Small and Medium Scale Enterprise (SMEs)

Small and medium scale enterprises (SMEs) are understood in India as enterprises where the investment in plant and machinery or equipments is between Rs. 25 lakhs ( ͌ US $ 0.04 million) to Rs. 10 crores  (  ͌  US$1.6 million) in case of a manufacturing industry and between Rs. 10 lakh ( ͌ US $ 0.02 million) to Rs. 5 Crore ( ͌ US $ 0.8 million)  in case of a service sector enterprise.

This definition is provided in Section 7 of Micro, Small & Medium Enterprises Development  Act, 2006 (MSMED Act) and was notified in September 2006. The Act provides for classification of enterprises based on their investment size and the nature of the activity undertaken by that enterprise.  As per MSMED Act, enterprises are classified into two categories - manufacturing enterprises and service enterprises. For each of these categories, a definition is given to explain what constitutes a micro enterprise or a small enterprise or a medium enterprise. What is not coming under the above three categories would be considered as  a large scale enterprise in India.

(a) Manufacturing Enterprises are the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use. The Manufacturing Enterprise are defined in terms of investment in Plant & Machinery.

(b) Service Enterprises are the enterprises engaged in providing or rendering of services and aredefined in terms of investment in equipment.

The limit for investment in plant and machinery / equipment for manufacturing / service enterprises, as notified on 29-09-2006 are as under:

Manufacturing Sector
Enterprises	Investment in plant machinery
Micro Enterprises	Does not exceed 25 lakh rupees
Small Enterprises	More than 25 lakh rupees but does not exceed 5 crore rupees
Medium Enterprises	More than 5 crore rupees but does not exceed 10 crore rupees
Service Sector
Enterprises	Investment in equipments
Micro Enterprises	Does not exceed 10 lakh rupees:
Small Enterprises	More than10 lakh rupees but does not exceed 2 crore rupees
Medium Enterprises	More than 2 crore rupees but does not exceed 5 core rupees

The enterprises can take any form - proprietorship, company, cooperative, association of persons, Hindu Undivided Family^[1] , partnership etc. Further, this definition is not restricted by the number of persons employed by the firm nor the electricity consumed by the firm, as was the case in the past or as is still practised in some other countries.

SMEs are identified to provide special investment assistance and handholding as they contribute significantly to the employment, production and export in the country.

As on date, there is no item reserved for exclusive manufacture in the micro small and medium scale sector unlike such a provision that existed during during pre-liberalisation phase (On 10.04.2015 Government has dereserved the remaining 20 items from the erstwhile list of items reserved for exclusive manufacture in Small scale industries (now – Micro and Small Enterprises)).

History
In India, before the enactment of MSMED Act in 2006, there was no official definition for medium scale enterprises. Consequently, there was no official definition for small and medium scale enterprises [SME's] as well as for what was commonly called then as large and medium scale enterprises [LME's]. What was officially defined was a small-scale industry (SSIs) and by definition what was not a small-scale unit, becomes automatically a large &medium scale enterprise or a non-SSI unit. As per the latest classification followed till the enactment of MSMED Act in 2006, a small-scale unit was defined as one with an investment up to Rs 1 crore in plant and machinery, provided it is not owned by or controlled by a subsidiary of any other industrial undertaking. This condition was set to prevent big firms from grabbing the benefits extended to small-scale industries by setting up their subsidiaries as small-scale undertakings. In addition, it was intended to discourage the misuse of incentives by establishing more than one SSI^[2] unit by the same person. The various definitions of SSI over the years are given in the Table below.

Definition of Small-scale Industries

YEAR	INVESTMENT LIMITS	ADDITIONAL CONDITIONS
1950	Up to Rs 5 lakhs in fixed assets	Employment of less than 50/100 persons with or without power
1960	Up to Rs 5 lakhs in Plant & Machinery	Employment condition was dropped
1966	Up to Rs 7.5 lakhs in Plant &Machinery	No condition
1975	Up to Rs 10 lakhs in Plant & Machinery	No condition
1980	Up to Rs 20 lakhs in Plant & Machinery	No condition
1985	Up to Rs 35 lakhs in Plant & Machinery	No condition
1991	Up to Rs 60 lakhs in Plant & Machinery	No condition
1997 (Dec)	Up to Rs.300 lakhs in Plant &Machinery*	No condition
1999 (Dec) to 2006	Up to Rs 100 lakhs in Plant & Machinery	No Condition

*Studies by Small Industries Development Bank of India (SIDBI) have shown that even though there was a general increase in the ceiling limit for investment in plant and machinery in the SSI sector, in real terms the revision has not made significant differences . However, the revision in the investment criterion in 1997 had provided opportunities for small units to undertake higher investment. The Government of India has since decided to lower the investment ceiling from Rs. 300 lakhs to Rs. 100 lakhs.

Amendments proposed in 2015
A need for change in definition has been raised by the various stakeholders from time to time. The MSME related Parliamentary Standing Committee on Industry had taken up this issue and in its 245th Report had recommended that considering the inflation and dynamic market situation, the definition of MSME as provided in the MSMED Act may be revised every five years. Further, in its 258th Report, it had recommended that "if needed, the Act should be amended to make definition flexible". Ministry of MSME has accordingly decided in November 2014 for an amendment to the MSMED Act, 2006 to double the investment limits of micro and small enterprises and triple the investment limits of medium scale enterprises. The bill is yet to be tabled in the Parliament.

Manufacturing Sector	Existing Definition	Proposed Definition
Enterprises	Investment in plant & machinery
Micro Enterprises	Does not exceed 25 lakh rupees	Does not exceed 50 lakh rupees
Small Enterprises	More than 25 lakh rupees but does not exceed 5 crore rupees	More than 50 lakh rupees but does not exceed 10 crore rupees
Medium Enterprises	More than 5 crore rupees but does not exceed 10 crore rupees	More than 10 crore rupees but does not exceed 30 crore rupees
Service Sector
Enterprises	Investment in equipments
Micro Enterprises	Does not exceed 10 lakh rupees:	Does not exceed 20 lakh rupees:
Small Enterprises	More than 10 lakh rupees but does not exceed 2 crore rupees	More than 20 lakh rupees but does not exceed 5 crore rupees
Medium Enterprises	More than 2 crore rupees but does not exceed 5 core rupees	More than 5 crore rupees but does not exceed 15 core rupees

International Comparisons 
Different organizations and countries set their own guidelines for defining SMEs, often based on headcount, sales/ turnover or assets.

For instance, European Union (EU) has defined SMEs in EU law: EU recommendation 2003/361 EU recommendation 2003/361 which has come into force from 1 January 2005. The main factors determining whether a company is an SME are number of employeesand eitherturnoverorbalance sheet total. The category of micro, small and medium-sized enterprises is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.

Company category	Employees	Turnover	or		Balance sheet total
Medium-sized	< 250	≤ € 50 m		≤ € 43 m
Small	< 50	≤ € 10 m		≤ € 10 m
Micro	< 10	≤ € 2 m		≤ € 2 m

These ceilings apply to the figures for individual firms only. A firm which is part of larger grouping may need to include employee/turnover/balance sheet data from that grouping too.

There is no universally accepted definition of an SME, even within the U.S. government. United States considers SMEs to include firms with fewer than 500 employees.The various definitions adopted by U.S. Department of Commerce (Commerce), the U.S. Small Business Administration (SBA), and the U.S. Department of Agriculture (USDA) can be seen in this 2010 report of US International Trade Commission. 

In China,an MSME can be an enterprisewith 1 to 3000 employees; total assets from ¥ 40 to 400 million and business revenues from ¥10 to 300 million depending on the industry. (Source World Bank Blog 2010; also see the definitions categorised and reproduced in this paper) SME definitions adopted by various countries can be seen in Appendix A-2 of this 2005 draft paper of World Bank.

1. The term 'Hindu Undivided Family' has not been defined under the Income Tax Act. It is defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor, including wives and unmarried daughters. A HUF cannot be formed by a group of people who do not constitute a family; lineal descendents with a common ancestor is a must. Even though Jain and Sikh families are not governed by the Hindu law, they can still be treated as a HUF. A HUF gets created the moment a person marries. (Source: knowledge.icsi.edu presentation by by Nikhil Agarwal & Sudhir Saklani)

2. A differential investment limit has been adopted since 9th of Oct.2001 for 41 reserved items, where the investment limit up to Rs. 5 Crore is prescribed for qualifying as a SSI unit.

In 1966, an ancillary unit was defined as one with investment limit in plant and machinery up to Rs. 10 lakhs. An ancillary unit was defined as an industrial undertaking which is engaged or is proposed to be engaged in the manufacture or production of parts, components, sub-assemblies, tooling or intermediates, or the rendering of services and undertaking supplies or renders or proposes to supply or render not less than 50 per cent of its production or services, as the case may be, to one or more other industrial undertakings and whose investment in fixed assets in plant and machinery whether held on ownership terms or on lease or on hire-purchase, does not exceed Rs 10 million.

In April, 1991 a third category of unit, viz., Export oriented unit has also been introduced (Reference No. S. O. 232(E) dt. 2nd April, 1991)

A tiny unit was defined in 1977 as one with investment in plant and machinery up to Rs. 1 lakh located in the rural areas or towns with a maximum population of up to 50,000 as per 1971 census. The latest definition of a tiny unit is as one with investment limit (in plant and machinery) of Rs 25 lakhs irrespective of location of the unit.

Service oriented enterprises were recognized as Small Scale Service Establishments (SSSE) from 1982 onwards. These included identified service related enterprises with an investment in fixed assets, excluding land and building, upto Rs. 2 lakhs provided they were located in rural areas or in towns with a population upto 5 lakhs. This category was reorganised in 1991 as industry related Small Scale Service and Business Enterprises (SSSBE's) including units with investment in fixed assets, excluding land and building, upto Rs. 5 lacs and irrespective of location. SSSBE's are entitled to all the incentives and facilities that are available to small scale units. This limit has been enhanced to Rs. 10 lacs in 2000.

References

For currency/unit conversions see here

EU guide on defining SMEs

2010 Report of IFC on Micro, Small, and Medium Enterprises: A Collection of Published Data

Contributed by

• Rosemary K Abraham (IES 2006)
• Email- rosemary.a@nic.in