Introduction
The classification of Micro, Small, and Medium Enterprises (MSMEs) plays a pivotal role in determining access to various government benefits, subsidies, and support schemes. Accurate classification requires a clear understanding of the criteria based on Investment in Plant and Machinery/Equipment and Turnover. This article delves into the calculation methods, considering the latest amendments, including the crucial refinements introduced in 2022. It also explains the conditions under which either or both criteria are applicable for MSME classification.
Key Criteria for MSME Classification
MSME classification is determined by two primary factors:
- Investment in Plant and Machinery/Equipment
- Turnover
An enterprise must meet both criteria to qualify under a specific MSME category—Micro, Small, or Medium. Any deviation in either factor may lead to reclassification.
Calculation of Investment in Plant and Machinery/Equipment
Definition
Plant and Machinery/Equipment includes assets directly involved in the manufacturing or production process. These are critical operational assets and do not include:
- Land and buildings
- Furniture and fittings
- Vehicles
This ensures that the classification is based on the core assets integral to business operations.
Valuation Methods
For New Enterprises:
- The investment is calculated based on the invoice value of the plant and machinery/equipment, excluding Goods and Services Tax (GST).
For Existing Enterprises:
- The Written Down Value (WDV) method is used as per the Income Tax Act, 1961, which considers the depreciated value of the assets, offering a realistic assessment of the enterprise's current investment.
Example:
- Suppose a medium enterprise purchased machinery five years ago for ₹50 Lakhs and recently added new equipment worth ₹10 Lakhs.
- Machinery (WDV): ₹30 Lakhs (after depreciation)
- New Equipment: ₹10 Lakhs (invoice value)
- Total Investment: ₹40 Lakhs
With a total investment of ₹40 Lakhs, this enterprise would be classified accordingly within the MSME framework.
Calculation of Turnover
Focus on Domestic Turnover
Turnover calculations for MSME classification focus exclusively on domestic turnover, with export turnover deliberately excluded. This approach encourages MSMEs to grow internationally without affecting their classification due to high export revenues.
Turnover Calculation Method
GST-Based Calculation:
- Turnover is determined based on GST returns, providing a verifiable and accurate record of the business’s sales.
Exclusion of Export Turnover:
- Export turnover is excluded from the turnover calculation, allowing enterprises to expand their international presence without altering their MSME classification.
Example:
- Consider a small enterprise with a total revenue of ₹70 Crores, including ₹20 Crores from exports.
- Total Revenue: ₹70 Crores
- Export Turnover: ₹20 Crores (excluded)
- Domestic Turnover: ₹50 Crores
This means the enterprise remains classified as a Small Enterprise, as its domestic turnover does not exceed the ₹50 Crore threshold.
MSME Classification Thresholds (Post-2020 and 2022 Refinements)
The MSME classification criteria, based on investment in plant and machinery/equipment and turnover, are as follows:
| Category | Investment in Plant & Machinery/Equipment | Turnover (Domestic) |
|---|---|---|
| Micro | Up to ₹1 Crore | Up to ₹5 Crores |
| Small | Up to ₹10 Crores | Up to ₹50 Crores |
| Medium | Up to ₹50 Crores | Up to ₹250 Crores |
Both criteria must be met for an enterprise to be classified within a specific category. If an enterprise exceeds either criterion, it may be subject to reclassification.
2022 Refinements: Clarifications in Valuation and Turnover Calculation
The 2022 refinements introduced significant clarifications:
Asset Valuation Methodology: For new enterprises, the invoice value (excluding GST) is used, while existing enterprises apply the WDV method. This ensures a consistent and fair assessment across different enterprises.
Turnover Calculation: The refinements emphasized the exclusion of export turnover and mandated the use of GST returns for accurate turnover determination. These changes enhance transparency and consistency, particularly for enterprises with substantial export activities.
These refinements ensure that the MSME classification process is both precise and reflective of the enterprise's actual scale and operations, supporting the effective implementation of policies and benefits.
Procedure for MSME Classification Calculation
Step 1: Determine the Investment in Plant and Machinery/Equipment
- For new enterprises, use the invoice value (excluding GST).
- For existing enterprises, calculate using the WDV method as per the Income Tax Act.
Step 2: Calculate the Turnover
- Focus on domestic turnover, excluding export turnover.
- Use GST returns for accurate turnover records.
Step 3: Compare Against MSME Thresholds
- Refer to the latest MSME classification thresholds.
- Ensure that both the investment and turnover criteria align with the desired MSME category.
Step 4: Classification
- Based on the calculated figures, determine whether the enterprise falls into the Micro, Small, or Medium category.
Conclusion
Understanding and accurately applying the criteria for MSME classification is essential for businesses to leverage government schemes and support. The 2022 refinements provided greater clarity, particularly in asset valuation and turnover calculation, ensuring that enterprises are classified appropriately.
By following the procedures outlined in this guide, businesses can confidently determine their MSME classification and ensure compliance with the latest regulations, maximizing their eligibility for government incentives and support.
