Broadening the MSME landscape: Impact of revised limits

– Sourish Kundu, Executive | corplaw@vinodkothari.com

The Ministry of Micro, Small, and Medium Enterprises (MSME), through its notification dated March 21, 2025, has revised the classification criteria for Micro, Small, and Medium Enterprises. While the proposed revision was mentioned in the Union Budget 2025, the formal notification confirms the upward revision of classification limits, effective April 1, 2025. This revision will permit several enterprises to qualify as MSMEs, as also allow existing MSMEs to expand, without losing their present classification. 

Need for revision: 

During the 2025 Budget Speech, the Hon’ble Finance Minister emphasized the critical role played by MSMEs in India’s economy:

“Currently, over 1 crore registered MSMEs, employing 7.5 crore people, and generating 36 per cent of our manufacturing, have come together to position India as a global manufacturing hub. With their quality products, these MSMEs are responsible for 45 per cent of our exports. To help them achieve higher efficiencies of scale, technological upgradation, and better access to capital, the investment and turnover limits for classification of all MSMEs will be enhanced to 2.5 and 2 times, respectively. This will give them the confidence to grow and generate employment for our youth.”

Revised Classification Criteria: 

Category	Investment in Plant and Machinery or Equipment (₹ crores)		Annual Turnover (₹ crores)
	Current	Revised	Current	Revised
Micro	≤1	≤2.5	≤5	≤10
Small	≤10	≤25	≤50	≤100
Medium	≤50	≤125	≤250	≤500

It is important to note that MSME classification follows a composite criterion, meaning that if an enterprise exceeds either the investment or turnover limit, it will be reclassified into the next higher category.

Applicability of the revised classification criteria

With effect from FY 2025-26, a substantial rise in eligible enterprises is expected, leading to a new influx of registrations on the UDYAM portal. The notification dated June 26, 2020 (the principal circular) prescribes the process for UDYAM registration.

A pertinent question arises regarding enterprises currently classified as Medium or Small Enterprises: Will they be downgraded to Small or Micro Enterprises due to the reclassification? Clause 8(6) of the principal circular clarifies:

“In case of reverse graduation of an enterprise, whether as a result of re-classification or due to actual changes in investment in plant and machinery or equipment or turnover or both, and whether the enterprise is registered under the Act or not, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1st April of the financial year following the year in which such change took place.”

This means that enterprises eligible for reverse graduation will retain their existing status until March 31, 2025, with the revised classification taking effect from April 1, 2025. 

Impact: 

The reclassification is expected to have far-reaching consequences across various economic sectors. Some key implications include:

1. Tax Implications & Payment Compliance

One of the major benefits for Micro and Small Enterprises (MSEs) over Medium Enterprises is derived from Section 43B(h) of the Income Tax Act, 1961, which allows deductions for payments made to MSEs only on a cash basis (i.e., upon actual payment rather than accrual). This provision aligns with Section 15 of the MSMED Act, 2006, which mandates payment within 45 days.

With a larger number of enterprises falling under the MSE category, buyers availing goods and services from these entities will need to ensure timely payments. Delays beyond the prescribed timelines may lead to tax disallowances and potential compliance issues.

In addition to disallowance of deductions under the Income Tax Act, 1961, such debtors, also have to comply with the requirement of filing Form MSME-1 on a half yearly basis, as discussed below.  

2. Enhanced Regulatory Compliance

The Ministry of MSME, via its notification dated March 25, 2025, has mandated that companies receiving goods or services from MSEs and failing to make payments within 45 days must file Form MSME-1 on a half-yearly basis, disclosing outstanding amounts and reasons for delay.

The form was revised by MCA’s order dated July 15, 2024; however, the revised classification criteria will not impact filings for the six months ending March 2025. Companies must ensure that subsequent filings accurately reflect payments owed to newly classified MSEs.

3. Enhanced Access to Credit

Furthermore, the Budget 2025 proposed enhancements in credit guarantee coverage:

• For Micro and Small Enterprises: From ₹5 crore to ₹10 crore, facilitating an additional ₹1.5 lakh crore credit over five years.
• For Startups: From ₹10 crore to ₹20 crore, with a 1% guarantee fee for loans in 27 identified focus sectors.
• For Export-Oriented MSMEs: Term loans up to ₹20 crore.

These initiatives are expected to bolster MSME financing through schemes like the Emergency Credit Line Guarantee Scheme (ECLGS), Credit Guarantee Fund Schemes (CGS-I & CGS-II), Credit-Linked Capital Subsidy Scheme (CLCSS), and the Micro Finance Programme. A comprehensive overview of these schemes can be accessed here.

4. Increase in scope of Priority Sector Lending (‘PSL’)

The expansion of MSME eligibility is set to widen the scope of financing options available to these enterprises. Under RBI’s Master Directions on Priority Sector Lending, loans extended to MSMEs are considered part of banks’ priority sector obligations. The increase in eligible entities may result in higher loan disbursements across both manufacturing and service sectors.

As per the Master Direction – Priority Sector Lending (PSL) – Targets and Classification, domestic Scheduled Commercial Banks (SCBs) and foreign banks must allocate 40% of their Adjusted Net Bank Credit (ANBC) to priority sectors, including Micro, Small, and Medium Enterprises (MSMEs). Specifically, domestic SCBs and foreign banks with 20+ branches must lend at least 7.5% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure (whichever is higher) to Micro enterprises.

5. Boost to Supply Chain Financing & Securitization

With a broader pool of eligible MSMEs, platforms such as TReDS (Trade Receivables Discounting System) and other supply chain financing mechanisms may witness an upsurge in receivables for securitization. This could lead to improved liquidity and lower financing costs for MSMEs. A detailed discussion on MSME receivables securitization is available here.

6. Other benefits to MSMEs by Central/State Government(s):

Apart from credit-related benefits, MSMEs receive various non-financial support from the government. Some of these are highlighted below: 

• The ZED Certification Scheme, launched by the Ministry of MSME, encourages small businesses to adopt quality manufacturing practices with a focus on energy efficiency and environmental sustainability. MSMEs registered under Udyam can apply, and eligible enterprises receive financial assistance covering up to 80% of certification costs for micro enterprises, 60% for small, and 50% for medium enterprises.
• To foster MSME clusters, the Micro and Small Enterprises – Cluster Development Programme (MSE-CDP) provides financial assistance for infrastructure development, setting up common facility centers, and improving market access. Industry associations, state governments, and groups of MSMEs can avail of grants covering 70-90% of project costs, depending on the cluster’s location and nature.
• Under the Public Procurement Policy for MSEs, all central government ministries, departments, and CPSEs must procure at least 25% of their requirements from MSEs, with sub-targets for SC/ST and women entrepreneurs.
• The Lean Manufacturing Competitiveness Scheme (LMCS), MSMEs assists in reducing their manufacturing costs, through proper personnel management, better space utilization, scientific inventory management, improved processed flows, reduced engineering time and so on.

These targeted initiatives collectively strengthen MSME growth, market access, and technological advancement.

Conclusion

While the upward revision of MSME classification limits may appear to be a simple adjustment, its implications are widespread. The surge in registrations will not only affect enterprises seeking MSME benefits but also influence businesses procuring goods/services from them and financial institutions extending credit. Companies and financial stakeholders must revisit internal policies to adapt to the evolving MSME landscape and ensure smooth compliance with the revised framework.

Read more on MSMEs here:

The big buzz on small business payment delays

Primer on MSME Financing

Resources on MSME financing