MSME / Udyam Registration: Definition, Eligibility and Issues

Udyam Registration (Effective from July, 2020): DEFINITION, ELIGIBILITY AND ISSUES

CONTENT

A. Definition of MSME

B. Activities (NIC codes) not covered under MSMED Act, 2006 for registration

C. How to Calculate Investment and Turnover?

D. Answers to queries relating to eligibility

You may watch Video explaining new MSME definition, eligiblity and issues at https://youtu.be/lyqfU1IErhc

A. Definition of MSME

In Hindi, Micro is known as “Suksham”, Small as “Laghu” & Medium as “Madhyam” Enterprises. On 26st June, 2020, Ministry of Micro, Small and Medium Enterprises has notified certain criteria for classifying the enterprises as MSME and has specified the form and procedure for filing the memorandum. The newly adopted definition comprises of an additional criterion of turnover. One of the major changes and new introduced is the calculation of turnover and calculation of investment in plant & machinery. Also the separate limit for manufacturing and service sector is removed. To know the detailed step-wise easy process to get Udyam Registration, Click Here

In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes:

i. Manufacturing Enterprises

The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule (provided in Appendix) to the Industries (Development and regulation) Act, 1951 or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use.

ii. Service Enterprises

The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.

Revised (New) definition of MSME based on Investment in plant & machinery AND turnover for both Manufacturing and Service sector is as follow:

Enterprises Investment in plant  machinery (in Rs.) Turnover (in Rs.)
Micro Enterprises Up to 1 crore Up to 5 crores
Small Enterprises Up to 10 crores Up to 50 crores
Medium Enterprises Up to 50 crores Up to 250 crores


B. Activities (NIC codes) not covered under MSMED Act, 2006 for registration

Ministry of Micro Small or Medium Enterprises notified vide notification number S.O. 2576 (E) dated 18.9.2015 and subsequent notification No. SO 85(E) dated 10.1.2017 for registration of Udyog Aadhaar Memorandum for Micro, Small or Medium Enterprises. In this context it is further clarified that the activities in Table.1 below would not be included in the manufacture or production of goods or providing or rendering of services in accordance with Section 7 of the Micro, Small and Medium Enterprise Development Act, 2006:

Table 1:

NIC Code

Activity

02

Forestry and logging

03

Fishing and aquaculture

45

Wholesale and retail trade and repair of motor vehicle and motorcycles

46

Wholesale trade except of motor vehicles and motor cycles 47

47

Retail Trade Except of Motor Vehicles and motor cycles

97

Activities of households as employees for domestic personnel

98

Undifferentiated goods and services producing activities of private households for own use

99

Activities of extraterritorial organization and bodies

The NIC 2-digit activity 01- crop, animal production, hunting and related activities would also not be included as per Section 7 of the Act except for the sub-classes of activities at 5-digit level given in below Table:

NIC Code

Activity

01462

Production of eggs

01463

Operation of poultry hatcheries

01492

Bee- keeping and production of honey and beeswax

01493

Raising of silk worms, production of silk worm cocoons

01612

Operation of agricultural irrigation equipment

01620

Support activities for animal production

01631

Preparation of crops of primary markets i.e. cleaning, trimming, grading disinfecting

01632

Cotton ginning, cleaning and bailing

01633

Preparation of tobacco leaves

01639

Other post-harvest crop activities, n.e.c

01640

Seed processing for propagation

C. How to Calculate Investment and Turnover?

A composite criterion of investment and turnover shall apply for classification of an enterprise as micro, small or medium.  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.

i. Calculation of investment in plant and machinery or equipment

Meaning of Plant and Machinery or Equipment

  • Plant and machinery or equipment of the enterprise, shall 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 shall include all tangible assets (other than land and building, furniture and fittings).
  • 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
  • In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration and relaxation upto the 31st March of the financial year in which it files its first ITR.
  • 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.
  • Plant and machinery or equipment = all tangible assets (purchased 1st hand or 2nd hand) – land and building – furniture and fittings
  • Cost = Purchase (Invoice) Value - Goods and Services Tax (GST). The cost of pollution control, research & development, industrial safety devices and such other items as may be specified, by notification, shall be excluded from investment cost.

 ii. Calculation of turnover

  • 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.
  • In case of a new enterprise, where no prior ITR or Pan is available, the turnover will be based on self-declaration and relaxation up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory.
  • Turnover = All unit turnover (goods or services) - Exports of goods or services or both
  • Enterprises with trading activities are not covered

D. Answers to queries relating to registration

Query 1: Energetic Pvt. Ltd. is having separate GSTN for locations in Gujarat (Turnover Rs. 50 crore), Maharashtra (Turnover Rs. 150 crore) and Karnataka (Turnover Rs. 300 crore). Can ABC Pvt. Ltd  register it’s locations in Gujarat and Maharashtra as MSME?

Answer: No, for the purpose of calculating turnover limit, the same need to be considered PAN-wise. Total turnover of ABC Pvt. Ltd for one PAN is Rs. 500 crore that is more than maximum threshold allowed for MSME registration.

Query 2: Futuristic Pvt. Ltd. has investment of Rs. 20 crore in Plant and Machinery. The company has turnover of Rs. 100 crore in manufacturing activity and Rs. 300 crore in trading activity. Can the company be registered as MSME?

Answer: Total turnover as per GST and Income Tax exceeds Rs. 250 crore. Eventhough the entity’s turnover from manufacturing activity is within limit, as the turnover at entity level exceeds threshold limit, Futuristic Pvt. Ltd will not be eligible to get MSME registration.

Query 3: Realistic Ltd. has investment in plant and machinery of Rs. 25 crore and total turnover of Rs. 300 crore, out of which turnover of Rs. 100 crore from trading activities, Rs. 80 crore from export and others from manufacturing activities. Is the company eligible to apply for MSME registration?

Answer: For the purpose of calculation of Turnover, export turnover is to be excluded hence, turnover for the purpose of MSME is Rs. 220 crore that is lower than the threshold limit. Therefore Realistic Ltd is eligible to apply for MSME registration.

If you have any other query, feel free to post so that the same can be responded to.

About Chintan Patel FCA, CPA(USA), Cert.IFRS(ICAI), CISA (USA), DISA, DIRM

CA Chintan Patel is a partner of Naresh J. Patel & Co. Chartered Accountants (www.nareshco.com). Key Professional Contributions: Immediate Past Chairman of Ahmedabad Branch of WIRC of ICAI, Co-author of book on Ind AS & ICDS published by Taxmann, Trainer/Faculty at more than 300 seminars/conferences. He has over 15 years of post qualification experience working with SMCs, MNCs on International GAAP, Companies Act, 2013, GST and other advisory.
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