What are the basis for classification of Micro, Small or Medium Enterprises under the MSME Act

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What are the basis for classification of Micro,
Small or Medium Enterprises under the MSME Act?
How does the Ministry ensure that Enterprises are
reporting correct data?
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The Ministry of MSME has been committed towards
promoting the MSME sector in India through its
MSME Act. This act lays down several procedures
for the Ministry to Work with the MSMEs of India
in order to strengthen the Indian economy. The
Ministry believes that when the MSME sector is
strengthened it will lead to better employment
opportunities as well as better economic growth
for the nation.
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In order for the Act to be able to deliver what
it promises there is a need to differentiate the
business into Micro, Small and Medium
Enterprises. The Ministry of MSME has laid down
its fundamentals clearly in it's the MSME Act,
2006. These fundamentals are pivotal when it
comes to forming the basis of any policies aimed
at providing any kind of support or benefits to
businesses in India. After all it will be
difficult to understand which business requires
what kind of support or assistance without
understanding its scale and its ability to absorb
those benefits. With constrained economic
resources that the government has to work with
this can be the basis to reduce over spilling of
resources which might be caused by granting more
support or benefits that businesses can absorb.
It also ensures there is no under assistance
being given and a fair practice is at play while
providing assistance to so many of the businesses
in India.
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Even though the Ministry of MSME laid down
criteria of classification of Micro, Small or
Medium Enterprises in 2006, the same has been had
a need of update with the ever changing market
and economic conditions of the country in recent
times. Considering this need the Ministry of MSME
has been carrying required updates to the Act via
its notifications released in November 2013 and
June 2017. In a recently done revamp to meet the
new age requirements of facilitating the Act the
ministry has recently released a notification
numbered S.O.1702 (E) on 1st June 2020 and the
same has been published in the Gazette of
India. Let's discuss the latest classification
of enterprises as Micro, Small or Medium
Enterprises as notified by the Ministry of MSME.
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• Any enterprise shall be primarily classified into
  Micro, Small or Medium Enterprises based upon the
  following criteria
• An enterprise will be classified as Micro if
  their investment in plant machinery or
  equipment is under Rs. 1 Crore and their turnover
  is under Rs. 5 Crore.
• An enterprise will be classified as Small if
  their investment in plant machinery or
  equipment is under Rs. 10 Crore and their
  turnover is under Rs. 50 Crore.
• An enterprise will be classified as Medium if
  their investment in plant machinery or
  equipment is under Rs. 50 Crore and their
  turnover is under Rs. 250 Crore. Any Enterprises
  which exceed the above mentioned limits will not
  be allowed to register themselves under the MSME
  Act and won't enjoy the benefits and assistance
  given under the Act.

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I am sure you must be wondering as to how
Enterprises move between Micro, Small Medium
classifications if their amount of turnover or
investment change from year to year and break the
ceiling limit of that particular classification
in which they are already classified. The answer
is simple, if any enterprise happens to exceed
the limit on the amount of either investment or
turnover specified in their current
classification then they will qualify for the
next classification immediately. This isn't the
same in situations where the amount happens to be
lower than the specified limit. In that case in
order to be qualified in the lower tier the
enterprise needs to match both the criteria for
investment as well as turnover in order to be
shifted into the lower criteria of
classification. An important factor that
enterprises need to consider is that even though
many enterprises have multiple entities
registered under their business, the MSME Act
considers any enterprise with multiple GST
registered against the same PAN as one entity
only. This has been done to avoid under-reporting
of actual figures by splitting businesses into
different entities just for the sake of
misrepresentation.dh
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How does the Ministry ensure that enterprises are
reporting the correct data when filing for their
registrations under these various classifications
you may ask? Well, they Ministry has a solution
even for that. While calculating the investment
in plant machinery or equipment it will fetch
data in the Income Tax Returns of the previous
years filed under the Income Tax Act, 1961. Only
in case the enterprise is a new one and has no
previously filed ITRs, their information will be
collected on a self-declaration basis by the
promoter which will then be verified when the
enterprise files their ITR after the year ending
on March that year.
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The same can be asked when it comes to reporting
of turnover by the Enterprises. How does the
Ministry plan to verify that information is
correct? As PAN is mandatory for every
registration, the ministry will fetch data filed
in the Income Tax Return as well as GST Returns
of the enterprises to verify whether the
information entered is as per records. In case of
new enterprises, a grace period up to 31st March
of the current financial year will be given after
which the enterprises will be liable to file
their ITR and GST Returns from which information
can be verified.
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In order to classify Enterprises into Micro,
Small or Medium Enterprises and provide them with
necessary benefits the Ministry of MSME has now
implemented the process of Udyam Registration.
Under this registration enterprises which are new
can either self-declare their information or have
the system fetch their information from their
previously filed ITRs and GST Returns. This new
and sophisticated system of Udyam
Registration has been introduced with a main
purpose of electronically streamlining data
reporting and making it easier for the Ministry
to verify data entered by the applicants. If any
enterprise intentionally misrepresents or
attempts to hide any self-declared facts and
figures while applying for their Udyam
Registration or updating their existing
registration then such an enterprise will be
liable to a penalty specified under the section
27 of the MSME Act.