MSME Classification in India: Key Criteria and Features

In India, there are approximately 63 million Micro, Small, and Medium Enterprises (MSMEs), which contribute nearly 30% percent to the country's GDP, as of 2023. MSMEs also provide employment to thousands of people. Needless to say, the MSME sector is essential to the Indian economy. 

 

Previously, the MSME classification system had limitations, making it difficult for businesses to access government schemes. In response to these challenges, the Indian Government introduced a new MSME classification system in 2020. It aimed to address the issues MSMEs face and promote their growth and development.

The new MSME classification system is based on business turnover, unlike the previous system, which was based on plant and machinery or equipment investment. Therefore, the classification of MSMEs has been revised to increase the turnover limit for each category and reduce the compliance burden of MSMEs.

 

Based on their annual turnover, the new classification system has 3 categories - micro, small, and medium.

Here are some of the key features of the latest MSME classification system:

• Turnover-based Criterion

Businesses with an annual turnover of up to ₹250 Crores are classified as MSMEs. This change in criteria allows for more flexibility and inclusion of more businesses, which will benefit the economy as a whole.

• Ease of Doing Business

The new MSME classification system is designed to promote ease of doing business by simplifying the registration process and reducing the compliance burden. The new system also eliminates the need for businesses to provide multiple registrations.

• Unique Identification Number

This unique number will help access various government schemes and benefits and provide a single reference point for all regulatory and compliance purposes.

• Incentives and Subsidies

The government has announced several measures to support MSMEs, such as reducing the cost of credit, providing subsidies for technology upgrades, and tax incentives.

Under the new MSME classification system, certain documents are essential for MSME registration:

1. Aadhar Card  

It must include details of the proprietors, partners, or directors required for individual identification.

2. PAN Card 

The PAN card of the business entity serves as a unique identifier for taxation and official purposes.

Here is how the new MSME classification system is expected to promote entrepreneurship and self-employment in India: 

• Promoting Local Manufacturing

The new classification of the MSME system helps achieve the goal of Atmanirbhar Bharat (Self-reliant India). This is achieved by promoting local manufacturing and reducing dependence on imports. The government encourages them to produce goods locally and reduce imports by providing incentives and subsidies to MSMEs

• Realising the Potential of MSMEs

The new classification system provides MSMEs with easier access to credit, technology upgradation, and other forms of government support.

• Access to Skilled Manpower

The government has launched several initiatives to address the skill gap in the MSME sector. These include the Skill India Mission, the Apprentices Act, and the Pradhan Mantri Kaushal Vikas Yojana. These provisions aim to provide youth and workers with skill training and employment opportunities.

• Government Support for MSMEs

The government has launched several schemes and initiatives to improve access to finance, technology, and a skilled workforce for small businesses. These include the Credit Guarantee Scheme, the Prime Minister's Employment Generation Programme, the technology upgradation program, and more.

Recognizing MSMEs’ contribution, the Government of India provides various tax benefits and incentives to MSMEs. Here are some of the tax benefits for MSMEs: 

• Income Tax Exemption

MSMEs with a turnover of up to ₹250 Crores are eligible for an income tax exemption under Section 80J of the Income Tax Act. This exemption is available for 7 years from the year of incorporation.

• Tax Holiday

MSMEs producing certain goods, such as mineral oil, natural gas, and fertilizers, are eligible for a tax holiday under Section 80-IB. This tax holiday is available for 5 years from the year of commencement of production.

• Reduced Tax Rates

MSMEs with a turnover of up to ₹50 Crores can avail of a reduced tax rate of 25% under Section 115BA.

• GST Benefits

MSMEs with a turnover of up to ₹1.5 Crores can avail of the Composition Scheme under the Goods and Services Tax (GST) regime. Under this scheme, MSMEs are required to pay a lower tax rate and have reduced compliance requirements.

• Capital Gains Exemption

MSMEs can avail of capital gains exemption under Section 54GB of the Income Tax Act. This exemption is available if the MSME invests the capital gains from the sale of a long-term asset in the equity shares of an eligible start-up.

• Investment Allowance

MSMEs investing in plant and machinery can avail of an investment allowance of 15% under Section 32AC of the Income Tax Act.

 

The tax benefits and incentives available to MSMEs are crucial for their growth and development. These benefits reduce the tax burden on MSMEs, enabling them to invest in their businesses and expand their operations. 

 

In addition, the tax benefits MSMEs enjoy allowing them to compete with larger firms. With the provision of incentives and subsidies, the new classification system helps MSMEs overcome the challenges of accessing finance, technology, and a skilled workforce.