The Indian government has recently redefined the entire MSME sector. Investment and turnover limit have been changed for all enterprises coming under the MSME segment. The new classification of the enterprises is--(i) a company will be defined as micro enterprise if the investment in plant and machinery or equipment does not exceed INR 1 crore and turnover does not exceed INR 5 crore ;(ii) a company will be classified as small enterprise if the investment in plant and machinery or equipment does not exceed INR 10 crore and turnover does not exceed INR 50 crore; and (iii) a company will be categorised as a medium enterprise if the investment in plant and machinery or equipment does not exceed INR 50 crore and turnover does not exceed INR 250 crore.
According to the government's latest notification, new guidelines have been created for the MSME sector. In order to establish a micro, small, or medium enterprise, an individual will have to file Udyam Registration online in the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof.
On registration, an enterprise, which would be known as "Udyam" in the Udyam Registration portal, will be assigned a permanent identity number to be known as "Udyam Registration Number". An e-certificate called "Udyam Registration Certificate" will also be issued on completion of the registration process.
Classifying Businesses as per Investment and Turnover
In the latest notification, a composite criterion of investment and turnover has been proclaimed that will be applicable for classification of an enterprise as micro, small or medium.
If a company 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 shall be 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.
All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.
Change in Computation of Investment in Plant and Machinery Equipment
Under the new definition of MSME, the government has also altered the calculation of investment in plant and machinery equipment, which is as follows:
(1) The calculation of investment in plant and machinery or equipment will be 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 will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.
(3) The expression Ã¢??plant and machinery or equipment of the enterprise, will have the same meaning as assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and will include 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, shall be 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 shall be excluded from the calculation of the amount of investment in plant and machinery.
Computing Turnover MSME Firms
The latest notification states that the way how companies under MSME sector have to compute their turnover, which is as follows:
(1) Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise whether micro, small or medium, for the purposes of classification.
(2) Information as regards turnover and exports turnover for an enterprise shall be 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 will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory.
The above-cited guidelines will be practiced w.e.f from 1st July, 2020. Thus, new companies, as well as existing ones, should carry out their transactions accordingly.