To redefine the criterion for classifying Micro, Small and Medium Enterprises, a bill has been introduced in the Lok Sabha by the government in June 2020. According to the MSMED (Micro, Small and Medium Enterprises Development) (Amendment) Bill, MSMEs will now be classified based on their “annual turnover”. Under the old regime, the criterion being “investment in plant and machinery or equipment”.
Giriraj Singh, Minister of State (Independent Charge) for MSMEs, withdrew the 2015 Bill on the issue and introduced the new bill in the Lok Sabha, that would make an amendment to Section 7 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

The bill defined, by asserting that any unit where the annual turnover does not exceed Rs. five crores will be a 'micro-enterprise' whereas a 'small enterprise' will be defined as a unit which has an annual turnover between Rs. 5 crore and Rs. 75 crore. Those businesses whose annual turnover is more than Rs. 75 crore but does not exceed Rs. 250 crore would be classified as 'medium enterprises'.

In addition to these changes, the Central Government may, by notification, vary these turnover limits, but they shall not exceed thrice the limits specified in amended Section 7 of the MSMED Act.

The PM-chaired Union Cabinet had earlier approved this proposal for amendment in February 2020.

Currently, MSMEs are defined in terms of the capital investment in plant & machinery, as well as in terms of investment in equipment, by the provision of MSMED Act, 2006.

Modifications were made in the bill, keeping in view that the criterion of investment in plant and machinery or equipment often incentivises the tendency of the promoters of enterprises to keep the investment size small in a particular business entity, to retain the benefits associated with the category of micro or small enterprises. Further, it entailed physical verification having associated transaction costs, as per the bill.

The bill also clarifies that if the criterion for classification is taken to be an enterprise's annual turnover, the information available with Goods and Services Tax (GST) network and other sources can be used for determination of the category of the enterprises.

It is pertinent to note that the MSMED Act, 2006, was enacted to facilitate the promotion and development, and enhancing the competitiveness of micro, small and medium enterprises.

However, in its statement of objects and reasons, the Bill states that over a while, it is necessary to change the criteria for the classification of enterprises, to align it with the current needs and the evolving business ecosystem.

Thus, overall, the turnover-based classification will help promote the ease of doing business and will also, hopefully, put in place a non-discretionary, transparent and objective classification system. This will result in consequent development and will pave the way for increased direct and indirect employment in the MSME sector of the economy.