The Ministry of Micro, Small, and Medium Enterprises has officially revised the classification criteria for Micro, Small, and Medium Enterprises (MSMEs) through a notification dated March 21, 2025. Although the proposed changes were highlighted in the Union Budget 2025, the formal notification confirms the upward revision of classification limits, effective from April 1, 2025. This update will enable numerous enterprises to qualify as MSMEs and allow existing MSMEs to expand without losing their current classification.
Rationale
In the 2025 Budget, the Union Government emphasized the importance of MSMEs in India’s economy. With over 1 crore registered MSMEs employing 7.5 crore people and contributing 36% to the manufacturing sector, these enterprises are crucial for India’s growth. MSMEs also account for 45% of exports.
To support MSMEs, the government announced an increase in investment and turnover limits for MSME classification by 2.5 and 2 times, respectively. This change aims to help MSMEs scale up, adopt new technologies, and access better capital.
The revised criteria will enable MSMEs to invest more in technology and innovation, boosting productivity and competitiveness. This expansion is expected to create more jobs and strengthen India’s position in the global market.
Revised Classification
| Category | Investment in Plant and Machinery or Equipment (in INR crores)
|
Annual Turnover (in INR crores)
|
||
| Previous | Revised | Previous | Revised | |
| Micro | ≤1 | ≤2.5
|
≤5 | ≤10 |
| Small | ≤10 | ≤25 | ≤50 | ≤100 |
| Medium | ≤50 | ≤125 | ≤250 | ≤500 |
Reverse Graduation
A key issue is whether enterprises previously classified as Medium or Small will be reclassified as Small or Micro under the new criteria. Clause 8(6) of the Micro, Small and Medium Enterprises Development Act, 2006 provides clarity on this matter and states that if an enterprise’s classification changes due to reclassification or actual changes in investment in plant and machinery, equipment, or turnover, it will remain in its current category until the end of the financial year. This rule applies whether the enterprise is registered under the Act or not. The enterprise will benefit from the new classification starting from April 1 of the next financial year. Therefore, enterprises eligible for reverse graduation will retain their existing status until March 31, 2025, with the new classification taking effect from April 1, 2025.
Conclusion
The new MSME classification limits have extensive implications, affecting not only enterprises seeking MSME benefits but also businesses procuring goods/services from them and financial institutions providing credit. This shift requires companies and financial stakeholders to thoroughly review and update their internal policies to align with the new MSME landscape. Ensuring smooth compliance with the revised framework is essential for maintaining operational efficiency and taking advantage of the new opportunities presented by the reclassification. Additionally, businesses must be prepared to navigate the complexities of the updated regulatory environment, including new tax implications, payment compliance requirements, and enhanced reporting obligations. By proactively addressing these changes, companies and financial institutions can better support the growth and sustainability of MSMEs, ultimately contributing to a more robust and dynamic economic ecosystem.