MSME and Indian Economy

Business / Jul 06, 2020

Since India got Independence in 1947, the focus, to a great extent was on establishing a strong economy on the basis of which, the country can stand with pride and connect with the world. The leaders of free India knew, that the Indian Industries can potentially be one of the pillars to support the economic structure and therefore, the industry became a focus of all the subsequent ‘Five Year Plans’ made by the Planning Commission.

Small Scale enterprises, together, played a great role in supplying a considerable percentage of revenue to the country since Independence. However, the system to conduct them was not properly laid down.

A single comprehensive act for development and regulation of small enterprises had been a long outstanding demand of the Sector so as to free it from a plethora of laws and regulations.

This was the basic Objective behind bringing a systemized statute known as, Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Under the Act, these enterprises were categorized on the basis of Investment as Micro, Small and Medium enterprises. MSMEs are also referred to as Small Scale Industries (SSIs).

Today after years of efforts, the MSME sector alone is contributing to nearly half of India’s exports, generates around 30% to the Gross Domestic Product (GDP) and employs 11.5 Crores people.

In the MSME Sector, the Micro enterprises constitute 90% of total MSMEs, the Medium Enterprises constitute around 1% of the total and the remaining are the Small Enterprises.

Now the question arises:

  • WHAT IS AN MSME?
    As per the abovementioned Act, an MSME can be either a Manufacturing Enterprise or a Service Enterprise. Though both of them have different definitions as stated in the following table, they both are equally important. Let us have a look at the diagram for crystal clear understanding.The following diagram mentions two types of MSMEs and their respective Definition.


    Now the next question which pops in mind is:

  • ON WHAT BASIS MICRO, SMALL AND MEDIUM ENTERPRISES ARE DISTINGUISHED?
    OLD CRITERIA:
    As per the MSMED Act, 2006, the criterion of distinction for Manufacturing Enterprises and service Enterprises was different. Manufacturing Enterprises and Service Enterprises were characterized on the basis of investments made by them. The amount of investment varied in both the enterprises. Investment in manufacturing Enterprises includes investment in Plant & Machinery and in Service Enterprises, investment in equipment. Let us have a look at the original criterion laid down by the Act.

     

    • For Manufacturing Enterprises
      ENTERPRISE INVESTMENT (in Plant and Machinery)
      MICRO Not exceeding ₹25 Lakhs
      SMALL Above ₹25 Lakhs up to ₹5 Crores
      MEDIUM Above ₹5 Crores up to ₹10 Crores
    • For Service Enterprises
      ENTERPRISE INVESTMENT (in Equipment)
      MICRO Not exceeding ₹10 Lakhs
      SMALL Above ₹10 Lakhs up to ₹2 Crores
      MEDIUM Above ₹2 Crores up to ₹5 Crores

    NEW CRITERIA:

    However recently, through a press release by the Honourable Finance Minister on 13/05/2020, a new definition for MSMEs has been introduced whereby the differentiation between manufacturing and service MSMEs investment limit is removed and the limit is revised upwards. Together with this, an additional criteria to define MSME is added, which is based on turnover. The following chart depicts the present scenario.

    ENTERPRISE INVESTMENT (in Plant and Machinery / Equipment) TURNOVER
    MICRO Upto ₹ 1 Crore Upto ₹ 5 Crore
    SMALL Above ₹ 1 Crore upto ₹ 10 Crore Upto ₹ 50 Crore
    MEDIUM Above ₹ 10 Crore upto ₹ 20 Crore Upto ₹ 100 Crore
  • HOW TO REGISTER AS AN MSME?
    Registration as an MSME under the MSMED Act, 2006 is not mandatory; however, the benefits are so many that the enterprises usually opt for registration. We will discuss about the benefits later in this blog, now let us look at the method and details required for registration as an MSME.

     

    • The MSME Registration (also known as SSI / Udyog Aadhar Registration) is available in online as well as offline mode.
    • Aadhar number is mandatory for Registration.
    • Online form can be filled through official Udyog Aadhar website.
    • Verification can be made through e-Aadhar OTP.
    • The Registration has lifetime validity with cancellation under certain circumstances.

    DOCUMENTS REQUIRED

    DOCUMENTS REQUIRED Other Documents For Unregistered Partnership Firm Specifically For Registered Partnership Firm Specifically For Company Specifically
    Address Proof of the business Aadhar Card Partnership Deed Registration Certificate Memorandum of Association (MoA)
    Sales and Purchase Bill Pan Card     Articles of Association
    Copy of Industrial Licence Bank particulars     Certificate of Incorporation
    Bills and Receipts on purchase of machinery       A copy of the resolution passed in general meeting of the Company
            A copy of Board resolution authorising a director to sign the MSME Application

    Concept of Provisional Registration:

    Provisional Registration is issued by the Ministry of MSME prior to commencement of business with a validity of 5 years. Such provisional registrations help in obtaining loans from banks and also in applying for NOC from the regulatory authorities. After the commencement of business, application can be made for Permanent licence which comes with lifetime validity and it can also be cancelled under special circumstances as stated above.

    Now, as we mentioned earlier, there are special benefits enterprises enjoy after registering as an MSME. That leads to our next question:

  • WHAT ARE THE BENEFITS GIVEN TO MSMEs?
    The government, with the objective to promote the Micro, Small and Medium Enterprises and to encourage registrations under the MSMED, Act has endowed the sector with great amount of benefits through policies or other means. These benefits are:

     

    Moreover, while presenting the budget every year, the government comes up with variety of benefits for the MSMEs because of the fact that the MSME sector is a strong pillar of economy and India wants to supply it with necessary measures to keep it strong and standing.

    Recently, Finance Minister, Nirmala Sitharaman has announced additional benefits for MSMEs through a press conference dated 13/05/2020, whereby considering the present situation and the burden it has brought to MSME sector the government has come up with exceptional benefits to support them. Let us look at the extended list of benefits recently added:

    • Collateral free Automatic loans for MSMEs:
      • Total facility upto 3 Lakhs Crore
      • MSMEs with 25 crore outstanding loan and 100 crore turnover can be benefitted
      • Tenure – 4 years
      • Moratorium period – 12 months (No repayment of Principal amount)
      • Available till 31st October, 2020
      • No Guarantee fees
      • No fresh collateral required
      • To benefit 45 Lakh units
    • Subordinate Debt based Scheme:
      • 20 Thousand crore Subordinate Debt Proposition
      • 2 Lakh MSMEs to be benefitted
      • NPAs and stressed MSMEs are eligible
    • Fund for infusing equity into the MSMEs:
      • Fund of funds being created for infusing 50 Thousand Crore as equity into the MSMEs
      • MSMEs having potential and are viable can avail this benefit
      • It has a corpus of 10 Thousand Crore through mother fund and daughter fund framework
      • It is to provide growth potential to these MSMEs
    • New Definition to MSMEs :
      • As discussed above, the investment limit is increased and a turnover criterion is added to define MSMEs. The distinction between service enterprises and Manufacturing Enterprises is removed.
    • Global Tenders:
      • Tender upto 200 Crore or less in Government procurement are disallowed on global levels
      • This is to make small units to participate in Government purchases more effectively.
    • E-Market linkage:
      • Provided across the board for all MSMEs
      • To enable MSMEs to find their market easily in the absence of being able to participate in Trade fairs due to the current pandemic situation.

    Now, let us move to another important question which is frequently asked relating to the GST-MSME situation. As the taxes impact the businesses to a great extent, it is pertinent to mention the effects which the advent of Goods and Services Tax has brought for MSMEs and what possibilities it holds for the upliftment of the MSME Sector. Let us look at it in detail:

  • WHAT IS THE IMPACT OF GST ON MSMEs?
    To understand the answer clearly, let us quickly get an overview of Goods and Services Tax.GST is a form of Indirect tax which is incorporated in India through 101st Constitutional Amendment. Indirect Taxes are taxes which are levied on Supply of goods and services. Such taxes are collected by intermediaries and ultimately paid to the government; hence the burden of paying such taxes ultimately shifts to the end customer by an increase in price of their purchased goods and services.

 

Earlier there were several indirect taxes which are now absorbed by GST. Hence, the GST is formed to strengthen the vision of one nation one tax.

The impact of GST on MSMEs has been positive so far. Following are the benefits which the MSMEs are getting after the introduction of GST.

    • Easy Process and Uniformity:
      The GST Law makes conducting of businesses a smooth affair. GST brings uniformity in process with its registration system which makes it easy to start a new enterprise/start-ups as well as easier to expand the business in different states. This harmonization of laws, procedures and rates of tax across the country has an impact of bringing down compliance costs of taxes. Moreover, the digitalization of tax processing will make the taxation system transparent.
    • Lower Tax Rates:
      Under the GST composition scheme, the manufacturers of goods with a turnover up to 1.5 crore and service providers up to 50 lakhs enjoy two benefits: reduced paperwork and compliance, and lower tax liability. The following table shows the applicable GST rates under the GST Composition Scheme:

       

      Type of Business Manufacturers of Goods Restaurants (not serving Alcohol) Service Providers
      CGST 0.5% 2.5% 3%
      SGST 0.5% 2.5% 3%
      Total GST 1% 5% 6%

      Fixed tax rates and reduced tax liability leads to increased liquidity which ultimately helps in maintaining cash flow better and to conduct operations smoothly.

    • Exemptions Available:
      Another major advantage is the GST exemption; MSMEs are majorly benefitted from these exemptions. Businesses can claim exemption from GST Registration if their aggregate turnover is upto ₹ 40lakhs. Earlier, the VAT registration was required for businesses having a turnover of more than ₹ 5 lakhs.
    • Wider and Cost Effective Access:
      GST has facilitated efficient inter-state flow of goods by removal of inter-state check posts, optimizing the warehouse structure and ultimately bringing down logistics costs. This has led to cheaper movement of goods across the states and also made the process less time consuming.
    • Considerable Savings:
      Cascading effect has been removed as a result of consolidation of various taxes into single Goods and Services Tax (GST). This system has a non-inflationary approach and will lead to reduction in the cost of doing business, adding up to more direct savings for the MSMEs.

CONCLUSION

Micro, Small and Medium Enterprise (MSME) sector has emerged as an important sector of the Indian economy, contributing significantly to employment generation, exports, innovation and inclusive growth of the economy. Global trends in classifying the MSMEs show that it widely differs across jurisdictions and depends upon the government policies of the country. Indian government from time to time has brought various policies or measures to provide direct benefit to the sector so that the basis of economy can be nourished and escalated for a brighter future. The recent years have witnessed a rise in number of registrations under the MSMED Act, 2006 in order to avail the benefits offered to registered enterprises. This is a positive step towards the expansion of a strong pillar of economy i.e., the MSME sector. With the sector being a major attraction of government and the rapid steps taken by it to promote the sector, it is certain that in the coming time the MSMEs will contribute significantly high to the GDP of the country ensuring personal and national growth.

Here is a sample MSME Registration Certificate for reference:

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