Industry not in favour of govt plan to have a single definition for MSMEs

No major stakeholder consultations held so far, wary industry urges government to abandon one-tag-fits-all approach

Industry bodies representing micro, small and medium enterprises (MSMEs) had vociferously backed the government's decision to update the definition of small businesses, last month. But with the Centre now increasingly making it clear that the new definition would be a single one for the entire sector, the excitement and cheer within the industry have died down.

MSME minister Nitin Gadkari had announced on August 23, that the government would be working to forge a new definition for MSMEs through an amendment to the MSME Act, 2006. Saddled by low capacity, battling a liquidity crisis and slowing domestic and export demand, the industry had supported the government's decision to bring in a more dynamic definition for MSMEs, to be used for taxation, investment and other business purposes.

Gadkari had also informed the press that further details would be made available within the next 15 days. Ten days have passed since, and the industry is yet to hold major stakeholder consultations with the MSME ministry, sources confirmed. The loudest opposition to peg the new definition only to annual turnover has come from the Laghu Udyog Bharati, affiliated with the Rashtriya Swayamsevak Sangh.

Slow movement

The existing definition relies on self-declared investments on plant and machinery. Since February 2018, when the Cabinet had approved the proposal, the government had pushed to redefine MSMEs based on their annual revenues. However, industry bodies representing the sector are extremely apprehensive about this plan.

"The definition needs to be revised because the current one actually disincentivises the registration of businesses as MSMEs. Turnover can vary significantly from one year to another, and a company may need to constantly keep on applying for benefits under different statuses, leading to the loss of ease of doing business," a senior functionary of the LUB said. "We have informed the ministry that any new definition needs to look at the functional challenges of MSME businesses."

"On the other hand, the Federation of Indian Micro and Small & Medium Enterprises has told us that importers and multinationals engaged in trading activities could pass themselves as MSMEs and take away their benefits," a ministry official said.

The government would need to bring the changes through amendments to the Micro, Small and Medium Enterprises Development Act, 2006, attempts at changing which had met with severe opposition in 2018.

The government had introduced the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018 in Parliament during the monsoon session in July. While the opposition had slammed the move, it had been countered by the Swadeshi Jagran Manch, a key industry ally of the government and an affiliate of the Rashtriya Swayamsevak Sangh. Back then, Ashwini Mahajan, co-convenor of the SJM, had argued that turnover was not the sole criteria for classifying MSMEs anywhere in the world.

As a result, it was referred to the department-related parliamentary standing committee on commerce and industry in October. Finally, in December, 2018, the committee also suggested that MSMEs be classified according to annual turnover. The panel had said the move would allow for more streamlined policy making in the sector, as more small businesses would come within the ambit of the MSME ministry, with the proposed changes.

Official argument

In the run-up to the last Lok Sabha elections, the Bharatiya Janata Party had stressed that it was keen on implementing the change after coming to power.

The statement of the amendment bill moved by the government last year said the criterion of investment entails physical verification, bringing with it transaction costs. It also incentivizes promoters to keep the investment size small in order to retain the MSME tag. “Overall, the turnover based classification will promote the ease of doing business and will put in place a non-discretionary, transparent and objective classification system,” the statement read.

This argument has continued to find favour with the ministry, which has continued to stress the government definition would align MSMEs better with the Goods and Services Tax (GST) regime, besides encouraging ease of doing business and making norms of classification growth oriented. On Friday, Gadkari said the government is aiming to bring more small business into the official GST framework. Of the 60 million businesses currently registered on the GST platform, an estimated 12.5 million are MSMEs, a senior MSME Ministry official, said.

According to official estimates, there were more than 63 million MSMEs, accounting for 45 per cent of industrial production, 30.5 per cent of the services sector and employing close to 110 million people as of 2017.

Defining MSMEs
Classification	Current definition: Investment in Plant and Machinery	Proposed definition: Annual turnover
Micro Enterprises	Up to Rs 25 lakh	Up to Rs 5 cr
Small Enterprises	More than Rs 25 lakh, up to Rs 5 cr	More than Rs 5 cr, up to Rs 75 cr
Medium Enterprises	More than Rs 5 cr, up to Rs 10 cr	More than Rs 75 cr, up to Rs 250 cr
Source: MSME Ministry