The Union cabinet on Wednesday approved a proposal to redefine micro, small and medium enterprises, or MSMEs, based on their annual revenue, replacing the current definition that relies on self-declared investment on plant and machinery.

The move is expected to improve ease of doing business, avoid unnecessary inspections and at the same time enable the authorities to verify claims of businesses using the sales data they have from the GST Network, the company that processes goods and services tax (GST) returns.

“Taking turnover as a criterion can be pegged with reliable figures available, e.g., in GST Network and other methods of ascertaining, which will help in having a non-discretionary, transparent and objective criteria and will eliminate the need for inspections, make the classification system progressive and evolutionary," said the statement.

The move is in addition to steps being taken to stimulate the MSME sector’s growth, including a cut in corporate tax from 30% to 25%, announced in the Union budget, and the Reserve Bank of India’s Wednesday decision to give a longer period to small businesses before classifying their loans as non-performing assets, or bad loans.

The central bank raised the repayment period before MSME loans are classified as bad loans from 90 days to 180 days.

According to the government’s new definition, businesses with revenue of as much as Rs5 crore will be called a micro enterprise, those with sales between Rs5 crore and Rs75 crore will be deemed as small and those with revenue between Rs75 crore and Rs250 crore will be classified as medium-sized enterprises. Finance minister Arun Jaitley proposed a 25% corporate tax rate for entities with sales of up to Rs250 crore in the budget.

Under the earlier definition, manufacturers with Rs25 lakh investment in plant and machinery were termed micro enterprises and those with investments between Rs25 lakh and Rs5 crore were regarded as small enterprises. Firms with investments of up to Rs10 crore are classified as medium.

Experts said the new norms will remove the ambiguity about investments in plant and machinery. The definition based on turnover is more rational and objective, said Bipin Sapra, partner at consultancy firm EY.

Some experts suggested that this could be followed up with further relief to MSMEs under the bankruptcy code. “The new turnover-based definition is progressive. MSMEs also need to be ring-fenced from the disqualification of defaulting promoters bidding for companies undergoing bankruptcy resolution. If promoters are disqualified, it is possible that in the absence of any external bidder, many MSMEs will go into liquidation," said Sumant Batra, managing partner at law firm Kesar Dass B and Associates.

V.K. Agarwal, past president of Federation of Indian Micro and Small & Medium Enterprises (FISME), however, said the maximum turnover limit of Rs250 crore is on the higher side and may allow larger companies to corner benefits meant for MSMEs. “We had suggested a maximum turnover limit of Rs50 crore. This could have really helped the smaller companies to get the benefits meant for MSMEs," he said.

The cabinet also approved auctioning of 60 discoveries of Oil and Natural Gas Corp. Ltd and Oil India Ltd under the Discovered Small Fields Policy. These discoveries are estimated to have 194.65 million tonnes of oil and oil equivalent gas in place. Production from these fields could create over 88,000 jobs, said the official statement.

The cabinet committee on economic affairs also approved a scheme for boosting human resources for health and medical education at a cost of estimated cost of Rs14,930.92 crore up to 2019-20. This will include setting up of 24 new medical colleges in underserved areas, 18,058 MBBS seats and post-graduate seats to be increased in medical colleges and setting up of 248 nursing and midwifery schools.

The cabinet also decided to amend India’s agreement with China on double taxation and the prevention of fiscal evasion.

Mayank Aggarwal, Asit Ranjan Misra and Neetu Chandra Sharma contributed to this story.

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