Micro, Small and Medium Enterprise: Classification and Original investment- MSMED Act, 2006
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 was enacted to meet the long standing demand from entrepreneurs and small industry associations. This was the first and single comprehensive legislation for micro, small and medium enterprises. Proper definitions for the Medium and Micro enterprises were provided for the first time in the Act. The Act came into effect on October 2, 2006.
What were the objectives of MSMED Act, 2006?
MSMED Act, 2006 contained guidelines and norms for safeguarding the interest and ensuring growth of Micro, Small and Medium Enterprises. The main provisions were
i) Establishment of a statutory National Board
ii) Provision for promotion, development and enhancement of the sector
iii) Ensuring smooth flow of credit to these enterprises
iv) Preference treatment to be extended by central and state governments on procurement of goods and services from them
v) Norms on time period for payment by buyers and penal interest for delayed payments.
How are the Micro, Small and Medium Enterprises classified under MSMED Act, 2006?
The concept of ‘industries’ was being followed till enactment of the Act. The concept was changed to ‘Enterprises’ with the enactment of MSMED Act. Enterprises are classified into two broad categories:
i) Enterprises engaged in the manufacture/production of goods pertaining to any industry; and
ii) Enterprises engaged in providing/rendering of services.
Each category were further classified into three as shown below:
| Manufacturing Enterprises | Service Enterprises | |
| Basis of classification | Investment in plant and machinery (excluding land & building) | Investment in equipment (excluding land & buildings) |
| Micro Enterprises | Investment up to Rs.25 lakh | Investment up to Rs.10 lakh |
| Small Enterprises | investment above Rs.25 lakh & up to 5 crore | investment above Rs.10 lakh & up to Rs.2 crore |
| Medium Enterprises | Investment above Rs.5 crore & up to Rs.10 crore | investment above Rs.2 crore & up to Rs. 5 crore |
Read about the Revised MSME Classification norms & Stimulus package
How is the amount of original investment calculated under MSMED Act, 2006?
Manufacturing and service enterprises have been classified into micro, small and medium enterprises based on their investment in plant and machinery (for manufacturing enterprises) or equipment (for service enterprises). There have been some confusion as to whether the original investment or the depreciated value to be considered for classification purpose.
Ministry of MSME, GOI, has come out the clarifications in this regard. Accordingly, while calculating the investment in plant and machinery / equipment,
i) the original price of investment shall be taken into account and
ii) original price shall be considered irrespective of whether the plant and machinery / equipment are new or second hand.
It is also clarified that following documents can be relied upon for calculating the original investment in the plant and machinery / equipment
i) A copy of the invoice of the purchase
ii) Gross block for investment as shown in the audited accounts; or
iii) A certificate issued by a Chartered Accountant confirming purchase price
Accordingly, original investment in the plant and machinery / equipment has to be considered for classification of an enterprise as Micro, Small or Medium and not the book value (purchase value minus depreciation.
This provision is applicable from the date on which the MSMED Act, 2006 came into force and not prospectively.
