The number of entity registered as micro, small and medium enterprise is growing every day as a result of different government incentive for micro, small and medium enterprise such as low interest loan as well as subsidy and secured payment from corporation and so on.
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Micro, small and medium enterprise registration and udyam registration has been in effect since 2006 and the criteria for classifying a company as an micro, small and medium enterprise and other provision have remained unchanged since then.
In light of the current situation the government has made several amendment to the micro, small and medium enterprise act such as the criteria for categorizing an entity as a small business the method of calculating turnover and investment for classification and the process of registration as a small business.
In this article the impact of revision to the micro, small and medium enterprise act is discussed in detail including what is the process of changing an entity micro, small and medium enterprise status during the year owing to change in classification criteria what procedure should be taken to change status and the repercussions of not changing status.
Changes to the criteria for classifying enterprise as micro, small and medium enterprise.
Different categorization criteria were provided for manufacturing and service company up until 30th of june, 2021 and classification was also entirely based on the amount of investment made in plant and machinery.
With effect from 1st of july, 2021 the distinction between manufacturing and service entity has been eliminated and a single classification criteria has been established for both types of company. Furthermore the classification criteria have been revised to include a new criterion of firm turnover in addition to the amount of investment made in plant and machinery.
What is the process for calculating plant and machinery investment?
Until 30th of june, 2021 when calculating the value of an investment in plant and machinery was to be regarded that is before depreciation was taken into account. Investment in other machinery such as tool as well as jigs and die as well as mould and spare pollution control equipment as well as research and development equipment and so on was also omitted.
However as of 1st of july, 2017 a new technique for calculating investment in plant and machinery has been prescribed.
The income tax act 1961 will be used to calculate the investment in plant and equipment. As a result the net block of plant and machinery declared in the income tax return is regarded to be an investment in plant and machinery.
Given the assumption used to calculate investment it can be concluded that investment made up until the end of the previous year should be considered for assessing an enterprise status.
In the instance of a new business where no prior year income tax return is available the investment will be based on the promoter self declaration. This self declaration is valid until the 31st of march of the financial year in which the first income tax return is filed.
When calculating the value of plant and machinery on a self declaration basis for newly created enterprise without an income tax return invoice value excluding good service tax shall be taken into consideration.
How to calculate turnover for micro, small and medium enterprise type classification.
The value of turnover has been included as a new foundation for classifying a business as an micro, small and medium enterprise. The procedure for calculating turnover is as follows.
Under all good service tax identification number the value of turnover will be calculated using information from income tax return and the goods and service tax return.
If an enterprise has numerous good service tax identification number associated with the same permanent account number it will be treated as a single entity and total turnover as well as investment for all good service tax identification number will be used to determine whether it is a micro, small and medium enterprise.
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The value of export of product and service is not included in the calculation of turnover. As a result even if a company is primarily engaged in export it can still preserve its micro, small and medium enterprise designation and take advantage of the benefit.
For enterprise without a permanent account number turnover data will be calculated based on self declaration for the period ending 31st of december, 2021. After 31st of december, 2021 permanent account number and good service tax identification number will be required. In the event that the permanent account number and good service tax identification number are not available the micro, small and medium enterprise registration would be terminated.
What is the impact of a change in an enterprise status as a result of altered classification rule?
Change in categorization criteria as well as the technique of calculating investment in plant and machinery may result in a significant shift in an enterprise status after 1st of july, 2021. The procedure for changing an enterprise status will be described next.
Unwanted change in the status of the company.
If the threshold limit for either of the criteria that is investment in plant and machinery increase upward under revised micro, small and medium enterprise provision the status of the enterprise shall be removed from the existing category and placed in the next higher category immediately.
