such relaxation ends after the 31st March of the financial year in which it files its first ITR. 
3. The expression “plant and machinery or equipment” of the enterprise, has the same meaning as assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and  includes all tangible assets (other than land and building, furniture and fittings).
4. The purchase (invoice) value of a plant and machinery or equipment, whether purchased first hand or second hand, is taken into account excluding Goods and Services Tax (GST), on self-disclosure basis, if the enterprise is a new one without any ITR.
5. The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Act like pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, are excluded from the calculation of the amount of investment in plant and machinery. 

C] Calculation of Turnover:

1. Exports of goods or services or both, are excluded while calculating the turnover of any enterprise whether micro, small or medium, for the purposes of classification.
2. Information regarding turnover and exports turnover for an enterprise is linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN.
3. The turnover related figures of such enterprises which do not have PAN are considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN are mandatory but the exemption from the requirement of having GSTIN as per the provisions of the Central Goods and Services Tax Act, 2017 is still available to the enterprise.

D] Registration of MSMEs

1. General: 

• With effect from 1st July, 2020, the notification provides for filing of online Udyam Registration on the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof. 
• On registration, an enterprise is assigned a permanent identity number to be known as “Udyam Registration Number” and an e-certificate, namely, “Udyam Registration Certificate” is issued on completion of the registration process.

2. Process of Registration:

• The online form for registration is available on Udyam Registration portal and the same is available without any fee.
• Aadhaar number of a promoter i.e. the proprietor/the managing partner (for a firm)/ Karta of a HUF/ an authorized signatory of a Company, LLP, Co-op Society, Society or a Trust) is required for Udyam Registration.
• In case an enterprise is duly registered as an Udyam with PAN, any deficiency of information for previous years when it did not have PAN shall be filled up on self-declaration basis.
• No enterprise shall file more than one Udyam Registration, provided that any number of activities including manufacturing or service or both may be specified or added in one Udyam Registration.
• Intentional misrepresentation or attempts to suppress the self-declared facts and figures appearing in the Udyam Registration or updation process is liable to penalty as specified under section 27 of the MSMED Act.
• In case of any proprietorship enterprise not registered under any Act or rules of the Central Government or the State Government, the proprietor may use his or her PAN for registration of the enterprise in the Udyam Registration portal and for all other types of enterprises PAN is mandatory.

E] Graduation of Enterprises and its effects: 

1. If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category but no enterprise is placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover.
2. Based on the information furnished or gathered from Government’s sources including ITR or GST return, the classification of the enterprise is updated. In case of graduation (from a lower to a higher category) or reverse-graduation (sliding down to lower category) of an enterprise, a communication will be sent to the enterprise about the change in the status. 
3. In case of an upward change in terms of investment in plant and machinery or equipment or turnover or both, and consequent re-classification, an enterprise shall continue to avail of all non-tax benefits of the category (micro or small or medium) it was in before the re-classification, for a period of three years from the date of such upward change
4. In case of reverse-graduation of an enterprise, whether as a result of re-classification or due to actual changes in investment in plant and machinery or equipment or turnover or both, and whether the enterprise is registered under the Act or not, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1st April of the financial year following the year in which such change took place.

F] Updation of information on Udyam Registration Portal:

1. An enterprise having Udyam Registration Number has to update its information online in the Udyam Registration portal, including the details of the ITR and the GST Return for the previous financial year and such other additional information as may be required, on self-declaration basis.
2. Failure to update the relevant information within the period specified in the online Udyam Registration portal will render the enterprise liable for suspension of its status.

G] Facilitation and grievance redressal of enterprises:

1. The Champions Control Rooms functioning in various institutions and offices of the Ministry of Micro, Small and Medium Enterprises including the Development and Facilitation Offices (MSME-DFO) acts as Single Window Systems for facilitating the registration process and further hand holding the micro, small and medium enterprises in all possible manner.
2. The District Industries Centres (DICs) are also acting as Single Window facilitation Systems in their Districts.
3. Any person who is not able to file the Udyam Registration for any reason including for lack of Aadhaar number, may approach any of the above Single Window Systems for Udyam Registration purposes with his Aadhaar enrollment identity slip or copy of Aadhaar enrollment request or bank photo passbook or voter identity card or passport or driving licence and the Single Window Systems will facilitate the process including getting an Aadhaar number and thereafter in the further process of Udyam Registration.
4. In case of any discrepancy or complaint, the General Manager of the District Industries Centre of the concerned District undertakes an enquiry for verification of the details of Udyam Registration submitted by the enterprise and thereafter forward the matter with necessary remarks to the Director or Commissioner or Industry Secretary concerned of the State Government who after issuing a notice to the enterprise and after giving an opportunity to present its case and based on the findings, may amend the details or recommend to the Ministry of Micro, Small or Medium Enterprises, Government of India, for cancellation of the Udyam Registration Certificate.