MSME Classification – all you need to know.

Last Updated on July 26, 2023

The Government had always been working for the benefit of Micro, Small, and Medium Enterprises (MSMEs). Along with this Government also provide many services to MSME registration. In India, when it comes to MSME registration, we can see that many benefits also come with it. A business can avail of these benefits only if it has been registered as an MSME/SSI under the MSME Act.

For a very long time, the MSME industry was waiting for definition change. The major problem of the sector was fear. The fear of growing in number and losing the opportunities to be recognized as MSME and failing to benefits, the industry worried. However, the change in the definition has given a feeling of relaxation to the entire MSME industry. 

On 13 May 2020, an announcement was made, an amendment in MSME classification and a definition change was made in Aatmanirbhar Bharat Package. This announcement ensures the MSMEs don’t have to worry about the MSME benefits’ ineligibility if they grow in numbers.

Why Classification Required?

The first question that may come to your mind is what is the purpose of classification in the first place. Well, here the answer. 

They are considered insignificant. But do not undermine the importance. You will be surprised to know that MSMEs contributed 29% to GDP in 2019! And they generated more than one crore jobs, thus solving the problem of unemployment to some extent. The government realizes their significance. Hence, they provide enormous benefits to startups, which include:

• Collateral-Free Loans: Finance is considered the lifeblood of business. Every business requires an adequate amount of funding to operate effectively. But MSMEs may not have the collateral for the loans. That is why the government gives collateral-free loans to ensure that no MSME faces a shortage of funds.
• Attractive Interest Rates: The government reduces a significant burden by giving collateral-free loans. But it doesn’t end here. They also offer loans at an attractive rate of interest. They are given an exemption of 1% while availing of the overdraft facilities.  
• Protection against delayed payments: Generally, the big corporations are their customers. That is why they often indulge in the exploitation of MSMEs. To prevent this from happening, the government has given a right to collect interest on payments made after the due date.
• Subsidies: The government grants subsidies on patent registration and industrial promotion. Their amount may be as high as 50%! MSMEs are given concessions on electricity bills as well.

In the budget 2021, there were several benefits given to MSMEs. Make sure to check it out, especially if you own one. It is necessary to classify them separately to ensure that these incentives don’t go into the wrong hands. But don’t worry. They have revised the classification to ensure that more MSMEs can avail the benefits.

Want to know the revised classification? Here you go.

Revised MSME Classification

On 1 June 2020, the Government issued a notification to implement the amendment made in Aatmanirbhar Bharat Package on 13 May 2020. Nirmala Sitharaman officially implemented the new definition and criterion on 1 July 2020.

As per the amendment in MSME classification, the definition change stated that the new definition increased micromanufacturing and services units to Rs. 5 Crore of turnover and Rs. 1 Crore of investment. Moreover, Rs. 10 Crore of investment and Rs 50 Crore of turnover became the limit for the small unit, and for the medium unit, it increased to Rs. 20 Crore of investment and Rs. 100 Crore of and turnover of Rs. 250 Crore.

Classification of MSME:

Let us briefly see what were the classifications of MSME 2020 as per the revised definition. The change in classification criteria of MSME is based on the following: 

Criteria for MSMEs classification in two categories earlier:

• Manufacturing 
• Service enterprises. 

After this notification, these two categories have been changed, and from now both will be identified as the same. Before, when MSMEs were classified into two categories, based on investment, they were defined. Once all the amendment in MSME classification is made this will be notified. According to the announcement made on Aatmanirbhar Bharat Package on 13 May 2020, the manufacturing and service MSMEs will be defined under a standard metric. This common metric will mix the company’s turnover and the investment in plants and machinery or equipment and turnover.

What was the previous classification of MSME valid up to 30 June 2020:

Before the amendment in the definition of MSME before 30 June 2020, let us see how the MSME sector was classified. This will give you a brief idea about what was the fear faced by the industry regarding the increase in number and how the new amendment in MSME classification by the Government will help the entire MSME industry. 

These were two classifications: 

1. Manufacturing Enterprises:

• Micro: Investment <Rs. 25 lakh
• Small: Investment <Rs. 5 crore
• Medium: Investment <Rs. 10 crore

2. Service Enterprises

• Micro: Investment <Rs. 10 lakhs
• Small: Investment <Rs. 2 crores
• Medium: Investment <Rs. 6 crores

After looking at this previous classification, you will see the difference between new and old type limits. The classification of MSME 2020 has given relaxation to the whole industry to grow. This opportunity will surely bring more value to the entire MSME industry. 

On 26 June 2020, a new notification was issued which states the form and procedures for filing the memorandum and other, namely: 

• Composite criteria of investment and turnover for classification,
• Calculation of investment in plant and machinery or equipment,
• Calculation of turnover,
• Registration process,
• Registration of existing enterprises,
• Updation of information and transition period in classification,
• Facilitation and grievance redressal of enterprises.

In the supersession of the notifications of the Government of India in the Ministry of Micro, Small and Medium Enterprises, this said notification has been issued, which was number S.O.1702 (E), dated 1 June 2020, S.O. 2052 (E), dated the 30 June 2017, S.O.3322 (E), dated the 1 November 2013 and S.O.1722 (E), dated the 5 October 2006. This was published in India’s Gazette, Extraordinary, Part II, Section 3, Sub-Section (ii), except as respects things done or omitted to be done before such supersession.

In the times of covid, the Indian Government took on the vital step towards the growth of the MSME industry on 13 May 2020. Finance Minister Nirmala Sitharaman made the announcement. This amendment concluded that Finance Minister Nirmala Sitharaman, along with the investment, added the additional turnover principle. She also addressed the reason behind the amendment in MSME classification. “The new definition will bring many benefits and aids to the industry to grow in size”, she said. Amidst the pandemic Indian Government made this decision under the Atma Nirbhar Bharat Abhiyan Economic Package to ensure the growth of the Indian economy. 

For other information related to the Classification of MSME, like their registration, one can visit the “Udyam Registration portal” to know more. Also, every detail regarding the respective industry is available on the portal.

Final Words

With the growth of MSMEs, it is only natural that they had a FOMO of the benefits given due to the increased investment. But the announcement brought a sigh of relief among them. The investment limit was increased significantly and a turnover-based limit was introduced. Also, the disparities with the service sector were eliminated. 

The government has left no stoned unturned to promote ease of business. You can see the result yourself. The number of MSMEs has increased by 18.5% YoY to 6.3 Crore!

In case you want to start your MSME, don’t hesitate to do so. The government (and us, of course 🙂 ) got your back.

Frequently Asked Question:

Q1: Is MSME registration is now Udyam Registration?

Yes, now MSME registration is replaced with Udhyam registration.

Q2: Can a new business as well as an existing business both can apply?

Yes, for MSME/Udyam registration, both can apply.

Q3: Can trading companies/businesses register under MSME?

No, only manufacturing and service companies and businesses can register themselves under MSME.

Q4: Do I need to do multiple registrations for the same business to run in different cities?

No, Udyam registration is for a single entity no matter how many plants and branches the entity has.

Q5: What is the expiry of MSME Certificate?

There is no such expiry date for the MSME certificate as of now.