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Change in classification norms for MSMEs to boost growth

New Delhi, 9 Feb 2018

The Cabinet’s decision to change the criteria for classification of micro, small, and medium enterprises (MSMEs) from ‘investment in plant and machinery’ to ‘annual turnover’ is likely to give a boost to SMEs sector by enhancing ease of doing business and helping them raise working capital finance, increase exports, improve access to markets, etc.

On February 7, 2018, the Union Cabinet approved the change in criteria of classification for MSMEs to encourage ease of doing business, make the norms of classification growth oriented and align them to the new tax regime revolving around GST (Goods & Services Tax).

As per earlier Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 norms, SMEs were defined as enterprises where investment in plant and machinery or equipment is between Rs 25 lakhs to Rs 10 crores in case of a manufacturing industry and between Rs 10 lakh to Rs 5 crore in case of a service sector enterprise.

After the amendment to define units producing goods and rendering services in terms of annual turnover, a micro enterprise will be defined as a unit where the annual turnover does not exceed Rs 5 crore and a small enterprise will a unit where the annual turnover is more than Rs 5 crore rupees but does not exceed Rs 75 crore. Similarly, a medium enterprise will be defined as a unit where the annual turnover is more than Rs 75 crore but does not exceed Rs 250 crore.

Additionally, the Central Government may, by notification, vary turnover limits, which will not exceed thrice the limits specified in Section 7 of the MSMED Act.

“Taking turnover as a criterion can be pegged with reliable figures available eg in GST Network and other methods of ascertaining which will help in having a non discretionary, transparent and objective criteria and will eliminate the need for inspections, make the classification system progressive and evolutionary, help in overcoming the uncertainties associated with the classification based on investment in plant & machinery/equipment and employment, and improve the ease of doing business. In addition the amendment will provide flexibility to the Government to fine-tune the classification of MSMEs in response to changing economic scenario without resorting to the amendment of MSMED Act,” said the GoI in a press statement.

The change in the norms of classification is expected to enhance the ease of doing business, and consequently boosting growth and paving the way for increased direct and indirect employment in the MSME sector of the country.

Amendment in MSMED Act is in line with the government’s action plan to give a fillip to SMEs. As a part of this strategy, the Budget 2018-19 announced a reduction in corporate tax rate from existing 30% to 25%, for companies who have reported turnover up to Rs 250 crore in the financial year 2016-17. The decision is likely to benefit the entire class of MSMEs (which account for almost 99% of companies that file tax returns). The lowering corporate tax rate for SMEs will leave them with higher investible surplus which in turn will create more jobs.

Out of 4,721 Indian listed companies that reported their numbers for 2016-17, 963 companies (20.3% of the total) are expected to gain majorly from the Budget proposal. The median tax rate for these companies was approximately 34% for FY17. Consequently, the difference in tax rate (to the tune of 9%) is expected to improve their profit after tax margins, thus leading to better earnings visibility.

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