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Box 4: Rationale for the revision in the definition of MSMEs:
Details of the deliberations on issues affecting MSMEs

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 had defined MSMEs
on the basis of investment in plant and machinery or equipment. Such investment was to be calculated
at the original price thereof. This had disadvantaged the sector as it disincentivized investment and
prevented the MSMEs to reap the benefits of economies of scale and contribute more significantly to
employment generation. In June-2020, GoI revised the investment limits upwards and also included
annual turnover of the enterprise as the additional criteria for the classification of MSMEs. The
calculation of such investment would now be linked to the Income Tax Return as filed under the IT
Act, thus allowing for annual depreciation.
The need for the revision in the MSME definition was carefully evaluated and announced after
stakeholders’ consultation and due diligence in accordance with the provision of MSMED Act, 2006.
The Economic Survey (2012-13 and 2018-19) highlighted the concerns and issues in the MSME
sector and the need for revamping the ecosystem for the MSMEs. The GoI had also attempted to
amend the MSME Act in 2015 and 2018 to boost the MSME sector. The 2015 Bill proposed an
upward revision in investment ceiling limits whereas the 2018 Bill attempted to replace investment
criteria with turnover criteria and remove the distinction between manufacturing and services.

The Department-Related Parliamentary Standing Committee (DRPSC) on Industry (2015) adopted
the 268 report which contains the recommendations regarding adoption of the Bill, without any
th
change. The Committee had in its 245 Report extensively examined the implementation of the
th
MSMED Act, 2006 and had given recommendations pertaining to Chapters IV and V of the parent
Act. The Committee had generally agreed to enhance the investment limits for the classification of
MSME sector in view of inflation. It had observed: “Considering the inflation and dynamic market
situation, the Committee feels that definition of MSMEs as provided in the Act may be revised every
five years.”
Committee of Secretaries in its meeting held on 11.11.2016 recommended addition of “turnover”
and/or “employment” as criteria for defining MSMEs. After the deliberation, the 2015 Bill was
withdrawn and the 2018 Bill was introduced on 23.07.2018.
The DRPSC on Industry (2018), carefully evaluated the 2018 Bill and had mentioned in the report
that the “classification based on investment in plant and machinery has a number of disadvantages as
it prevents MSMEs to become competitive in the market, inhibits investment to modernize, upscale,
improve productivity and technology upgradation due to rigor of investment thresholds.’’
The DRPSC report (2018) further mentions: ‘…the extent of financial limits fixed in 2006 for
MSMEs are no longer relevant, given the impact of inflation. Most of the Industry Associations and
stakeholders have, therefore express the need for changing the present criteria of investment in plant
and machinery to annual turnover as criterion for classification of MSMEs.’
The DRPSC report (2018) also says: ‘…the problem with employment criteria in the Indian context is
the non-availability of reliable/verifiable sectoral data and the seasonal variance in labour engagement.
The employment system, if taken into consideration, will increase the need for inspection, which will
involve huge transaction cost and could place a question mark on the veracity of the figures given
by the enterprises in different Sectors. Moreover, it will also lead to large number of litigations.’ The
2018 Bill lapsed on dissolution of the Sixteenth Lok Sabha on 25.05.2019.