‘Micro Small & Medium Enterprises (‘MSME’) Ready Reckoner’ is a comprehensive book on laws governing MSMEs in India. This book provides an analysis of all provisions of the MSME Act, 2006 along with relevant Circulars and Notifications. The Present Publication is the 1st Edition, which incorporates all the amendments announced by the Government of India and Reserve Bank of India (‘RBI’), such as: · ‘Covid-19 Relief Measures’ announced by RBI, · New MSME definition, · Emergency Credit Line Guarantee Scheme and, · Clarification on new registration for existing EM Part-II/UAM. The Book has been divided into 8 divisions as under: · MSMEs – Definition, Classification And Registration | Is there a uniform definition of small businesses or small and medium enterprises (‘SME’) for the purposes of all laws benefitting SMEs? · Benefits to Registered MSMEs · Benefits to Small Businesses, whether Registered MSMEs or Not · Legal Forms of Organisation MSMEs Can Adopt (with Pros and Cons of each Legal Form) · Micro Enterprises · Small Enterprises · Medium Enterprises · Start-Ups

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3. Micro Enterprises Reckoner I-11
Small Enterprises Reckoner I-15
Medium Enterprises Reckoner I-19
DIVISION ONE
MSMEs - DEFINITION, CLASSIFICATION
AND REGISTRATION
Is there a uniform definition of ‘small businesses’ or Small
and Medium Enterprises (SMEs) for the purposes of all laws
benefitting SMEs 3
Chapter 1
What is the new definition of “Micro Enterprises”, “Small
Enterprises” and “Medium Enterprises”? 6
Chapter 2
How to compute the investment ? 23
Chapter 3
How to compute turnover 41
Chapter 4
Classification of MSMEs based on new composite criteria
(with illustrations and case studies) 45
Chapter 5
Udyam Registration - How to file Udyam Registration 50
PAGE
Contents
I-5

4. Chapter 6
How and when MSMEs will be reclassified 67
Chapter 7
What is ‘manufacturing’/‘production’ MSME and what is
‘service MSME’ ? 76
DIVISION 2
BENEFITS TO REGISTERED MSMEs
Chapter 8
What are the benefits available to registered MSMEs
under MSMED Act in respect of protection/remedies
against delayed payments by buyers 97
Chapter 9
TReDS-Trade Receivables Discounting System 126
Chapter 10
Public Procurement Policy 131
Chapter 11
What other benefits available to registered MSME under
Central Schemes ? 139
Chapter 12
Distressed Asset Fund - Subordinated Debt for Stressed
MSMEs (DAF-SDSM)/Credit Guarantee Scheme for Sub-
ordinate Debt (CGSSD) 147
DIVISION 3
BENEFITS TO SMALL BUSINESSES, WHETHER
REGISTERED MSMEs OR NOT
Chapter 13
Benefits available to Small Businesses under the Income-tax
Act, 1961 159
PAGE
CONTENTS I-6

5. Chapter 14
Presumptive Tax Regime available under Income-tax Act
to businesses which are micro enterprises 184
Chapter 15
Presumptive Tax Regime available under Income-tax Act
to micro professional enterprises 229
Chapter 16
Exemption from compulsory tax audit to micro enterprises 246
Chapter 17
Low tax rate without exemption regime applicable to com-
panies irrespective of size 250
Chapter 18
Concessional rate of tax for SME companies without fore-
going any exemptions 314
Chapter 19
Relaxations in compliances to small companies under
Companies Act, 2013 316
Chapter 20
Relaxations in compliances to small companies due to
COVID-19 outbreak 324
Chapter 21
MUDRA Scheme - Funding the non-corporate small busi-
ness sector (NCSBS) 332
Chapter 22
PM Street Vendor’s Atma Nirbhar Nidhi (PM SVANidhi) : A
Special Micro-Credit facility for Street Vendors 342
Chapter 23
Guaranteed Emergency Credit Line (GECL Scheme) (as
clarified by NCGTC) 347
PAGE
I-7 CONTENTS

6. DIVISION FOUR
LEGAL FORMS OF ORGANISATION MSMEs CAN
ADOPT AND PROS AND CONS OF CHOICE OF
VARIOUS LEGAL FORMS
Chapter 24
What legal forms of organisations can MSMEs adopt 373
Chapter 25
Sole proprietorship 375
Chapter 26
Traditional/General Partnership/Partnership Firm 377
Chapter 27
Limited Liability Partnership (LLP) 384
Chapter 28
Companies 390
Chapter 29
Hindu Undivided Family 400
DIVISION FIVE
MICRO ENTERPRISES
Chapter 30
Definition of micro-enterprises 405
Chapter 31
Legal forms of organisation that are suitable for micro
enterprises 407
Chapter 32
Registration as micro enterprise 409
PAGE
CONTENTS I-8

7. DIVISION SIX
SMALL ENTERPRISES
Chapter 33
Definition of small enterprises 415
Chapter 34
Legal forms of organisation that is suitable for small enter-
prises 417
Chapter 35
Registration as small enterprise 419
DIVISION SEVEN
MEDIUM ENTERPRISES
Chapter 36
Definition of medium enterprises 427
Chapter 37
Legal forms of organisation that is suitable for medium
enterprises 429
Chapter 38
Registration as medium enterprise 431
DIVISION EIGHT
START-UP
Chapter 39
Definition of Start-up 439
Chapter 40
Benefits to DPIIT-recognised start-ups under Start-up India
Scheme 450
PAGE
I-9 CONTENTS

8. APPENDICES
APPENDIX 1 : COVID-19 RELIEF MEASURES ANNOUNCED ON
27.03.2020 459
APPENDIX 2 : COVID-19 RELIEF MEASURES ANNOUNCED BY
RBI ON 17.04.2020 461
APPENDIX 3 : MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006 465
APPENDIX 4 : NEW MSME NOTIFICATION (NMN) 480
APPENDIX 5 : CLARIFICATION ON EXISTING ENTREPRENEURS
MEMORANDUM (EM) PART-II/UDYOG AADHAAR
MEMORANDUM (UAM)/NEW UDYAM REGISTRA-
TION 485
APPENDIX 6 : EMERGENCY CREDIT LINE GUARANTEE SCHEME
(ECLGS) - MODIFICATION IN OPERATIONAL GUIDE-
LINES 487
PAGE
CONTENTS I-10

9. C H A P T E R
WHAT IS THE NEW DEFINITION OF “MICRO
ENTERPRISES”, “SMALL ENTERPRISES”
AND “MEDIUM ENTERPRISES”?
1.0 Backdrop
The old definition and classification of Micro, Small and Medium
Enterprises (MSMEs), applicable from 02.10.2006 to 30.06.2020, was
based ceilings for investment in plant and machinery for enterprises
in the manufacturing sector and investment in equipment in services
sector. The investment ceilings were fixed way back in 2006 and were
not adjusted for inflation. These outdated investment ceilings not
adjusted for inflation discouraged MSMEs from undertaking new in-
vestments in plant and machinery or equipment for fear of losing the
MSME status due to investment limits being exceeded. Government of
India has notified new definitions and classification criteria of MSMEs
vide Notification No. S.O. 2119 (E), dated 26.06.2020 (hereafter referred
to as the New MSME Notification or simply as NMN for brevity sake).
The NMN provides as under:
u Definition and classification of MSMEs based on composite crite-
ria of investment and turnover (Para 1of NMN ) [Chapter 1 and
Chapter 4]
u Calculation of investment in plant and machinery or equipment
(Para 4) [Chapter 2]
u Calculation of turnover (Para 5) [Chapter 3]
u Clubbing of investment and turnover of enterprises with distinct
GSTINs but these GSTINs are all linked to single PAN (Para 3)
[Chapter 2 and Chapter 3]
1
6
SAMPLE CHAPTER

10. u Becoming micro, small or medium Enterprise (Para 2) [Chapter
5]
u Registration process (Para 5) [Chapter 5]
u Updation of information and transition period in classification
(Para 8) [Chapter 5]
u Cancellation of Udyam registration (Para 9) [Chapter 5]
u Registration of existing enterprises (Para 7) [Chapter 5]
u Facilitationandgrievanceredressalofenterprises(Para9)[Chapter
5]
u Reclassification if investment or turnover falls below the floor set
for small or medium category (Para 3) [Chapter 6]
u Reclassification if investment or turnover exceeds ceiling stipu-
lated for a category (Para 3) [Chapter 6]
The NMN has not only revised upwards the investment limits substan-
tially but also changed the method of computing investment limits
from original cost basis to net investment i.e. depreciated cost basis.
The investment limit in NMN is in terms of "Net investment in plant
and machinery or equipment". It is not the original investment or cost
of plant and machinery or equipment but the depreciated cost of plant
and machinery or equipment with reference to ITRs filed. Only for
new enterprises without prior ITRs filed the net investment will be the
original cost or purchase invoice value of plant and machinery or equip-
ment. A noteworthy point is depreciated value as per ITRs is reckoned
by charging rates of depreciation as per Income Tax Rules which rates
are higher than the commercial rates of depreciation given in Sched-
ule II of the Companies Act, 2013 for instance. The net investment or
depreciated cost as per ITR will be lower than the depreciated cost as
per audited books of account/balance sheet for companies. This will
ensurethatmuchlargernumberofenterprisesgetincludedindefinition
of MSME and there is no disincentive to invest for fear of losing MSME
status due to investment limit being exceeded. An existing MSME, with
an whose plant and machinery or equipment cost Rs. 50 crores over
the years and having written down value of Rs. 10 crores as per ITR
filed, can invest Rs. 40 cr in new plant and machinery without losing
MSME status and will be regarded as medium enterprise. Under the old
system of reckoning investment limit with reference to original cost,
investment in plant and machinery would be Rs. 50 crores even under
the new definition under NMN and any further investment would result
in 50 cr. limit being exceeded and enterprise going out of MSME fold.
7 CH. 1 : DEFINITION OF MICRO, SMALL & MEDIUM ENTERPRISES Para 1.0

11. NMN excludes export turnover in computing turnover limit. This will
incentivise MSMEs to export more and grow without fear of exceeding
turnover limit and losing MSME status thereby.
1.1What is the new definition for MSMEs? How is it different
from the old classification or definition?
The new definition of MSME applicable with effect from 01.07.2020 is
based on the composite criteria of turnover limits and limits of invest-
ment in plant and machinery or equipment. The same limits apply to
both manufacturing enterprises and service enterprises.
Old MSME definition and classification applicable from 02.10.2006
to 30.06.2020
Criteria: Investment in plant and machinery (for manufacturing enter-
prises)/Investment in equipment (for services enterprises)
Classification Micro Small Medium
Manufacturing
Enterprises
Investment ≤
25 lac
Investment > Rs.
25 Lac but ≤ Rs. 5
crores
Investment > Rs.
5 crores but ≤ Rs.
10 crores
Services
Enterprises
Investment ≤
10 lac
Investment > Rs.
10 Lac but ≤ Rs. 2
crores
Investment > Rs.
2 crores but ≤ Rs.
5 crores
New MSME definition and classification criteria applicable with effect
from 01.07.2020
Criteria: Composite criteria of Net Investment in plant and machinery
and Net turnover
The following Table shows the classification of MSMEs into micro, small
and medium categories based on various combinations of situations as
regards net investment in plant and machinery or investment and net
turnover:
Net turnover
does not ex-
ceed Rs. 5cr
Net turnover
exceeds Rs.
5 cr but not
Rs. 50 cr
Net turnover
exceeds Rs.
50 cr but not
Rs. 250 cr
Net turnover
exceeds
Rs. 250 cr
Net invest-
ment in plant
and machinery
or equipment
does not ex-
ceed Rs. 1 cr
Micro
1
Small
2
Small
3
-----
4
Out of
MSME fold..
large Enter-
prise
Para 1.1 DIV.1 : MSMEs - DEFINITION, CLASSIFICATION REGISTRATION 8

12. Net turnover
does not ex-
ceed Rs. 5cr
Net turnover
exceeds Rs.
5 cr but not
Rs. 50 cr
Net turnover
exceeds Rs.
50 cr but not
Rs. 250 cr
Net turnover
exceeds
Rs. 250 cr
Net invest-
ment in plant
and machinery
or equipment
exceeds Rs. 1
cr but not Rs.
10 cr
Small
5
Small
6
Medium
7
Out of
8
MSME fold..
large Enter-
prise
Net invest-
ment in plant
and machinery
or equipment
exceeds Rs. 10
cr but not Rs.
50 cr
Medium
9
Medium
10
Medium
11
Out of
12
MSME fold..
large enter-
prise
Net invest-
ment in plant
and machinery
or equipment
exceeds Rs.
50 cr
Out of
13
MSME fold..
large enter-
prise
Out of
14
MSME fold..
large Enter-
prise
Out of
15
MSME fold..
large enter-
prise
Out of
16
MSME fold..
large enter-
prise
Notes:
1. In the above table cell No. 1 represents a situation where net in-
vestment in plant and machinery of an enterprise does not exceed
Rs. 1 crore and net turnover does not exceed Rs. 5 crores and
so on.
2. Investment in plant and machinery or equipment means “the net
investment in plant and machinery or equipment” and not original
cost or book value (See Chapter 2)
3. Net Turnover means Total turnover less export turnover. (See
Chapter 3)
4. If an enterprise crosses the ceiling limits specified for its present
category in either of the two criteria of investment or turnover, it
will cease to exist in that category and shall be placed in the next
higher category.
5. No enterprise shall be placed in the lower category unless it goes
below the ceiling limits specified for its present category in both
the criteria of investment as well as turnover.
9 CH. 1 : DEFINITION OF MICRO, SMALL MEDIUM ENTERPRISES Para 1.1

13. 6. All units with Goods and Services Tax Identification Number
(GSTIN)listedagainstthesamePermanentAccountNumber(PAN)
shallbecollectivelytreatedasoneenterpriseandtheturnoverand
investment figures for all of such entities shall be seen together
and only the aggregate values will be considered for deciding the
category as micro, small or medium enterprise.
SUMMARY:
Category
of MSME
enterprise
Sector New composite classi-
fication criteria of in-
vestment and turnover
applicable with effect from
01.07.2020 (investment
reckoned on WDV/depre-
ciated cost/net investment
basis as per ITRs filed)
and turnover = net turn-
over i.e. net of export
turnover)
Old classification
criteria of invest-
ment applicable
from 02.10.2006 to
30.06.2020 (invest-
ment reckoned on
original cost basis
Micro
Enterprise
Manufac-
turing
Net investment in plant and
machinery or equipment ≤
Rs. 1 crore and net turnover
≤ Rs. 5 crores
Investmentinplantand
machinery ≤ Rs. 25 lac
Small
Enterprise
Manufac-
turing
Net investment in plant and
machinery or equipment ≤
Rs. 10 crores and net turn-
over ≤ Rs. 50 crores
Investmentinplantand
machinery Rs. 25
Lacs but ≤ Rs. 5 crores
Medium
Enterprise
Manufac-
turing
Net investment in plant and
machinery or equipment ≤
Rs. 50 crores and net turn-
over ≤ Rs. 250 crores
Investment in plant
and machinery Rs.
5 crores but ≤ Rs. 10
crores
Micro
Enterprise
Services Net investment in plant and
machinery or equipment ≤
Rs. 1 crore and net turnover
≤ Rs. 5 crores
Investment in equip-
ment ≤ Rs. 10 lac
Small
Enterprise
Services Net investment in plant and
machinery or equipment ≤
Rs. 10 crores and net turn-
over ≤ Rs. 50 crores
Investment in equip-
ment Rs. 10 lac but
≤ Rs. 2 crores
Medium
Enterprise
Services Net investment in plant and
machinery or equipment ≤
Rs. 50 crores and net turn-
over ≤ Rs. 250 crores
Investment in equip-
ment Rs. 2 crores but
≤ Rs. 5 crores
Para 1.1 DIV.1 : MSMEs - DEFINITION, CLASSIFICATION REGISTRATION 10

14. 1.2 Is satisfying the above composite criteria of investment
and turnover sufficient to qualify as MSME and avail the
benefitsundertheMSMEDAct?Orisanyregistrationneeded
to be recognised as MSME under the said Act?
Para 2 of the NMN deals with “becoming a micro, small or medium
enterprise” and provides as under:
(1) Any person who intends to establish a micro, small or medium
enterprise may file Udyam Registration online in the Udyam
Registration portal (www.udyamregistration.gov.in), based on
self-declarationwithnorequirementtouploaddocuments,papers,
certificates or proof.
(2) On registration, an enterprise (referred to as “Udyam” in the
Udyam Registration portal) will be assigned a Permanent Identity
Number to be known as “Udyam Registration Number”.
(3) An e-certificate, named “Udyam Registration Certificate” will be
issued on completion of the registration process.
Para6oftheNMNdealswithregistrationprocessandprovidesasunder:
(1) The form for registration shall be as provided in the Udyam Reg-
istration portal.
(2) There will be no fee for filing Udyam Registration.
(3) Aadhaar number shall be required for Udyam Registration.
(4) The Aadhaar number shall be of the proprietor in the case of
a proprietorship firm, of the managing partner in the case of a
partnership firm and of a karta in the case of a Hindu Undivided
Family (HUF).
(5) In case of a Company or a Limited Liability Partnership or a Co-
operative Society or a Society or a Trust, the organisation or its
authorised signatory shall provide its GSTIN and PAN along with
its Aadhaar number.
(6) In case an enterprise is duly registered as an Udyam with PAN,
any deficiency of information for previous years when it did not
have PAN shall be filled up on self-declaration basis.
(7) No enterprise shall file more than one Udyam Registration. Any
number of activities including manufacturing or service or both
may be specified or added in one Udyam Registration.
(8) Whoever intentionally misrepresents or attempts to suppress the
self-declaredfactsandfiguresappearingintheUdyamRegistration
11 CH. 1 : DEFINITION OF MICRO, SMALL MEDIUM ENTERPRISES Para 1.2

15. or updation process shall be liable to such penalty as specified
under section 27 of the MSMED Act.
Para 7 of the NMN deals with registration of existing enterprises and
provides as under:
(1) All existing enterprises registered under EM±Part-II or UAM shall
register again on the Udyam Registration portal on or after the
1st day of July, 2020.
(2) All enterprises registered till 30th June, 2020, shall be re-classified
in accordance with this notification.
(3) The existing enterprises registered prior to 30th June, 2020, shall
continue to be valid only for a period up to the 31st day of March,
2021.
(4) An enterprise registered with any other organisation under the
Ministry of Micro, Small and Medium Enterprises shall register
itself under Udyam Registration.
From a conjoint reading of Paras 2, 6 and 7 of the NMN, it is clear that
merely satisfying the above composite criteria of investment and turn-
over is NOT sufficient to qualify as MSME and avail the benefits under
the MSMED Act. The heading of Para 2 “Becoming a micro, small or
medium enterprise” seems to indicate that filing of Udyam Registration
is essential for MSME enterprise to be recognised as such under the
MSMED Act and to avail benefits [See Q.1.7, Q.1.8, Q.1.9 Q.1.10
below] under that Act.
1.3 Whether the new definition and classification based on
composite criteria applicable only to new enterprises estab-
lished on or after 01.07.2020? Or does it apply to enterprises
existing as on 30.06.2020 also?
The new definition applies to existing enterprises as on 30.06.2020 also.
If existing enterprises are registered under Udyog Aadhaar or EM Part
II, the same will be reclassified as per the new definition. The UAM
registration shall remain valid only till 31.03.2021. All existing enter-
prises registered under UAM as on 30.06.2020 need to re-register under
Udyam on or after 01.07.2020 before their UAM registration expires on
31.03.2021.
Para 1.3 DIV.1 : MSMEs - DEFINITION, CLASSIFICATION REGISTRATION 12

16. 1.4 Whether MSMEs should adopt any particular legal form
of organisation to avail benefits under MSME Act?
No. There is no particular form of legal organisation to be adopted to
be eligible for benefits under the MSMED Act. Benefits under MSMED
Act will be available so long as the enterprise satisfies the investment
andturnoverlimitsasaboveandhasfiledEntrepreneur’sMemorandum
(EM) or Udyog Aadhaar Memorandum (UAM) or Udyam Registration.
It does not matter whether the enterprise is a proprietorship or part-
nership firm or a limited liability partnership (LLP) or a company or
Hindu undivided family (HUF).
According to Notification No. SO 1642 (E), dated 29-9-2006, an enter-
prise may be:
u proprietorship,
u Hindu undivided family,
u association of persons,
u co-operative society,
u partnership firm,
u company,
u undertaking, or
u any other legal entity
The term ‘any other legal entity’ used in Notification No. 1642 (E) is wide
enough to cover limited liability partnership and formed and registered
undertheLimitedLiabilityPartnershipAct,2008.EvenSelf-HelpGroups
can be considered as “enterprises”.
However, if MSME is a start up, it must be a partnership firm or LLP
or a private limited company to avail benefits under DPIIT’s Start up
Notification No. GSR 127(E), dated 19.02.2019 [hereinafter referred to
as Latest Startup Notification (LSN)] [See Division 8; Chapter 39]
1.5 Whether street vendors will be regarded as MSMEs as
per the revised definition ?
No.
An MSME “enterprise” may be :
u An industrial undertaking; or
u A business concern; or
u Any other establishment.
13 CH. 1 : DEFINITION OF MICRO, SMALL MEDIUM ENTERPRISES Para 1.5

17. To fall within the definition of the term “enterprise”, the service provider
should be an industrial undertaking or a business concern or any other
establishment. It appears that an individual service provider without an
undertaking/concern/establishmentwouldnotqualifyasan“enterprise”.
[See Chapters 21 and 22 for schemes benefitting street vendors].
1.6Would the following qualify as MSMEs under the revised
definition? (i) individual practising CA, (ii) an individual
professional photographer,(iii) plumbers,(iv) gardeners,(v)
cobblers, (vi) puncture wallahs?
An individual service provider without an undertaking establishment
or concern is not an “enterprise” as defined in MSMED Act [See Q.1.5
above].
Thus, a CA firm or a CA having an office shall be an “enterprise”. An
individual CA practising as such and not having any establishment will
not be a “service enterprise”. A photography studio is a service enter-
prise.Anindividualprofessionalphotographerisnotaserviceenterprise.
Likewise, plumbers, gardeners, cobblers, puncture wallahs, road-side
tea vendors -….those that do not have any undertaking/establishment
- it appears these are not “enterprises”.
1.7 What benefits are available under the MSMED Act to
MSMEs filing the Udyam Registration?
The following Table summarises benefits available to MSMEs filing
Udyam Registration:
Sr.
No.
Benefits available under
the MSMED Act
Whether
available
To Micro
Enterprises
Whether
available
To Small
Enterprises
Whether
available
To Medium
Enterprises
1. Protection against delayed payments
by buyers of goods/services (Section
15 of the MSMED Act) and right to
interestfordelayedpayments(Section
16 of the MSMED Act) [See Chapter 8]
Yes Yes No.
2. Time-bound settlement of pay-
ment-related disputes with buyers of
goodsorservicesthroughconciliation
and arbitration (Sections 18 to 21 of
the MSMED Act) [See Chapter 8]
Yes Yes No
Para 1.7 DIV.1 : MSMEs - DEFINITION, CLASSIFICATION REGISTRATION 14

18. Sr.
No.
Benefits available under
the MSMED Act
Whether
available
To Micro
Enterprises
Whether
available
To Small
Enterprises
Whether
available
To Medium
Enterprises
3. Central Government measures for
promotion and development [section
9 of the MSMED Act]
Yes Yes Yes
4. RBIscreditpoliciesforensuringtimely
and smooth flow of credit (Section 9
of the MSMED Act)
Yes Yes Yes
5. Preference policies (preference to
micro enterprises in respect of goods
andservicesprocuredbyGovernment
Departments/aided institutions/
PSEs) notified by Central/State Gov-
ernment (Section 11 of the MSMED
Act) [See Chapter 10]
Yes. Yes No.
1.8 What benefits are available under the MSMED Act to a
micro enterprise filing the Udyam Registration?
A micro/small enterprise which has filed the EM/UAM/Udyam Regis-
tration may avail the following benefits under the MSMED Act:
u Protection against delayed payments by buyers of goods/services
to a micro/small enterprise (section 15 of the MSMED Act) and
right to interest on delayed payments for micro small enter-
prises if section 15 is violated (section 16 of the MSMED Act) [See
Chapter 8].
u Time-bound settlement of payment-related disputes with buyers
of goods/services through conciliation and arbitration (Sections
18 to 21 of the MSMED Act) [See Chapter 8].
u Central Government’s measures for promotion and development
(Section 9 of the MSMED Act).
u RBI’s credit policies for ensuring timely and smooth flow of credit
(Section 10 of the MSMED Act).
u Preference policies (preference to micro enterprises in respect of
goods and services procured by Government Departments/aided
institutions/PSEs)notifiedbyCentral/StateGovernment(Section
11 of the MSMED Act) [See Chapter 10].
The above benefits/facilities are available under the MSMED Act to
all micro enterprises or small enterprises which have filed EM/UAM/
15 CH. 1 : DEFINITION OF MICRO, SMALL MEDIUM ENTERPRISES Para 1.8

19. Udyamregistrationwhethertheyaremanufacturing/productionmicro/
small enterprises or service micro/small enterprises.
1.9 What benefits are available under the MSMED Act to a
small enterprise filing the Udyam Registration?
A micro/small enterprise which has filed the EM/UAM/Udyam Regis-
tration may avail the following benefits under the MSMED Act:
u Protection against delayed payments by buyers of goods/services
to a micro/small enterprise (section 15 of the MSMED Act, 2006)
and right to interest on delayed payments for micro small
enterprises if section 15 is violated (section 16 of the MSMED Act,
2006) [See Chapter 8].
u Time-bound settlement of payment-related disputes with buyers
of goods/services through conciliation and arbitration (Sections
18 to 21 of the MSMED Act) [See Chapter 8].
u Central Government’s measures for promotion and development
(section 9 of the MSMED Act).
u RBI’s credit policies for ensuring timely and smooth flow of credit
(section 10 of the MSMED Act).
u Preference policies (preference to micro/small enterprises in re-
spectofgoodsandservicesprocuredbyGovernmentDepartments/
aided institutions/PSEs) notified by Central/State Government
(section11 of the MSMED Act) [See Chapter 10].
The above benefits/facilities are available under the MSMED Act to
all micro enterprises or small enterprises which have filed EM/UAM/
Udyamregistrationwhethertheyaremanufacturing/productionmicro/
small enterprises or service micro/small enterprises.
1.10 What benefits are available under the MSMED Act to a
medium enterprise filing the Udyam Registration?
The following benefits/facilities are available under the MSMED Act to
amediumenterprisewhichhasfiledtheEM/UAM/UdyamRegistration
whether the enterprise is a manufacturing/production enterprises or
service enterprises:
u Central Government’s measures for promotion and development
(section 9 of the MSMED Act)
u RBI’s credit policies for ensuring timely and smooth flow of credit
(section 10 of the MSMED Act)
Para 1.10 DIV.1 : MSMEs - DEFINITION, CLASSIFICATION REGISTRATION 16

20. A medium enterprise is not entitled to the benefits of
u Protection against delayed payments by buyers of goods/services
to a micro/small enterprise (section 15 of the MSMED Act, 2006)
and interest on delayed payments (section 16 of the MSMED Act,
2006)
u Time-bound settlement of payment-related disputes through
conciliation and arbitration (Sections 18 to 21 of the MSMED Act,
2006)
u Purchase Preference policies (section 11 of the MSMED Act)
1.11 Whether a micro, small or medium enterprise is
eligible for any tax holiday under the Income-tax Act ?
MSMEs are entitled to tax holiday under section 80-IAC of the
Income-tax Act, 1961 only if they are startups as defined in the Latest
Startup Notification (LSN) [See Division 8, Chapter 39] and satisfy the
conditions stipulated in section 80-IAC1
. For non-startups MSMEs, no
tax holiday is available under the Income-tax Act.
1.12 Whether there is any reservation policy of reserving
items exclusively for manufacture by MSMEs?
No.ReservationofitemsformanufacturebySSIs/MSMEswasgradually
phased out over the years and finally totally ended in 2015. Presently,
there are no items reserved for manufacture exclusively by MSMEs.
1.13 Whether startups will be regarded as MSMEDs as per
the revised definition?
Only partnership firms, LLPs and Companies can have both the
statuses of “MSME” under MSMED Act and of startup under the LSN
[See Chapter 39]. They will be regarded as MSMEs provided they satisfy
the investment limits in the definitions of MSME under the MSMED Act.
Proprietorships, HUFs, Public limited companies, AOPs, Co-operative
societies can be MSMEs but not startups.
1.14 What is the legal difference between an MSME and a
startup?
MSME is defined by the MSMED Act. Startup is defined by the DPIIT's
StartupNotificationNo.GSR127(E),dated19.02.2019[i.e.LatestStartup
17 CH. 1 : DEFINITION OF MICRO, SMALL MEDIUM ENTERPRISES Para 1.14
1. For detailed discussion on the subject, refer Taxmann’s ‘Taxation of Start-ups Investors’.

21. Notification (LSN)] [See Chapter 39] An enterprise can be an MSME as
well as a startup by satisfying the definitions of NMN as well as LSN
respectively. The distinction between MSME and startup is summed
up as under:
Sr.
No.
MSME Startup
1. Defined by NMN issued under the
MSMED Act
Defined by LSN issued by DPIIT
2. Investment limits and turnover
limits should both be satisfied to be
regarded as MSME
Only turnover limit of Rs. 100 cr is
applicable. No investment limits in
the definition of startup.
3. Turnover limit for MSME recogni-
tion is in terms of net turnover i.e.
turnover less export turnover
Turnover limit for DPIIT purposes
is gross turnover without reducing
exports.
4. MSME status will exist as long as
investmentlimitsandturnoverlimits
are not exceeded.
Startup status will last till turnover
exceeds Rs. 100 crores or 10 years
from date of incorporation are com-
pleted, whichever is earlier
5. Turnover limit for MSME Status is
net turnover of Rs. 250 crores
Turnover limit for Startup Status
is gross turnover of Rs. 100 crores
6. Investment ceiling for MSME status
is Rs. 50 crores. If that is exceeded,
enterprise ceases to be MSME
No investment ceilings to be regard-
ed as startup under LSN
7. Enterprise can enjoy MSME status
for any length of time after its incor-
poration so long as its investment in
plant and machinery or equipment
does not exceed Rs. 50 crores and
turnover does not exceed Rs. 250
crores
Startup status under LSN is only for
10 years from date of incorporation
8. To be recognised as MSME, enter-
prise must file Udyam Registration
To be recognised as startup, enter-
prise must file application for DPIIT
Recognition in terms of LSN
9. If investment limit of Rs. 50 crores
(as per NMN) is not exceeded and
turnover limit of Rs. 100 crores (as
perLSN)isnotexceededbut10years
have lapsed since date of incorpora-
tion, then enterprise will be MSME
but will not be a startup.
IfinvestmentlimitofRs.50crores(as
per NMN) is exceeded but turnover
limit of Rs. 100 crores (as per LSN)
is not exceeded and 10 years have
not elapsed from date of incorpora-
tion, enterprise will not be regarded
as MSME but will be regarded as
startup.
Para 1.14 DIV.1 : MSMEs - DEFINITION, CLASSIFICATION REGISTRATION 18

22. Sr.
No.
MSME Startup
10. MSME enterprise can have any
legal form of organisation i.e. pro-
prietorship or partnership firm or a
limited liability partnership (LLP) or
acompany(whetherpubliclimitedor
private limited) or Hindu undivided
family(HUF)orAOPorco-operative
society.
Only partnership firms, LLPs and
private limited companies will be
eligible for startup status.
11. Enterprise can follow any business
model to qualify as MSME.
To qualify as a startup, Business
model must be working towards
innovation, development or im-
provement of products or services
or business model must be scalable
with high potential of employment
generation or wealth creation. [See
Chapter 39]
12. Enterprise will be an MSME even
if it is formed by splitting up or
reconstruction of business already
in existence.
Enterprise will not qualify as a start-
up if it is formed by splitting up or
reconstruction of business already
in existence.
13. MSME private limited companies
which do not qualify as startups are
liable to angel tax on shares issued
at premium if issue price is higher
than Fair Market Value.
Startup private limited companies
are exempted from angel tax1
if
investments made or to be made
by all investors including family and
friends do not exceed Rs. 25 crores.
14. No tax holiday for an MSME unless
it qualifies as a startup, is DPIIT-
recognised and is a private limited
company/LLP which satisfies con-
ditions of section 80-IAC.
Tax holiday u/s 80-IAC of the
Income-tax Act, 1961 is available for
astartupwhichisanLLPoraprivate
limited company.
15. No tax exemption to capital gains
from sale of residential property of
promoter if the same is invested into
a private limited company which is
an MSME but does not qualify as a
startup.
Tax exemption under section 54GB1
oftheIncome-taxAct,1961tocapital
gainsfromsaleofresidentialproper-
tyofpromoterifthesameisinvested
intoaprivatelimitedcompanywhich
is a startup.
16. BenefitsundertheMSMEDActavail-
able to MSMEs. However, benefits
under Startup India Scheme will not
be available unless the enterprise
satisfies the definition of ‘startup’
in LSN and gets DPIIT recognition.
Benefits under the MSMED Act are
not available to startups unless they
qualify as MSMEs by satisfying the
investment limits in the definition
and file Udyam Registration.
19 CH. 1 : DEFINITION OF MICRO, SMALL MEDIUM ENTERPRISES Para 1.14
1. For detailed discussion on the subject, refer Taxmann’s ‘Taxation of Start-ups Investors’.

23. 1.15 Can an enterprise satisfy the definition of MSME and
startupandgetthebestofboththeworldsi.e.benefitsunder
MSMED Act as well as LSN?
Yes. An enterprise can claim benefits under both MSMED Act as well
as LSN if:
u It is a partnership firm or LLP or private limited company and 10
years has not elapsed from the date of its incorporation. (Howev-
er, from tax benefits under Income-tax Act, 1961 point of view, it
should be a private limited company); and
u It satisfies the composite criteria of turnover and investment
limits under the NMN and it has filed Udyam Registration/UAM/
EM.
[Refer Taxmann’s Taxation of startups and Investors for more details].
1.16 For availing tax holiday under section 80-IAC of the
Income-tax Act,will it be necessary for startup to file Udyam
Registration?
No. Benefits to a startup under section 80-IAC of the Income-tax Act,
1961 are dependant on satisfying conditions under section 80-IAC and
LSN. Not filing Udyam Registration will not result in denial of benefits
under Income-tax Act, 1961 though it will result in loss of benefits under
MSMED Act (See Q.1.7 to Q.1.10 above).
[Refer Taxmann’s Taxation of startup and Investors for more details].
1.17 Whether an MSME company is entitled to any benefits
under the Companies Act, 2013 by way of simplified proce-
dural regime?
According to section 2(85) of the Companies Act, 2013, a company is a
‘small company’ if it satisfies the following conditions:
u It is not a public company, i.e., it is a private company or a One
Person Company.
u Its paid-up share capital does not exceed Rs. 50,00,000 or such
higher amount as may be prescribed which shall not be more
than Rs. 10,00,00,000.
Note : The Central Government has not notified a higher paid-up
share capital limit than Rs. 50,00,000 under the above sub-clause
Para 1.17 DIV.1 : MSMEs - DEFINITION, CLASSIFICATION REGISTRATION 20

24. as yet. Thus, by default, paid-up share capital for small company
is Rs. 50,00,000 as of now.
u Its turnover as per its profit and loss account for the immediately
preceding financial year does not exceed Rs. 2,00,00,000 or such
higher amount as may be prescribed which shall not be more
than Rs. 100,00,00,000.
Note : The Central Government has not exercised its power to
notify a turnover limit higher than Rs. 2 crores but not exceeding
Rs. 100 crores. Thus, by default, turnover limit for small company
remains Rs. 2 crores.
u It is not a holding company or a subsidiary company.
u It is not a company registered under section 8 of the Act.
u It is not a company or body corporate governed by any special
Act.
Thus, an MSME company which is a private limited company or OPC
qualifies as a small company if conditions in section 2(85) of the Com-
panies Act, 2013 are satisfied. The Small company is entitled to certain
relaxationsandexemptionsinprovisionsoftheCompaniesActapplicable
to them. [See Chapter 19]
1.18 Does the MSME Company need to file Udyam Regis-
tration to qualify as Small Company under the Companies
Act, 2013?
No. However, it should file Udyam Registration so that it can avail
benefits [See Q.1.7 to Q.1.10] under the MSMED Act.
1.19 If MSME does not file Udyam Registration, will it be
deniedbenefitsundertheIncome-taxAct,1961orotherActs?
No. The following benefits are available to small businesses under the
Income-taxAct,1961regardlessofwhethertheyfileUdyamRegistration
u An individual or HUF or partnership firm carrying on business
with turnover not exceeding Rs. 2 crores in any financial year
can opt for presumptive taxation scheme under section 44AD of
Income-tax Act, 1961 whereby it can offer to tax 8% of its turnover
as taxable business income (6% if turnover is from cashless pay-
ment modes). A simple SUGAM ITR form can be filed. No books
of account need be maintained. Compulsory audit of accounts
under section 44AB not applicable. [See Chapter 14]
21 CH. 1 : DEFINITION OF MICRO, SMALL MEDIUM ENTERPRISES Para 1.19

25. u Any small business which falls under clause (a) of section 44AB
of Income-tax Act, 1961 and whose turnover or gross receipts in
any financial year does not exceed Rs. 5 crores is exempt from
compulsory tax audit under section 44AB with effect from assess-
ment year 2020-21 if:
(a) aggregateofallamountsreceivedincludingamountreceived
for sales, turnover or gross receipts during the previous
year, in cash, does not exceed 5 per cent of the said amount;
and
(b) aggregate of all payments made including amount incurred
for expenditure, in cash, during the previous year does not
exceed five per cent of the said payment [See Chapter 16]
If such small business does not comply with above conditions,
then turnover threshold exemption limit for audit is Rs. 1 crore.
u A company whose turnover does not exceed Rs. 400 cr. in a finan-
cial year is entitled to concessional rate of tax of 25% applicable to
smallandmediumcompaniesaspertheFinanceAct.[SeeChapter
18 for more details]
For startups, following tax benefits applicable whether they satisfy
MSME definition or not
u Startup LLPs and PLCs entitled to tax holiday under section
80-IAC of the Income-tax Act, 1961
u Startup PLCs entitled to angel tax exemption
u A startup entity which falls under clause (a) of section 44AB of
Income-tax Act, 1961 and whose turnover or gross receipts in any
financial year does not exceed Rs. 5 crores is exempt from com-
pulsory tax audit under section 44AB with effect from assessment
year 2020-21 if
(a) aggregateofallamountsreceivedincludingamountreceived
forsales,turnoverorgrossreceiptsduringthepreviousyear,
in cash, does not exceed 5% of the said amount; and
(b) aggregate of all payments made including amount incurred
for expenditure, in cash, during the previous year does not
exceed five per cent of the said payment [Chapter 16]
u A company whose turnover does not exceed Rs. 400 cr. in a finan-
cial year is entitled to concessional rate of tax of 25% applicable
to small and medium companies as per the Finance Act [Chapter
18]
[Refer Taxmann’s Taxation of Startups and Investors for details].
Para 1.19 DIV.1 : MSMEs - DEFINITION, CLASSIFICATION REGISTRATION 22

26. ‘MicroSmallMedium Enterprises(‘MSME’)ReadyReckoner’isacomprehensive
bookonlawsgoverningMSMEsinIndia.Thisbookprovidesananalysisofallprovi-
sionsoftheMSMEAct,2006alongwithrelevantCircularsandNotifications.
ThePresentPublicationisthe1stEdition,whichincorporatesalltheamendments
announcedbytheGovernmentofIndiaandReserveBankofIndia(‘RBI’),suchas:
‘Covid-19ReliefMeasures’announcedbyRBI,
NewMSMEdefinition,
EmergencyCreditLineGuaranteeSchemeand,
ClarificationonnewregistrationforexistingEMPart-II/UAM.
TheBookhasbeendividedinto8divisionsasunder:
MSMEs–Definition,ClassificationAndRegistration|Isthereauniform definitionof
smallbusinessesorsmallandmedium enterprises(‘SME’)forthepurposesofall
lawsbenefittingSMEs?
BenefitstoRegisteredMSMEs
BenefitstoSmallBusinesses,whetherRegisteredMSMEsorNot
LegalFormsofOrganisationMSMEsCanAdopt(withProsandConsofeachLegal
Form)
MicMicroEnterprises