Change in definition of MSMEs will lead to more output orientation: Experts

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Finance Minister Nirmala Sitharaman on May 13 said the government had tweaked the definition of micro, small and medium enterprises (MSMEs) to help businesses tide over the current crisis.

Sitharaman also said the distinction between manufacturing and service units for MSMEs had been removed.

The change in definition is likely to benefit retailers and contractors as the distinction between manufacturing and services has been removed. However, SME associations have been wary of this change as it may benefit to traders to be included as well.

"The previous proposed definition would allow traders to benefit, without any investment in plant and machinery. However, the government has now reached a middle ground," said Anil Bhardwaj, Secretary General, Federation of Indian Micro, Small and Medium Enterprises (FISME).

Currently there is no check on the investment in plant and machinery claimed by an enterprise and is based on self authentication.

The additional inclusion of turnover may help in bringing in better regulation as GST registration is a more stringent process and has relatively more authenticated  information. Therefore, with the definition requiring turnover, firms would need to register on GST thereby making them eligible for the scheme, according to Sobti from KPMG.

The Union Cabinet had in 2018 approved changes in the basis of classifying micro, small and medium enterprises from 'investment in plant & machinery/equipment' to 'annual turnover'. However, the bill could not pass both the houses after cabinet approval. The government has stated the necessary changes will be made to the law to adopt the new definition.

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