MSME Classification: Meaning, Criteria & Benefits

The micro, small, and medium enterprises (MSME) significantly contribute to the economic growth as well as India’s GDP. MSMEs boost job creation, innovation, and overall development of the nation. The revised MSME classification was launched by the government on 13th May 2020 as the Atmanirbhar Bharat package to determine the eligibility of MSMEs. This blog will cover the meaning, criteria, and advantages of the revised MSME classification helping businesses drive progress by leveraging their framework.

What is the revised Classification of MSME?

As per the earlier Micro, Small, and Medium Enterprise Development (MSME) Act 2006, manufacturing and services were considered separate categories. In the revised classification of MSMEs in 2020, the difference between manufacturing-based MSMEs and Service-based MSMEs has been removed. Besides this, in the revised classification of MSME, the inclusion of turnover has been introduced which was earlier determined based on investments.

With the new MSME classification, MSMEs will strengthen their enterprises and leverage their growth and it will help them export goods without losing the advantage of MSMEs. This new MSME classification came into effect on 1st July 2020. The MSME Development Act established the National Board for Micro, Small, and Medium Enterprises (NBMSME), which plays a crucial role in supporting the development and competitiveness of MSMEs.

Given below is the revised or new MSME classification: According to the new definition, exports will not be considered as a part of turnover for any micro, small, and medium enterprise. This classification is aligned with the latest guidelines under the MSME Development Act, helping businesses access targeted benefits based on their size.

Definition and Full Form of MSME

The full form of MSME is Micro, Small, and Medium Enterprises. These enterprises are defined under the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006. Over the years, the definition of MSMEs has evolved to encompass both manufacturing and services units. The revised classification now focuses on two main criteria: annual turnover and investment in plant and machinery. This dual approach ensures a more comprehensive and inclusive categorization, allowing a broader range of businesses to benefit from MSME status.

Investment based Classification

Turnover based Classification

Small enterprises are classified based on their turnover, with specific financial thresholds determining their categorization within the MSME framework.

Types of MSMEs

MSMEs are classified into three categories: Micro Enterprises, Small and Medium Enterprises (SMEs), and Medium Enterprises. Each category has its own set of characteristics and benefits, tailored to support businesses of varying sizes and capacities.

Micro Enterprises

Micro Enterprises are the smallest units within the MSME sector. These businesses have an investment limit of up to ₹1 crore in plant and machinery or equipment, and an annual turnover of up to ₹5 crore. Typically, Micro Enterprises are small-scale operations, often family-owned and operated, with a limited number of employees. They play a crucial role in the manufacturing and services sectors, contributing significantly to local economies and providing employment opportunities at the grassroots level.

Small and Medium Enterprises (SMEs)

Small and Medium Enterprises (SMEs) occupy the middle ground between Micro and Medium Enterprises. SMEs have an investment limit of up to ₹10 crore in plant and machinery or equipment, and an annual turnover of up to ₹50 crore. These enterprises are generally more formalized than Micro Enterprises, featuring a larger workforce and a more complex organizational structure. SMEs are pivotal in driving economic growth, fostering innovation, and enhancing competitiveness in various industries.

Medium Enterprises

Medium Enterprises represent the largest units within the MSME classification. These businesses have an investment limit of up to ₹50 crore in plant and machinery or equipment, and an annual turnover of up to ₹250 crore. Medium Enterprises are often well-established, with a significant number of employees and a sophisticated organizational framework. They are typically industry leaders, making substantial contributions to the economy through innovation, large-scale production, and employment generation.

Characteristics of MSMEs

MSMEs are distinguished by their limited investment in plant and machinery or equipment, as well as their annual turnover. Typically small in size, these enterprises often have a limited number of employees and are frequently family-owned or operated. MSMEs span a wide array of sectors, including manufacturing, services, and trade. Known for their flexibility and adaptability, MSMEs are often at the forefront of innovation, pioneering new technologies and products. Their ability to quickly respond to market changes makes them a vital component of the Indian economy.

What are the new features of the new MSME classification?

Below are some of the key points:

Turnover-based criteria: Businesses with an annual turnover of up to ₹250 crore are part of the latest classification of MSME. Turnover-based criteria allow for more flexibility and integration of additional businesses, benefiting the economy.

Simplified business options: The new MSME classification simplifies the registration process and minimizes compliance burdens, making it simpler to do business. You are not required to do multiple registrations now.

Special ID number: A unique identification number grants access to various government schemes and benefits and serves as a single reference for regulatory and compliance needs.

Funding and incentives: The government has introduced measures to aid MSMEs, including reduced credit costs, subsidies for technology upgrades, and tax incentives.

What are the benefits of being the latest classified MSME?

There are several benefits of being part of the new classification of an MSME, some of which are given below:

Collateral-free bank loans: Small and micro businesses now can enjoy collateral-free financing after the Indian government has introduced this feature. This program benefits both new and old businesses. 

Access to international trade: MSME delegates can participate in international trade shows, exhibitions, business meetings, seminars, and conferences worldwide funded by the Indian government.

Reduced rate of interest from banks: The interest rate for MSME-registered businesses is lower than for other enterprises benefiting them. A priority credit has been sustained for the MSME classified new sector. MSMEs benefit from cheap business loan rates as banks lending to them have reached a certain threshold.

Subsidy on Patent Registration: MSMEs registered with the ministry of micro, small and medium enterprises are eligible for a 50% discount on their patent registration costs as per the existing regulations. The subsidy encourages small companies and start-ups to keep on developing innovative ideas and technologies.

Tax Exemption: MSMEs can be relieved of taxation and the tedious process of audits and maintaining books of accounts. They can save money and enjoy several benefits in the new MSME classification criteria.

Electricity bill concessions: MSMEs with Registration Certificates can qualify for electric bill discounts. By giving an application for concession along with the certificate of registration, micro, small, and medium-sized businesses (MSME) can enjoy electricity concessions as a new MSME classification.

Marketing and promotion assistance from the government: MSMEs get access to international trade-related events, craft fairs, exhibitions, and exchanges all organized by the Indian government as being part of MSME's latest classification. This builds new commercial relationships with other countries and MSMEs also benefit from subsidies, tax breaks, and technical assistance from the government.

Technology upgradation support to MSME: The government reimburses the MSMEs for the expenses incurred for creating clean technology, preparing audit reports, and providing licensing products of national and international standards. The government encourages the cost-effective promotion of clean energy used for manufacturing enterprises as part of the classification of MSME.

MSME Certificate and Registration

An MSME Certificate is an official document issued by the Government of India, certifying that a business qualifies as a Micro, Small, or Medium Enterprise (MSME). This certification is usually obtained through the Udyam Registration portal, a streamlined online process designed to simplify registration. Being recognized under the MSME Development (MSMED) Act, 2006, provides businesses with numerous advantages. These include access to government subsidies, tax exemptions, and preferential treatment in government procurement processes. Registration as an MSME not only validates the business’s status but also opens doors to a range of support mechanisms aimed at fostering growth and sustainability.

MSME Development and Support

The Ministry of Micro, Small and Medium Enterprises is dedicated to the development and support of MSMEs in India. This ministry offers a comprehensive range of services and schemes designed to foster the growth and sustainability of MSMEs. These initiatives include financial assistance, technology upgrades, skill development programs, and market access support. By providing these resources, the ministry aims to enhance the competitiveness of MSMEs, enabling them to thrive in both domestic and international markets. The ministry’s efforts are crucial in driving economic development, promoting entrepreneurship, and creating employment opportunities across the country.

What is the role of the new MSME classification in India?

Here's how the new MSME classification is prepared to nurture entrepreneurship and self-employment in India.

Boosting Local Manufacturing: The MSME classification new sector aligns with the Atmanirbhar Bharat Yojana by encouraging local manufacturing and reducing dependence on imports. The government allows incentives for domestic production to boost local manufacturing.

Unlocking MSME potential: To facilitate growth and unlock the full potential for the new MSME classification, the facilities get access to credits, technology upgrades, and various government aids.

Access to the skilled workforce: Government-initiated schemes like Skill India Mission, the Apprentices Act, and Pradhan Mantri Yojana provide skill training and entrepreneurial opportunities for the newly classified MSME sector that needs the required trained personnel.

Conclusion

Micro, Small, and Medium Enterprises (MSMEs) are essential for driving economic growth, fostering innovation, and creating employment opportunities across the country. To fully utilize the government’s support, such as financial aid, tax benefits, and improved market access, it is crucial to understand the classification of MSMEs under the changed definition based on investment and turnover criteria. This updated framework not only simplifies their categorization but also aligns their potential with the nation’s growth goals. With the new definition in place, MSMEs can drive resilience, sustainable development, and long-term progress for the country.

FAQs

Q1. What is the new payment rule of MSME?

Ans. The 45-day MSME payment rule significantly benefits MSMEs by ensuring they receive timely payments for their goods and services. By mandating buyers to settle dues within 45 days of accepting goods or services, the rule helps MSMEs maintain steady cash flow and stability of the financial institution.

Q2. What is the new classification of MSME recently announced?

Ans. As per the new definition, the classification of MSMEs are as follows

Q3. Who is not eligible for MSME?

Ans. MSME eligibility is only for business entities. Any business with an annual turnover of over ₹250 crores is not eligible for MSME registration as it exceeds the MSME turnover limit which means it falls under the category of large businesses.

Q4. What are the eligibility criteria to avail of MSME benefits?

Ans. Eligibility Criteria for MSME Certificate:-

Manufacturing: Investment in plant and machinery does not exceed INR 25 lakhs.

Service Enterprise: Investment in equipment does not exceed INR 10 lakhs.

Q5. Which industries come under MSME?

Ans. Micro, Small, and Medium Enterprises (MSMEs) cover a wide range of industries, which are broadly classified into manufacturing and service sectors. Here's an overview:

Manufacturing Industries

• Textiles and Garments: Small-scale production of fabrics, clothing, and home textiles.
• Food and Beverage: Bakeries, packaged snacks, and small food processing units.
• Automotive Components: Small-scale manufacturing of parts for vehicles.
• Machinery and Equipment: Production of small tools, machines, and industrial components.
• Pharmaceuticals: Small-scale drug production and formulation.
• Furniture and Woodwork: Manufacturing furniture and other wooden products.
• Handicrafts and Artisan Products: Small workshops producing handmade goods like pottery, jewelry, and artworks.

Service Industries

• Information Technology (IT) Services: Web design, software development, and IT support services.
• Retail and Trading: Small retail shops, e-commerce businesses, and traders.
• Healthcare Services: Small clinics, pathology labs, and wellness centers.
• Logistics and Transportation: Courier services, local transport, and small freight companies.
• Education and Training: Coaching centers, vocational training, and online education platforms.

Key Sectors Under MSME Development

Under various government initiatives, specific sectors have received focused support, such as:

• Agro-based industries
• Traditional industries (like Khadi and village industries)
• Export-driven MSMEs in sectors like gems and jewelry.