Industry backs govt's move to have a single definition for small businesses

However, they are opposing the decision to base definition only on annual turnover

Industry bodies representing micro, small and medium enterprises (MSMEs) have backed the government’s decision to have a single definition for small businesses for taxation, investment and other business purposes. But they have opposed the decision to base the definition only on annual turnover. 

Work on changing to a new definition is afoot and an announcement may be made within 15 days through an amendment to the MSME Act, 2006, MSME Minister Nitin Gadkari said on Friday.

The existing definition relies on self-declared investment on plant and machinery. Since February 2018, when the Cabinet approved the proposal, the government had pushed to redefine MSMEs based on their annual revenue. However, industry bodies representing MSMEs have expressed grave apprehensions with this plan. 

“The definition needs to be revised because the current one disincentivises the registration of businesses as MSMEs. The turnover can vary significantly year-to-year and a company may need to constantly keep on applying for benefits under different statuses, leading to the loss of ease of doing business,” a senior functionary of the Laghu Udyog Bharti said. We have informed the ministry that any new definition needs to look at the functional challenges of MSME businesses, 

he added.

“On the other hand, the Federation of Indian Micro and Small & Medium Enterprises has told us that importers and multinationals engaged in trading activities could pass themselves as MSMEs and take away their benefits,” a ministry official said.

Slow progress

The government would need to bring the changes through amendments to the Micro, Small and Medium Enterprises Development Act, 2006, attempts at changing, which had been met with severe opposition in 2018. 

The government had introduced the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018 in Parliament during July’s monsoon session. While the Opposition had slammed the move, it had also been countered by a key industry ally of the government, the Swadeshi Jagran Manch (SJM), an affiliate of the Rashtriya Swayamsevak Sangh. Back then, Ashwini Mahajan, co-convener of the SJM, had argued that turnover was not the sole criteria for classifying MSMEs anywhere in the world.

As a result, it was referred to the department-related parliamentary standing committee on commerce and industry in October. Finally, in December 2018, the committee also suggested that MSMEs be classified according to their annual turnover. The panel had said the move would allow for more streamlined policies in the sector, as more small businesses would come under the ambit of the MSME ministry.

In the run-up to the last Lok Sabha elections, the BJP had stressed it was “keen on implementing the change after coming to power”.

Official argument

The statement of the amendment Bill moved by the government last year said the criterion of investment entails physical verification, bringing with it transaction costs. It also incentivises promoters to keep the investment size small to retain the MSME tag. “Overall, the turnover-based classification will promote the ease of doing business and will put in place a non-discretionary, transparent and objective classification system,” the statement read.

This argument has continued to find favour with the ministry, which has continued to stress that the government’s definition would align MSMEs better with the GST regime, besides encouraging ease of doing business and making norms of classification growth-oriented. On Friday, Gadkari said the government was aiming to bring more small business into the official GST framework. Of the 60 million businesses registered on the GST platform, an estimated 12.5 million are MSMEs, a senior MSME ministry official said. 

According to official estimates, there are more than 63 million MSMEs, which account for 45 per cent of industrial production, 30.5 per cent of services sector and employ close to 110 million people.