Q.Explain the composite criterion used to classify enterprises as micro, small or medium under the MSMED Act, 2006.
Since the government notification that took effect on 1 July 2020, the MSMED Act, 2006 no longer classifies an enterprise using a single measure such as investment alone. Instead, it uses a composite criterion built on two figures:
- Investment in plant and machinery or equipment (the value of productive assets the enterprise owns, excluding land and building).
- Annual turnover (the enterprise's yearly sales/revenue, linked to its GST returns for verification).
Both figures are checked, and the enterprise is classified into whichever of the three tiers — micro, small or medium — corresponds to the higher of the two results. For example, if an enterprise's investment level alone would place it in the "micro" tier but its turnover is high enough to fall in the "small" tier, the enterprise as a whole is classified as "small", not "micro". This prevents a unit with very high sales but deliberately low fixed investment (common among trading and some service businesses) from being wrongly treated as a very small enterprise.
The indicative ceilings notified in 2020 were: Micro — investment up to Rs. 1 crore and turnover up to Rs. 5 crore; Small — investment up to Rs. 10 crore and turnover up to Rs. 50 crore; Medium — investment up to Rs. 50 crore and turnover up to Rs. 250 crore. These figures are revised periodically by government notification, so the classification logic (two criteria, higher category governs) is the durable part of the answer, while the exact rupee limits should always be checked against the Ministry of MSME's current notification.
The composite criterion also applies identically to manufacturing and service enterprises — an important change from the pre-2006 position, which classified the two separately.
The composite criterion classifies an enterprise as micro, small or medium by taking BOTH its investment in plant & machinery/equipment and its annual turnover together, and placing it in the higher of the two categories that either measure alone would indicate — replacing the earlier practice of separate, investment-only classification for manufacturing and service units.
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