05 Nov 2020 21:11 IST

How to set up an MSME as an entrepreneur

If empowered with information, entrepreneurs can establish an MSME and turn their dreams into reality

The MSME sector in India has demonstrated remarkable resilience in the face of the Covid-19 pandemic and its debilitating global and domestic economic consequences. The sector's calibre becomes evident from their level of employment generation, low-capital technology requirements, use of traditional or inherited skill, industrial development in rural/semi-urban areas, and exportability of their products.

Today, financial inclusion fulfils banking needs of MSME even in tier-2 and tier-3 cities. According to the Confederation of Indian Industry, MSMEs contribute around 6.11 per cent of manufacturing GDP and 24.63 per cent of the GDP from service activities. Also, they have employed over 120 million people and contributed to about 45 per cent towards exports.

This sector has shown a consistent growth of nearly 10 per cent year-on-year. It is plausible that the positive traction of Indian MSMEs could inspire an emerging entrepreneur looking to make a mark. For entrepreneurs who see an opportunity in this sector and are thinking of establishing an MSME unit can do so by adopting some policies and guidelines. Here is some pre-requisite knowledge needed in setting up a MSME:

Classification: These set-ups or enterprises are recognised as micro, small, and medium.

Formation: Any person who intends to establish an MSME may file Udyam Registration online, based on self-declaration. After which a permanent identity known as Udyam Registration number shall be assigned.

Investment calculations: The measure of investment in plant and machinery will be linked to Income Tax Returns(ITR) of previous years, in case no prior ITR is available the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after March 31 of the financial year when the enterprise files its first ITR.

• Turnover calculations: Exports of goods or services or both shall be excluded while calculating the turnover of any enterprise whether micro, small, or medium and this turnover information shall be linked to Income Tax Act or the Central Goods and Services Act (CGST Act).

With the right kind of credible information, an entrepreneur can make suitable judgments and an action plan for implementation. Moreover, one has to possess the zeal to continue moving forward after taking the first few steps. To turn ideas into a business reality, one needs the right kind of passion, derive appropriate incentives, and receive positive feedback and constructive criticism for improvement. This brings us to the different types of incentives and benefits that are associated with the formation of an MSME and its subsequent operation.

• An MSME can avail loans up to ₹2 crore which need not be supported by collateral.

• A significant subsidy on the trademark registration and a considerable subsidy of 50 per cent is given towards registration of patent to encourage innovation.

• For further enhancement of equipment like plant or machinery, MSMEs have access to industrial promotion subsidy.

• MSMEs get a concession on their electricity consumption, and they can also ask for reimbursement on ISO certification charges.

• While considering the aspect of working capital, MSMEs get a benefit of one per cent on the overdraft interest.

• As protection against delayed payments, a buyer is expected to make the payment for goods and services to the MSME within 15 days of purchase. Recently, there was a change in the definition of MSME; an aspect of turnover has also been introduced along with the earlier criteria of investment which has also been enhanced.

As per the new definition,

• Micro units, investment up to ₹1 crore and turnover up to ₹5 crore

• Small units, investment up to ₹10 crore and turnover up to ₹50 crore

• Medium units, the investment is up to ₹20 crore and turnover up to ₹100 crore

The rationale behind this change is there has been apprehension among successful MSMEs that if they outgrow the size of what had been previously defined as an MSME, they will lose their entitled benefits. It forces them to remain within the limits of the definition, rather than grow and expand.

With the revised definition, they won't have to worry about expansion in terms of availing benefits. Given the benefits and incentives, it becomes increasingly clear that the government and the market have pinned their hopes on the MSME sector. This positive reinforcement becomes the validation a business and its creator needs to rightfully convince them to travel in the path that they have taken.

(The writer is currently pursuing PGDM from the School of Management and Entrepreneurship, IIT Jodhpur.)