The MSME Act: How It Benefits Small Businesses in India

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In the year 2006, the government came up with the Micro Small and Medium Enterprises (MSME) Act with the objective to increase the competitiveness of the businesses that operate on a smaller scale and boost local economies.

Small businesses, due to their limited resources and reach, face numerous issues in obtaining funds, accessing markets, and venturing into new product lines. However, their growth is considered crucial for developing regional economies as they offer employment to a large number of people and promote Indian handicrafts. They are generally labour-intensive, and can hence cater to a large proportion of our nation’s working population without the need for heavy investments in capital assets like plants, machines, etc.

Recognising the potential of these enterprises, the government revised the definitions of the MSMEs under the Atmanirbhar Bharat Package in the year 2020 to allow a greater number of enterprises to avail the benefits of being recognised as a small business.

What is an MSME?

As per the revised definitions, the MSMEs are determined based on the investment in capital assets and the annual turnover. A Manufacturing Enterprise or an Enterprise Rendering Services can be classified as an MSME if it meets the following criteria:

Mirco Enterprises: Investment in Plant and Machinery or Equipment not more than Rs. 1 crore and Annual Turnover not more than Rs. 5 Crore
Small Enterprises: Investment in Plant and Machinery or Equipment not more than Rs. 10 crore and Annual Turnover not more than Rs. 50 Crore
Medium Enterprises: Investment in Plant and Machinery or Equipment not more than Rs. 50 crore and Annual Turnover not more than Rs. 250 Crore

Based on these definitions, there are about 5.56 crore Micro, 7.3 lakh Small and 68 thousand Medium enterprises in the country. They contribute about 30% to the country’s GDP, 45% to the Exports, and employ over 23 crore people.

Benefits of Registering as MSME

Being recognised as an MSME makes you eligible to avail the benefits of a host of government initiatives aimed at making things easier for small businesses. These are discussed as follows:

Preferential Lending by Banks – Banks are required to ensure that 60% of their lending goes to MSMEs, with an annual increase of 20% in the amount of lending and 10% in the number of micro loan accounts.
Collateral-free Funding – Under the Credit Guarantee Scheme for Micro & Small Enterprises (CGTMSE), Micro and Small Enterprises (MSEs) can get loans without collateral and third-party guarantees up to Rs. 5 Crores.
Credit Protection – Entities that buy goods or services from MSMEs are required to make payment to these firms within 45 days of purchase, failing which they are liable to attract compound interest on these loans applied on a monthly basis, along with penal interest at a rate three times the Bank Rate as specified by the Reserve Bank of India (RBI). This is to ensure that MSMEs can meet their working capital needs and that their funds do not get held up with big enterprises for long periods.
Relaxation in Public Procurement Norms – MSMEs can access the Government e-Marketplace (GEM) to list their goods and services. Additionally, public sector enterprises are required to source 20% of their purchases from MSMEs mandatorily. The ‘Turnover’ requirements for applying to tenders are relaxed for these enterprises, and they are not required to provide the Earnest Money Deposit (EMD).
Benefits on Expenses and Taxes – MSMEs get rebates on electricity bills for their facility, subsidies in Intellectual Property registration fees, and reimbursements in ISO certification fees. Along with that, they get several tax concessions from the central and the state governments.
Access to Domestic and International Markets – The government organises trade fairs, exhibitions, and trade expos, for MSMEs to showcase their products on national and international platforms. These also serve as a means to educate and upskill MSMEs in the latest technologies and global best practices across various domains like manufacturing, packaging, etc.

How to Register as an MSME

The process of registering as an MSME is fairly simple. A business wishing to register as an MSME has to visit the Udyam portal and follow the directions on the website to complete their registration, providing the necessary details about the entrepreneur and the enterprise. The process is completely paperless and free of cost. Upon registration, the Udyam Registration Certificate is issued in digital format, along with the Udyam Registration Number.

In order to register, Aadhar card and PAN card details are required. It is not mandatory to have a GST number to register as an MSME if the business falls below the GST threshold limits. However, if the business is taxable under GST, then they need to provide their GST number. Click here to learn more about the GST registration process.

Brydgework Consultants can help your organisation determine your eligibility for MSME, assist with registering under MSME, GST and related schemes, and make it easier for you to meet all compliance requirements at the setting up stage for your business. To explore our full range of Business Nurture consultancy services, click here.