Udyam registration and MSME classification explained

Who is an MSME

Classification rests on two measures taken together: investment in plant and machinery or equipment, and annual turnover. An enterprise must be within both limits of a class to belong to it. If it crosses either limit, it moves to the next class.

These are the limits currently notified. They have been revised upwards in the past and may be again, so confirm the figures on the official Udyam portal before relying on them.

• Investment means plant, machinery and equipment. Land, buildings, furniture and fittings are left out. The figure is taken from your income-tax return.
• Turnover is linked to your GST returns. Export turnover is excluded when testing the limit, so an exporter is not pushed into a higher class by overseas sales.
• The same criteria apply to manufacturing and service enterprises.
• All units under one PAN are counted together as one enterprise.

How to register

Registration is done on the government’s Udyam Registration portal. It is online, paperless and based on self-declaration; nothing has to be uploaded.

1. Enter the Aadhaar number of the proprietor, managing partner, karta or authorised signatory and verify it by one-time password.
2. Enter the PAN of the enterprise. Where the law requires you to have a GSTIN, that is needed too.
3. Fill in the details asked for: name and address of the enterprise, bank account, activity, number of employees.
4. Investment and turnover figures are drawn from the income-tax and GST systems against your PAN and GSTIN.
5. Submit. You receive a permanent Udyam Registration Number and an e-certificate carrying a QR code.

What registration brings

• Priority-sector status for bank credit. Loans to MSMEs count towards the priority-sector targets that RBI sets for banks, which gives banks a reason to lend to registered enterprises.
• Eligibility for credit guarantee cover. Lenders can cover eligible loans to micro and small enterprises under the credit guarantee scheme, reducing the need for collateral. See collateral-free business loans and credit guarantee cover.
• Protection against delayed payments. Under the MSMED Act, 2006, a buyer must pay a micro or small enterprise supplier within the agreed period, which cannot exceed 45 days. Beyond that the buyer owes compound interest at three times the bank rate, and the supplier can approach the Micro and Small Enterprises Facilitation Council.
• Access to TReDS. Registered MSMEs can discount invoices raised on large buyers through RBI-authorised platforms. See TReDS explained.
• Concessions in government procurement. Micro and small enterprises get relaxations such as exemption from earnest money deposit, and a share of government purchases is reserved for them.
• Recognition by lenders. Many lenders ask for the Udyam certificate as part of a business loan file.

Registration by itself does not entitle you to a loan. It makes you eligible for schemes; each lender still assesses the business on its merits.

What it does not cover

Traders

Retail and wholesale traders can register on Udyam, but for them the benefit is limited to priority-sector lending. The delayed-payment provisions of the MSMED Act protect enterprises engaged in manufacturing or services. If you both manufacture and trade, the classification of your registered activities decides what applies, so describe them accurately.

Medium enterprises

The 45-day payment rule and the credit guarantee scheme are aimed at micro and small enterprises. A medium enterprise is an MSME for classification and for priority-sector lending, but it is not a “supplier” protected by the delayed-payment provisions.

Using the delayed-payment protection

The protection applies to supplies made after you are registered, so register before a dispute arises, not after. In practice:

• print your Udyam number on invoices and tell large buyers of your status in writing;
• state the credit period in the purchase order or invoice;
• remember that a buyer’s income-tax deduction for amounts owed to micro and small enterprises is deferred until actual payment if the buyer pays beyond the statutory period — a point finance teams at large buyers take seriously.

Keeping it accurate

• Update your Udyam record online when the address, activity, bank account or other details change.
• File income-tax and GST returns on time. Classification is refreshed from that data, and the information you give is self-declared; false declarations attract penalties.
• If growth moves you into a higher class, the change takes effect under the rules, with a transition period during which certain non-tax benefits of the earlier class continue.
• One enterprise should hold only one Udyam registration, listing all its activities and units.

When you apply for finance through Vaanij Capital, the regulated bank or NBFC that assesses your application may ask for your Udyam certificate, so it helps to have it ready with your other papers.

This article is general information for business owners. It is not financial advice — loan terms are set by the lender, so read the lender’s own documents before you commit.