THE NEW CLASSIFICATION OF MSMSE
The most significant provision is the proposed change in the decade old definition of MSME.
Now as per MSME DEVELOPMENT (AMENDMENT) BILL, 2018 under the micro enterprise tag the companies will have annual sales turnover of less than Rs. 5 Cr, small, if they are in the Rs. 5 Cr to Rs. 75 Cr range, and medium, if they are in the Rs. 75 Cr to Rs. 250 Cr band.
A LOGICAL MOVE
As there is a steady escalation in the project costs, comparing investments in plants & machinery cost over time, illogically puts newer ones in a disadvantageous position over the older ones and therefore militates against the modernisation efforts in the industry.
Also, annual turnover criteria can be directly verified from GST Network so it puts an end to physical inspections and the inspection raj necessitated by the investment based regime.
Turnover based sops may be friendlier to technology intensive sectors such as Engineering, Auto components or Pharmaceuticals, where substantial capital investments are needed to ensure a minimum scale of production.
Turnover criteria may allow a unit to graduate from its MSME status on reaching a fair size and discourage proliferation of inefficient units created mainly with an eye to tax sops. One of the problems plaguing the Indian industry is mushrooming of tiny units that stand little chance against competition. As per the recent NSSO survey of 6.43 crores of unincorporated ventures, 84% of these were own account enterprises, which did not employee even one worker.
For “Make in India” initiative to take wings and for Indian firms to stand a fighting chance in the export market, the policy of MSMEs need to be actively push them to scale up over time rather than shower them with sops to remain small scale.
Industry bodies expressed the concern, that under the new definition, medium enterprises up to Rs. 250 crore may crowd out smaller peers in cornering the benefits.
There are few sectors where investment is low but turnover is high for example gems and jewellery units, units producing Aluminium conductor steel-reinforced cable (ACSR) among others. Many of the units have been under small category owing to investment criteria but having high turnover ranging from Rs 100 to 30 crore. They enjoyed benefits under Public Procurement Policy for MSEs which mandates 20% set-aside for Micro and Small Units in all central government purchases.
Another criticism about the new definition is that India still does not take into account the number of people employed. Globally, the two most important elements used to define MSMEs remain turnover and employment. Not including the employment criterion may be because of inability of the system to cross check employment figures in a transparent manner. The practice of under reporting number of people employed is widespread especially in smaller units to remain below the threshold of 10 employees to save on very high social security and compliance costs. Lack of labour reforms has exacerbated the situation. Adding such a criteria would have led to more paper work and corruption.