With a low ‘turnover’ threshold, Government’s new MSME definition sows confusion

Presenting her financial package deal on Wednesday, Finance Minister Nirmala Sitharaman mentioned the definition of an MSME is being revised by elevating the funding restrict. An extra criterion of turnover was launched and the excellence between manufacturing and repair sector was additionally eradicated. Revision of the definition has been a longstanding demand of the sector and whereas it’s a welcome one, it has now led to confusion for thousands and thousands of small companies within the nation.
Puran Dawar, Regional Chairman (North) – Council for Leather Exports (CLE) says the new definition of MSME has left everybody very confused. “It should have been either based on investment or on turnover. Labour oriented sectors with a Rs 20 crore investment in plant and machinery may achieve even Rs 500 crore turnover, which has now been capped at Rs 100 crore only,” says Dawar.

As this
report factors out, the revision of the definition of MSMEs within the nation has been lengthy and a number of governments have tried it for a variety of years. In truth the Narendra Modi authorities had moved forward to amend the definition in its very first time period in energy, however needed to scale down as a consequence of opposition from the RSS associates.

The present definition was linked to funding in plant and equipment, however the authorities was pushing for turnover-based classification. However, highly effective foyer teams equivalent to Swadeshi Jagran Manch and Laghu Udyog Bharti, have at all times argued that any change in definition to solely a turnover-based would imply merchants and assemblers who import from China and put collectively a product, may gain advantage at the price of native producers.

For gamers throughout the sector, the new turnover restrict laid out by the FM is proving to be a level of hassle. “While there are some benefits of the new definitions, some players will lose too, because of the fact that the upper limit on turnover has been kept very less. Investment limit is okay, since the government has doubled that, but the turnover limit is very small,” says Rajiv Chawla of IamSMEofIndia.

Chawla provides that originally, the federal government had prescribed higher turnover of Rs 75 crore for small and Rs 250 crore for medium enterprises, and one can’t perceive why the restrict has been purchased down now.

“While the new definitions do offer some privileges to MSMEs, in many cases, these cripple their operations too. Say, in case of their [MSMEs] global investment, if it’s more than the prescribed limit, they would no longer be able to enjoy the relaxations meant for them. For many firms, if either their investment increases or turnover increases, they will lose the status of an MSME. The new changes are not as beneficial to the sector as they could have been because the limit on turnover has been kept so less,” says Chawla.

Arvind Sharma, Partner, Shardul Amarchand Mangaldas & Co, nonetheless, says that the rise in funding limits will convey many new models inside the realm of the MSME sector, and this may result in extra inclusive progress that’s related to the current scenario.

“Since details of investments and turnover are easily available in books of accounts that are required to be statutorily maintained, compliance should not be an issue. Turnover details should be available in the GST system. There are several other legislations that prescribe dual or multiple criteria eligibility criteria and compliance or implementation is not an issue,” says Sharma.

Sharma provides that the turnover threshold can have a counterbalancing impact and firms that don’t profit from the current change in threshold, ought to make a illustration to the Government to hunt appropriate aid.

Rohit Shah, Co-founder & CEO, Hemp Horizons Pvt Ltd says whereas the new definitions set forth are undoubtedly complicated, a lot of firms will now have to begin re-evaluating their numbers, Profit and Loss (P&L) assertion and many others. to attempt to slot in these new rules.

This will almost certainly create a hoard of fixations inside a lot of organizations to get the mentioned advantages whereas falling in the proper bracket. “Our Government has been long thinking about amending these definitions, but this will still need a lot of clarification, in order to benefit from these schemes. Similar to how GST was rolled out and slowly they started making amendments which led to a lot of transactional issues, accounting issues. We hope this won’t create another set of problems to deal with in these challenging times.”

The challenges could also be notably evident in some sectors. “Take the case of diamond exporters, for example. Even a small diamond exporter will have a turnover of Rs 500 crore, which implies, then, that all such diamond exporters will fall out of the purview of the definition. There are millions of gems and jewellery manufacturers who are MSME players. They are exporting atleast more than Rs 250 crore because firstly the raw material cost is high and secondly, they also do substantial value addition,” says Ajay Sahai, Director General & CEO of the Federation of Indian Export Organisations (FIEO).

Jayanth Mutha, Director, Himlite Products doesn’t see the transfer as encouraging in any means. “Does this give any benefit as such remains in question? Perhaps it will only be of real benefit to the medium scale companies since these could have gone out of the slab previously and missed out on the benefits. It will not really lead to any material benefit for micro and small units,” says Mutha.

Scale is essential

Falling beneath the purview of the definition of an MSME is essential for scores of corporations. A small enterprise qualifies for precedence sector lending, exemptions beneath labour rules, comes beneath the purview of the Credit Guarantee Fund Scheme, finds a place within the buy choice coverage, value choice coverage, get profit in tendering, eligible for advertising and marketing help scheme amongst different insurance policies.


Source – Economic Survey of India

If the edge to qualify as an MSME is saved low, corporations are incentivized to stay small so as to reap the advantage of the schemes and insurance policies. According to the Economic Survey of 2018-19 insurance policies typically create a “perverse” incentive for corporations to stay small. “As economies of scale stem primarily from firm size, these firms are unable to enjoy such benefits and therefore remain unproductive,” mentioned the Survey.

In a chapter dedicated to MSME, the Survey mentioned job creation in India, suffers from insurance policies that foster dwarfs. “These dwarfs, i.e., firms with less than 100 workers despite being more than ten years old, account for more than half of all organized firms in manufacturing by number, their contribution to employment is only 14 per cent and to productivity is a mere 8 per cent. In contrast, large firms (more than 100 employees) account for three-quarters of such employment and close to 90 per cent of productivity despite accounting for about 15 per cent by number.”

At the center of this downside is the definition of MSME. If the edge or the factors to qualify is ready too low within the definition, India runs the chance of corporations staying small and never rising. The turnover threshold of Rs 100 crore for a medium agency appears low.

“If we really want to take the economy to the next level, we have to think at the macro level. If the level for the medium enterprises has been kept at only Rs 100 crore, we can’t achieve much. If looked, on the basis of turnover, it should not be less than Rs 250 crore – or should be based on only investment in plant and machinery, irrespective of any turnover criteria,” says Dawar.

(With contributions from Neha Dewan and Shariq Khan)

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