Micro, Small and Medium Enterprises (MSMEs) is a concept and sector defined by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The Act, which came into effect in October 2006, was created to provide a single, comprehensive legal framework for the promotion and development of the sector, solving the problem of a plethora of laws and regulations that previously governed Small Scale Industries (SSI). The legislation extended the scope to include the service sector and was based on recommendations from bodies like the Abid Hussain Committee.
The mechanism for classification was significantly changed, effective from July 1, 2020, via a gazette notification (S.O. 2119(E)) dated June 26, 2020, as part of the Atmanirbhar Bharat Abhiyaan package. The original classification, which was based only on investment and had separate limits for manufacturing and services, was replaced. The new composite criteria, which eliminated the distinction between sectors, is based on both investment in plant and machinery/equipment and turnover.
Under the revised criteria: a Micro enterprise has investment $\le$ ₹1 Crore and turnover $\le$ ₹5 Crore; a Small enterprise has investment $\le$ ₹10 Crore and turnover $\le$ ₹50 Crore; and a Medium enterprise has investment $\le$ ₹50 Crore and turnover $\le$ ₹250 Crore.
The MSMED Act connects to the Ministry of Micro, Small and Medium Enterprises and the Udyam Registration portal, which replaced the earlier Udyog Aadhaar Memorandum. A key provision is Section 15, which mandates that buyers must pay registered micro and small enterprises within 45 days (if agreed in writing) or 15 days (if no agreement exists). Failure to comply attracts compound interest with monthly rests at three times (3X) the bank rate notified by the RBI, as per Section 16. This payment timeline is also enforced through Section 43B(h) of the Income-tax Act, which links a buyer's tax deduction to timely payment.