The revised MSME (Micro, Small and Medium Enterprises) definition in India, which now uses a composite criterion of both investment and annual turnover, has raised questions about its compliance with Article 14 of the Constitution, which guarantees equality before the law and equal protection of the laws.

Here's a breakdown of the arguments concerning equity and proportionality:

The Revised MSME Definition and its Purpose:

Changes: Previously, MSMEs were classified based on investment in plant and machinery for manufacturing units and investment in equipment for service units, with different thresholds for each. The revised definition, implemented in 2020 and further updated in 2025, introduced a composite criterion of investment and annual turnover, removing the distinction between manufacturing and services. The thresholds have also been significantly increased.
Micro: Investment up to ₹1 crore, turnover up to ₹5 crore (Revised to ₹2.5 crore investment, ₹10 crore turnover in 2025).
Small: Investment up to ₹10 crore, turnover up to ₹50 crore (Revised to ₹25 crore investment, ₹100 crore turnover in 2025).
Medium: Investment up to ₹50 crore, turnover up to ₹250 crore (Revised to ₹125 crore investment, ₹500 crore turnover in 2025).
Objectives: The government's stated aims for these revisions include:
Allowing more businesses to qualify as MSMEs and avail benefits.
Encouraging growth and expansion without fear of losing MSME status too quickly.
Enhancing access to credit, subsidies, and government tender participation.
Simplifying compliance.
Promoting formalization of the sector.
Article 14 of the Constitution and its Principles:

Article 14 states: "The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India." This encompasses two main concepts:

Equality Before Law: This is a negative concept, meaning no one is above the law and all are subject to the same ordinary law of the land.
Equal Protection of Laws: This is a positive concept, implying that among equals, the law should be equal and equally administered. It permits "reasonable classification" but prohibits "class legislation." For a classification to be reasonable, it must satisfy two conditions:
Intelligible Differentia: The classification must be based on a discernible and understandable difference between persons or things grouped together and those left out.
Rational Nexus: The differentia must have a reasonable and rational relation to the object sought to be achieved by the legislation.
Doctrine of Proportionality: While not explicitly mentioned in Article 14, the Supreme Court has read the doctrine of proportionality into it, especially in cases involving state action that impacts fundamental rights. Proportionality requires that the means employed by the state must be proportionate to the aim sought to be achieved. The measure should not be more restrictive than necessary to achieve the legitimate state interest.
Arguments for Violation of Equity and Proportionality:

Arbitrary Grouping (Lack of Intelligible Differentia):
Wide Gaps within Categories: Critics argue that the new turnover limits create very wide ranges within each category. For example, a "Small Enterprise" could have a turnover of ₹10 crore or ₹100 crore, yet both receive the same set of benefits and face the same regulations. This broad grouping might be seen as treating unequals equally, leading to an unfair advantage for larger businesses within a category and disadvantage for smaller ones.
Impact on Competitive Advantage: Businesses at the lower end of a category might struggle to compete with those at the higher end that now enjoy the same MSME benefits, potentially hindering their growth or even survival. This could be seen as disproportionately benefiting larger players now brought into the MSME fold.
Disproportionate Impact (Lack of Rational Nexus/Proportionality):
Incentive to remain small: While the aim is to encourage growth, some might argue that the significantly increased thresholds might still disincentivize some businesses from growing beyond a certain point if the benefits of being in a lower category are highly attractive and the jump to the next category comes with significant compliance burdens or loss of specific benefits. However, the current revision aims to mitigate this by allowing greater headroom for growth within each category.
Misuse of Benefits: Concerns have been raised that larger companies might exploit the new definition by structuring their operations (e.g., through multiple subsidiaries) to fall under MSME categories and avail benefits intended for genuinely smaller enterprises. If this occurs, it could undermine the very purpose of the MSME Act and be seen as a disproportionate allocation of state resources.
Regulatory Burden on Smaller Entities: Even with simplified compliance, the nature of regulations might still be more burdensome for micro and small enterprises compared to the relatively larger ones now included in the same category. This might not be proportionate to their capacity.
Fluctuating Turnover: For businesses with seasonal or fluctuating turnover, the combined criteria might lead to frequent changes in their MSME classification, creating administrative complexities and uncertainty, which could be seen as an arbitrary application of the law.
Arguments Against Violation of Equity and Proportionality:

Broader Inclusion and Benefits: The primary argument in favor of the revised definition is that it brings a larger number of enterprises under the MSME umbrella, enabling them to access crucial government support, credit facilities, and other incentives. This is argued to promote inclusive growth and strengthen a vital sector of the Indian economy.
Facilitating Growth: By increasing the thresholds, the government aims to provide a longer runway for MSMEs to grow without immediately losing their benefits, thereby addressing the earlier "dwarfing" incentive (where businesses intentionally remained small to retain benefits). This is a step towards promoting scaling up.
Economic Reality: The previous definitions were considered outdated and not reflective of the current economic landscape, where investment and turnover thresholds have naturally increased. The revised definition attempts to align with contemporary business realities.
Rational Basis for Classification: The classification based on investment and turnover is not inherently arbitrary. These are quantifiable and measurable economic parameters directly related to the scale and capacity of an enterprise. The rationale is to provide targeted support to businesses of different sizes, recognizing their varying needs and contributions to the economy.
Policy Objective: The ultimate goal is economic development, employment generation, and industrialization, particularly in rural and backward areas. The classification is a tool to achieve these legitimate policy objectives. As long as there is a rational nexus between the classification and the objective, it is generally upheld under Article 14.
Conclusion:

Whether the revised MSME classification criteria violate the principles of equity and proportionality under Article 14 of the Constitution would likely depend on a detailed judicial scrutiny, should a challenge arise.

While the revised definition aims to be more inclusive and facilitate growth, potential arguments against it would focus on the wide disparities within the same category and the potential for disproportionate impact or misuse of benefits. The judiciary would examine:

Rationality of the Classification: Is there a clear and logical basis for grouping enterprises based on the new investment and turnover limits?
Nexus with the Object: Does this classification genuinely help achieve the stated objectives of promoting and developing the MSME sector, especially for the smaller players within each category?
Absence of Arbitrariness: Does the new definition lead to arbitrary results or unintended consequences that undermine the principles of fairness and equal treatment?
Ultimately, the intent of the government is to provide greater support to a larger segment of businesses. However, the implementation and its actual impact on businesses of varying sizes within the revised categories would be key to determining if it truly adheres to the spirit of equity and proportionality enshrined in Article 14

Classification Criteria for MSMEs: Article 14 Analysis
Background- The revised MSME definition in India now uses both investment and turnover as criteria for classification, replacing the earlier system based solely on investment in plant and machinery or equipment. This change aims to make the system more objective, transparent, and aligned with the GST regime, using reliable data sources like the GST Network.

Article 14: Principles of Equity and Proportionality
Article 14 of the Constitution guarantees "equality before law" and "equal protection of the laws" to all persons. It prohibits arbitrary discrimination and mandates that any classification by the State must be reasonable, based on intelligible differentia, and have a rational nexus to the objective sought to be achieved.

The principle of proportional equality under Article 14 means:

Equals should be treated equally.

Unequals can be treated differently, but the differentiation must be reasonable and justifiable.

Reasonable Classification Test
For a classification to be constitutionally valid under Article 14:

There must be an intelligible differentia distinguishing those grouped together from others left out.

The differentia must have a rational relation to the object sought to be achieved by the law.

Application to MSME Classification
Justification for Investment and Turnover Criteria

Using investment and turnover as criteria for MSME classification is intended to objectively distinguish businesses of different scales, aligning policy support with the needs of smaller enterprises.

The use of turnover, backed by GST data, enhances transparency and reduces subjectivity compared to self-declared investment figures.

The classification aims to support ease of doing business and adapt to economic changes efficiently.

Potential Concerns

The Standing Committee noted possible issues, such as:

Wide gaps in turnover limits within a single category (e.g., an enterprise with ₹6 crore turnover and another with ₹75 crore both being classified as 'small'), which may lead to incongruous results.

Risk of larger corporates misusing the system by splitting operations into multiple entities to avail MSME benefits.

Fluctuations in turnover could cause frequent reclassification, potentially undermining stability for businesses.

Equity and Proportionality Assessment

The dual criteria are not arbitrary; they are based on measurable economic indicators and aim to group businesses with similar economic footprints for targeted policy benefits.

While the system may have operational challenges (such as broad turnover bands), these do not inherently violate Article 14 unless the classification is shown to be manifestly arbitrary or lacking rational nexus to the policy objective.

The principle of proportional equality is served as the classification differentiates based on economic capacity, which is relevant to the purpose of MSME support.

Conclusion
The revised MSME classification criteria based on investment and turnover do not, on their face, violate the principles of equity and proportionality under Article 14, as they are founded on reasonable and objective economic indicators with a clear nexus to the objective of supporting small and medium enterprises. However, operational issues such as broad turnover bands and potential misuse may warrant future refinement to ensure the classification remains fair and effective. The current approach is constitutionally valid as long as it is not arbitrary and continues to serve the legitimate aim of targeted economic support.