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Revised Guidelines on Classification of MSMEs and Registration under Udyam

CA Mahesh Bansal 
on 29 June 2020

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The Central Govt. has notified revised method of classification of micro, small and medium enterprises w.e.f. 1st July 2020. Those who could not find time to read entire notification or could not get any point clearly, may go through the following gist with examples for simple but clear understanding.

1. The classification of entities based on investment in plant & machinery or equipment and/or aggregate turnover is proposed as follows:

  • Micro units- investment in plant & machinery or equipment (P&M or E) upto Rs. 1 Cr. and turnover upto Rs. 5 Cr.
  • Small units- investment in P&M or E upto Rs. 10 Cr. and turnover upto Rs. 50 Cr.
  • Medium units- investment in P&M or E upto Rs. 50 Cr. and turnover upto Rs. 250 Cr.
  • All those units not covered under any of above three categories shall be called large enterprises.

2. To be classified under a particular category, the unit should satisfy both the criteria (investment in P&M or E and aggregate turnover) of that category. If it exceeds the limit under any of the two criteria, it will lose its category and will be classified under next higher category.

Examples:

a) P&M or E is Rs. 60 lakh but turnover is Rs. 6 Cr.- small enterprise
b) P&M or E is Rs. 8 Cr. but turnover is Rs. 4 Cr.- small enterprise
c) P&M or E is Rs. 90 lakh but turnover is Rs. 55 Cr.- medium enterprise
d) P&M or E is Rs. 9 Cr. but turnover is Rs. 200 Cr.- medium enterprise
e) P&M or E is Rs. 75 lakh but turnover is Rs. 260 Cr.- large enterprise

It means category of a unit will be higher of the two determined under the two criteria (investment in P&M or E and turnover).

3. All units under same PAN will be counted as one and their investment in P&M or E as well as turnover will be combined for classification purposes.

Revised Guidelines on Classification of MSMEs and Registration under Udyam

For example- if an individual has 3 different businesses under 3 different proprietorship firms, they will be treated as one for this purpose because their PAN will be same. However, if one individual has 2 proprietorships and is a partner in one partnership firm, the turnover/P&M or E of the partnership shall not be clubbed with those of the 2 proprietorship firms since PAN of the partnership shall be different.

4. Calculation of investment in P&M or E shall be linked to your ITRs filed for previous years. If it is a new entity and no previous ITR exists, the first time value of investment in P&M or E shall be on self declaration basis but this relaxation shall cease to exist on 31st March of the year in which you file your first ITR.

For example- if you commence a new unit today i.e. on 27.06.2020, you shall have to self-declare value of investment in P&M or E and it will be accepted. But since you will file your first ITR in next financial year i.e. FY 2021-22, the self-declaration will have no effect after 31.03.2022 and the system will pick the value of P&M or E declared in your ITR.

5. The term P&M or E shall include all tangible assets except land & building and furniture & fittings. Meaning thereby, intangible assets such as goodwill, patent, trademarks, copyrights etc. will not be included in value of P&M or E.

6. The original purchase value (and not the WDV) of P&M or E, whether bought new or second hand, but excluding amount of GST, shall be considered forever for the purpose of computation of investment in P&M or E.

7. While computing turnover, value of exports of both goods and services shall be excluded. Information regarding turnover and exports turnover shall be imported from your GST profile. However, in case of a new entity which does not have PAN, the turnover shall be accepted on declaration basis maximum upto 31st March 2021 after which both PAN and GSTIN shall be mandatory.

8. The registration window named as 'Udyam' shall open from 1st July 2020. The process of registration shall be almost similar to that under Udyog Aadhaar. Aadhaar number shall be mandatory here also.

9. All existing entities already registered under Udyog Aadhar need to register again under Udyam on or after 1st July 2020 but before 31st March 2021. After 31.03.2021,existing units registered under Udyog Aadhaar shall lose their benefits if not registered under Udyam. All existing entities registered under Udyog Aadhaar shall be re-classified in line with these guidelines.

10. After first time registration, all registered entities shall have to update their details every year within a specified period else their status may be suspended.

11. Based on information filed by you and gathered from Income Tax portal and GST portal, your classification may change from time to time.

12. However, if your classification gets revised upwards (e.g. from small to medium or micro to small), it will take effect after one year from the end of the financial year in which such change occurs.

For example- if you update your details on 01.07.2020 and your status revises upwards from micro to small, you will still remain a micro unit till 31.03.2022 for all purposes and continue to take all benefits available to micro units.

13. But if the classification revises downwards, it will take effect from 1st April of the next financial year. For example- if you update details on 15.07.2020 and your status changes downwards from small to micro, it will take effect from 01.04.2021.

 
 

14. Only manufacturing and service providing entities are to be covered under MSMEs as usual. Trading entities are not to be covered under this classification.

15. Finally, registering under Udyam, like Udyog Aadhaar, is voluntary and not mandatory. But, to avail certain benefits (including concession on interest rates on bank loans), you must be registered thereunder.

Still, if you have any query, please feel free to ask.


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