MSMED ActFAQs – MSME Notified & Unveiled

INTRODUCTION

The Government has constantly been in talks to provide and generate loans and other credit facilities to the Micro, Small and Medium Enterprises (“MSMEs”) and other business enterprises for them to regain their operational pace and begin working. These initiatives will help those facing serious cash flow issues and were at the verge of closing down during the hard hit by the pandemic of COVID – 19 on the economy.

The authorities have been continuously addressing the country and releasing several relief measures after taking into consideration the various queries and requests addressed to them. These measures plan to bring remarkable change to their business model and help them provide with immediate cash flow with minimal interest rates which is their need of the hour.

In furtherance of the same, MSMEs have been continuously waiting for the Government to codify the recent announcement made by them to amend the Classification of enterprises as under Section 7 of the Micro, Small & Medium Enterprises Development Act, 2006 (“MSMED Act, 2006”).

The earlier position of classification covered the enterprises on the basis of their investment and also bifurcated them as manufacturing and service sectors separately.

Now, the Government has planned to waive off such bifurcation and introduce thresholds of both investment and turnover for the enterprises to be registered under the MSMED Act, 2006.

Therefore, the Ministry of Micro, Small and Medium Enterprises on 26^th June, 2020 introduced Notification F. No. 21(5)/2019-P&G/Policy(Pt-IV) wherein the authorities;

“…notifies certain criteria for classifying the enterprises as micro, small and medium enterprises and specifies the form and procedure for filing the memorandum (hereafter in this notification to be known as ―Udyam Registration‖), with effect from the 1^st day of July, 2020”

We have covered some frequently asked questions hereunder to solve queries about the said announcements.

REVISION OF THE MSME DEFINITION 

1. How has the Government decided to revise the definition of the enterprises governed by the MSMED Act, 2006?

Answer: The Government has, through the said Notification dated 26^th June, 2020 come to a conclusion to uplift the definition of MSMEs. The following thresholds have been announced coming into effect from 1^st July, 2020:

REGISTRATION OF AN ENTERPRISE

2. How can an enterprise be registered under the MSMED Act, 2006?

Answer: The said Notification under Clause (2) covered Becoming a micro, small or medium enterprise and stated the following to be registered as an enterprise;

• Any person intending to establish a MSME may file Udyam registration online at the portal without any requirement to upload documents, papers, certificates or proof;
• After registration, the enterprise will be assigned a Permanent Identification Number which is known as Udyam Registration Number; and 
• An E-Certificate will be generated on completion of the process.

3. What shall be the registration process for such enterprises?

Answer: The following shall be the registration process for registration as per the Notification;

• Form of registration shall be provided in the Udyam Registration Portal;
• No fee for filing of an application;
• Aadhar Number is mandatory;
• Aadhar Number of the proprietor in the case of a proprietorship firm, of the managing partner in the case of a partnership firm and of a karta in the case of a Hindu Undivided Family (HUF) will be required;
• Company / LLP / Cooperative Society / Society / Trust shall provide for its GSTIN and PAN along with its Aadhar Number;
• Any deficiency of information for previous years when it did not have PAN shall be filed on self-declaration basis; and 
• Not more than one Udyam registration and all activities to be specified or added in one registration itself.

4. What shall be the consequence of anyone misrepresenting or suppressing facts about their enterprise?

Answer: Anyone who intentionally misrepresents or attempts to suppress any self-declared facts and figures in an Udyam Registration or updating process shall be liable to such penalty as specified under Section 27 of the MSMED Act, 2006.

5. Are the existing MSMEs required to register again in pursuance of this Notification?

Answer: The existing enterprises registered under EM-Part II or UAM shall have to register again on the Udyam Registration Portal on or after 1^st July, 2020. The said enterprises shall be reclassified according to the fresh thresholds introduced by the authorities.

The enterprises registered prior to 30^th June, 2020 shall be considered to be valid for a period up to 31^st March, 2021. An enterprise registered with any other organization under the Ministry of Micro, Small and Medium Enterprises shall register itself under the Udyam Registration.

COMPOSITE CRITERIA FOR CLASSIFICATION

6. How shall the enterprises decide under which category they fall under?

Answer: The enterprises shall be classified as per their investment and turnover criteria together in order to decide the category of enterprise they fall under.

7. How can fluctuation in investment and turnover affect their category?

Answer: The following points are required to be kept in mind by enterprises experiencing fluctuations in criteria;

• If an enterprise crosses the ceiling limit of either investment or turnover, the said enterprise shall be placed in the next higher category;
• If an enterprise goes below the ceiling limit of both investment and turnover, only then shall the enterprise will be shifted to the lower category; and
• All units of Goods and Services Tax Identification Number (“GSTIN”) listed against the same Permanent Account Number (“PAN”) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as MSMEs.

CALCULATION OF THRESHOLDS

8. How will figures be decided for calculation of Plant and Machinery or Equipment?

Answer:  The calculation of plant and machinery or equipment will be decided as follows;

• The calculation of investment in Plant and Machinery or Equipment will be linked to the Income Tax Return (“ITR”) of the previous years filed under the Income Tax Act, 1961.
• If the enterprise in question is new and has not filed an ITR, then the calculation of investment will be based on self-declaration of the promoter of the enterprise. However, the said enterprise shall not have such relaxation after the upcoming 31^st March of the financial year in while the enterprise shall be required to file an ITR.
• The Purchase Value (Invoice) of the Plant and Machinery or Equipment shall be considered excluding GST on self-disclosure basis provided the enterprise is new with no ITR.
• The cost of certain items is excluded while calculating Plant and Machinery or Equipment which has been enshrined under Explanation I of Section 7 of the MSMED Act, 2006 i.e.

“…the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.”

The Notification mentions that such exclusions shall continue their applicability while calculating Plant and Machinery & Equipment.

• The definition of Plant and Machinery or equipment shall be considered same as defined under the Income Tax Rules, 1962.

9. What shall be the factors to consider while calculating turnover?

Answer: While   calculating turnover the enterprises shall consider the following;

• Exports of goods or services or both, shall be excluded to calculate turnover of any enterprise;
• Turnover or export turnover of an enterprise shall be linked to the Income Tax Act or the Central Goods and Services Act and the GSTIN;
• The turnover figures shall be self-declaratory for new enterprises which do not have PAN for a period up to 31^st March, 2020 and thereafter, PAN and GSTIN shall become mandatory.

UPDATING INFORMATION AND TRANSITION PERIOD

10. What is graduation and reverse graduation?

Answer: Graduation means when an enterprise uplifts from a lower category to a higher category of enterprise.

Reverse Graduation means when an enterprise slides down to a lower enterprise from a higher enterprise.

11. When should an enterprise update its information online on the Udyam Registration portal?

Answer:  An enterprise shall update the information online including details of the ITR and GST Return for the previous financial year and other additional information as may be required on self-declaration basis.

Based on information furnished or gathered from Government sources like ITR or GST return, the classification of the enterprise shall be updated.

Failing which, the enterprise can be suspended from its status.

12. How will the enterprise know about graduation or reverse graduation of their enterprise?

Answer: A communication shall be sent to the enterprises intimating about their change in status.

13. What are the obligations of the graduating enterprises?

Answer: Re-classification of enterprises because of upward change in investment or turnover, an enterprise will maintain its prevailing status till expiry of one year from the close of the year of registration.

14. What are the obligations of the reverse-graduating enterprises?

Answer: Reverse graduation of an enterprise because of reclassification or changes in investment and turnover, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1^st April of the financial year following the year in which such change took place.

GRIEVANCE REDRESSAL OF ENTERPRISES

15. Which authority shall take care of the registration process and other matters announced under the Notification?

Answer: The Champions Control Rooms in various institutions and offices of the Ministry of Micro, Small & Medium Enterprises shall as a Single Window Systems to facilitate the registration process and further handholding of MSMEs.

District Industries Centres shall also facilitate as a Single Window Facilitation System in their districts.

16. How can these Centres help to facilitate the applicant enterprises?

Answer: Any person who is not able to file the Udyam Registration for any reason including for lack of Aadhaar number can approach the Centre with his Aadhaar enrolment identity slip or copy of Aadhaar enrolment request or bank photo pass book or voter identity card or passport or driving license and the Centre will facilitate the process to get an Aadhar Number and further the process of registration.

17. What shall be the procedure in case of any discrepancy or complaint against an enterprise?

Answer: The General Manager of the District Industries Centre of the concerned District shall undertake an enquiry for verification of the details of Udyam Registration submitted by the enterprise and thereafter, forward the matter with necessary remarks to the Director or the Commissioner or the Industry Secretary of the concerned State Government who after issuing a notice to the enterprise and after giving an opportunity to present its case and based on the findings, may amend the details or recommend to the Ministry of Micro, Small or Medium Enterprises, Government of India, for cancellation of the Udyam Registration Certificate.

 IMPACT OF THESE ANNOUNCEMENTS

These amendments plan to re-register all the enterprises under the MSMED Act, 2006 and welcome new registrations according to the new threshold classifications. The Notification has covered and clarified the methods of calculating investment and turnover to decipher the classification of the enterprises.

The Notification makes it mandatory for new enterprises with no ITR / GSTIN or PAN to acquire the same after the 31^st March of the upcoming financial year and prior to the same depends on self-declaration of the promoters. In order to avoid mala fide activities of the promoters, the said Notification penalizes any faulty declaration or no declaration at all.

The Section 27 of the MSMED Act, 2006 shall be referred for such penalty which is reproduced below for easy reference;

“Penalty for contravention of section 8 or section 22 or section 26.—

(1) Whoever intentionally contravenes or attempts to contravene or abets the contravention of any of the provisions contained in sub-section (1) of section 8 or sub-section (2) of section 26 shall be punishable—

(a) in the case of the first conviction, with fine which may extend to rupees one thousand; and

(b) in the case of second or subsequent conviction, with fine which shall not be less than rupees one thousand but may extend to rupees ten thousand.

(2) Where a buyer contravenes the provisions of section 22, he shall be punishable with fine which shall not be less than rupees ten thousand.”

Now that the propositions have become a product, we await to see how the MSME Sector reacts to the provisions put forth by the authorities and how are these implemented. We predict to see a swift turn in the working of the enterprises of the country.

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