To Boost Ease Of Doing Business, Government Moves To Redefine MSMEs Based On Annual Revenue

The government has approved a new proposal to redefine micro, small and medium enterprises (MSMEs) based on annual returns, doing away with the current method that categorises manufacturers with Rs 25 lakh investment as micro enterprises, those with investments between Rs25 lakh and Rs 5 crore as small enterprises and those with investments of up to Rs10 crore as medium.

Under the new definition, businesses with up to Rs 5 crore revenue will be called a micro-enterprise, those with sales between Rs 5 crore and Rs 75 crore will be deemed as small and those with revenue between Rs 75 crore and Rs 250 crore will be classified as medium-sized enterprises.

This move is in line with other initiatives being taken by the government to stimulate growth in MSMEs, including reduction in corporate tax from 30 per cent to 25 per cent for entities with sales of up to Rs 250 crore and the Reserve Bank of India’s (RBI) decision to give a longer period to small businesses before classifying their loans as non-performing assets, or bad loans. The RBI has said it would allow up to 180 days to make loan repayments to Goods and Services Tax (GST)-registered MSMEs before classifying their account as a non-performing asset.

According to experts, the move will improve ease of doing business, help do away with unnecessary inspections and enable the authorities to use sales data from the GST Network to verify claims of businesses.

“Taking turnover as a criterion can be pegged with reliable figures available, e.g., 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,” Ministry of Micro, Small & Medium Enterprises said in a statement.

Experts believe the government would follow this up with relief to MSMEs under the bankruptcy code. “The new turnover-based definition is progressive. MSMEs also need to be ring-fenced from the disqualification of defaulting promoters bidding for companies undergoing bankruptcy resolution. If promoters are disqualified, it is possible that in the absence of any external bidder, many MSMEs will go into liquidation,” said Sumant Batra, managing partner at a law firm.