The Union Cabinet last week approved a proposal to change the definition of Micro, Small and Medium enterprises. Since 1950s Small Scale Industries (SSIs) and later MSMEs have been traditionally defined based on their investment in plant and machinery for manufacturing units, and investment in equipment for service enterprises, and now the new definition define them based on their annual turnover. This decision, which came on the heel of the Budgetary proposal to the reduce corporate tax to companies having turnover up to Rupee 250 crore, is a welcome one.

According to the new definition, a micro enterprise is a unit where the annual turnover does not exceed Rs. 5 crore, a small enterprise is one where annual turnover is between Rs. 5 crore and Rs 75 crore, and a medium enterprises is where the turnover is more than Rs 75 crore but does not exceed Rs 250 crore. In order to give this new MSME definition into effect, the Section 7 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 will be amended in the coming days.

The move also aligns the definition with GST regime. It will be easier now for authorities to verify claims of businesses using the sales data they have from the GST Network. This will eliminate the need for inspections, make the classification system progressive, and contribute to ease of doing business as well. It is also expected that with this new definition the Government will do away with those clauses that exclude medium sector from various promotional schemes for the sector.

Meanwhile, in another positive development, the RBI last week gave MSMEs an extension of up to 180 days to clear their loans to banks. Now, they shall continue to be classified as a standard asset in the books of banks and NBFCs subject to amount from the borrower overdue as on September 1, 2017 and payments from the borrower due between September 1, 2017 and January 31, 2018 are paid not later than 180 days from their respective original due dates. No doubt, this move will help MSMEs to adjust to the new formalised business environment under the GST.

I invite your opinions.