MSME Classification explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
S.O. 1364(E) dated 21 March 2025 raised every threshold in the MSME classification with effect from 1 April 2025 — micro to Rs 2.5 crore and Rs 10 crore, small to Rs 25 crore and Rs 100 crore, medium to Rs 125 crore and Rs 500 crore.
From the ICAI Guidance Note on Tax Audit (Revised 2026), Appendix XVII, which reproduces both S.O. 2119(E) dated 26 June 2020 and the amending S.O. 1364(E) dated 21 March 2025. These are MSMED Act, 2006 instruments and are unaffected by the change of income-tax statute — they remain the basis for the section 43B(h) reporting at clause 26 whichever income-tax Act applies.
The revised thresholds for MSME classification
S.O. 1364(E) was issued in exercise of the powers under sub-section (1) read with sub-section (9) of section 7 and sub-section (2) read with sub-section (3) of section 8 of the MSMED Act, 2006, after obtaining the recommendations of the Advisory Committee, amending paragraph 1 of S.O. 2119(E):
| Category | Investment in plant and machinery or equipment | Turnover |
|---|---|---|
| Micro | one crore → two crore and fifty lakh | five crore → ten crore |
| Small | ten crore → twenty five crore | fifty crore → one hundred crore |
| Medium | fifty crore → one hundred twenty five crore | two hundred and fifty crore → five hundred crore |
"This notification shall come into force with effect from the 1st day of April, 2025."
Section 43B(h) denies a deduction, until actual payment, for sums payable to a micro or small enterprise beyond the MSMED Act time limit. Because the MSME classification thresholds more than doubled on 1 April 2025, suppliers who were medium enterprises before that date can be small after it — bringing amounts payable to them inside section 43B(h) for the first time. The auditor cannot carry forward last year's supplier categorisation.
The composite criterion behind the MSME classification
Paragraph 3 of S.O. 2119(E):
- a composite criterion of investment and turnover applies;
- if an enterprise crosses the ceiling limits for its present category in either of the two criteria, it ceases to exist in that category and is placed in the next higher category; but
- no enterprise shall be placed in the lower category unless it goes below the ceiling limits for its present category in both the criteria; and
- all units with a GSTIN listed against the same PAN shall be collectively treated as one enterprise, the turnover and investment figures of all of them seen together, only the aggregate values being considered.
The rule is deliberately asymmetric: one criterion breached moves an enterprise up; both must fall before it moves down.
Measuring investment for the MSME classification
- The calculation is linked to the Income Tax Return of the previous years filed under the Income-tax Act, 1961.
- For a new enterprise with no prior ITR, investment is based on self-declaration of the promoter, and that relaxation ends after the 31 March of the financial year in which it files its first ITR.
- "Plant and machinery or equipment" has the same meaning as plant and machinery in the Income-tax Rules, 1962 and includes all tangible assets other than land and building, furniture and fittings.
- The purchase (invoice) value, whether purchased first hand or second hand, is taken excluding GST, on a self-disclosure basis for a new enterprise without an ITR.
- The cost of certain items in Explanation I to section 7(1) of the Act is excluded.
Measuring turnover
- Exports of goods or services or both are excluded while calculating turnover for the purposes of the MSME classification;
- turnover and export turnover information is linked to the Income-tax Act or the CGST Act and the GSTIN; and
- figures for an enterprise without PAN were taken on self-declaration up to 31 March 2021, after which PAN and GSTIN are mandatory.
Udyam Registration
| Feature | Provision |
|---|---|
| Filing | Online on the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof |
| Identifier | A permanent identity number — the Udyam Registration Number — and an e-certificate, the Udyam Registration Certificate |
| Fee | No fee |
| Aadhaar | Required — of the proprietor for a proprietorship, the managing partner for a partnership, the karta for an HUF; a company, LLP, co-operative society, society or trust provides its GSTIN and PAN along with the authorised signatory's Aadhaar |
| One registration only | No enterprise shall file more than one Udyam Registration, though any number of activities — manufacturing or service or both — may be specified or added in one registration |
| Misrepresentation | Whoever intentionally misrepresents or attempts to suppress the self-declared facts and figures is liable to the penalty under section 27 of the Act |
Existing enterprises registered under EM Part-II or UAM had to register again on the Udyam portal on or after 1 July 2020; all registrations up to 30 June 2020 were re-classified, and those prior registrations remained valid only up to 31 March 2021.
Updation, graduation and reverse-graduation
- An enterprise must update its information online, including details of the ITR and GST return for the previous financial year, on a self-declaration basis. Failure to update within the specified period renders the enterprise liable for suspension of its status.
- The MSME classification is updated based on information furnished or gathered from Government sources including the ITR or GST return, and a communication is sent on graduation or reverse-graduation.
- Upward change: the enterprise maintains its prevailing status till the expiry of one year from the close of the year of registration.
- Reverse-graduation: whether by re-classification or actual change, and whether the enterprise is registered under the Act or not, it continues in its present category till the closure of the financial year and gets the benefit of the changed status only with effect from 1 April of the following financial year.
Because both graduation and reverse-graduation carry a delayed effective date, a supplier's Udyam certificate may show a category that its current figures no longer support — legitimately. For clause 26 and the section 43B(h) analysis, the auditor works from the status the notification gives the enterprise for that period, not from a recomputation of its turnover.
Facilitation and grievance redressal
- Champions Control Rooms in the Ministry's institutions and offices, including the MSME Development Institutes, act as Single Window Systems; so do the District Industries Centres in their districts.
- A person unable to file for want of an Aadhaar number may approach a Single Window System with an Aadhaar enrolment identity slip, a copy of the enrolment request, a bank photo pass book, voter identity card, passport or driving licence.
- On a discrepancy or complaint, the General Manager of the District Industries Centre enquires and forwards the matter with remarks to the Director, Commissioner or Industry Secretary of the State Government, who — after notice and an opportunity to be heard — may amend the details or recommend cancellation of the Udyam Registration Certificate.
Audit checklist
- Apply the post-1 April 2025 thresholds; do not carry forward an earlier MSME classification.
- Obtain Udyam Registration Certificates from suppliers and note the category and date.
- Aggregate all GSTINs under one PAN before applying the MSME classification.
- Remember that one breached criterion promotes but both must fall to demote.
- Exclude exports from turnover.
- Exclude land, building, furniture and fittings from plant and machinery.
- Respect the delayed effective dates on graduation and reverse-graduation.
- Feed the result into the clause 26 section 43B(h) analysis and the Appendix IXC item 14 working papers.
Common mistakes
- Using the pre-2025 thresholds for a supplier's MSME classification.
- Classifying GSTIN-wise instead of aggregating under the PAN.
- Including export turnover in the test.
- Recomputing a supplier's category instead of using its notified status for the period.
- Treating an unregistered supplier as outside the MSMED Act without checking the facts.