On 4 January, 1960, ‘capital investment’, i.e., investment in land, building, plant and machinery was introduced – with a limit of Rs. 5 lakhs for SSI and Rs. 10 lakhs for ancillary SSI unit. This limit was gradually scaled up (1966, 1974, 1980, 1996, 1997, 2000 and 2001) to Rs. 100 lakhs with some caveats and exemptions.
Over the years the definition became complex and classifying a unit as small-scale industry has become interpretative than definitive. The fiscal advantages that accrued to small-scale industries tempted the large scale industries to take advantage of the situation.
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Clarifications issued by the Government from time-to- time as to what constitutes plant and machinery are given as annexure to this chapter. In 1989, the Government of India clarified that if investment in plant and machinery in a unit set up by a common proprietor/partner(s)/director(s) for the manufacture of similar/different products exceeded the ceiling, then all such units would be deregistered. In 1993, these restrictions were considered as impediments to industrial growth and were done away with.
An industrial undertaking engaged or to be engaged in the manufacture processes / preservation of goods/repairs services with investment in fixed assets in plant and machinery whether on ownership terms or on lease or by hire-purchase not exceeding the limit specified in the Act and where the industry undertakes to export at least 30 per cent of the annual production at the end of the third year, is classified as Export Oriented Unit.
The following requirements are to be complied with by an industrial undertaking for being regarded as ancillary industrial undertaking.
An industrial undertaking which is engaged or is proposed to be engaged in the manufacture of parts, components, sub-assessments tooling or intermediates or the rendering of services and undertaking supplies or proposes to supply such components at no more than 50 per cent of its production or services as the case may be, to one or more industrial undertakings and where investment in fixed assets in plant and machinery does not exceed Rs. 10 mn.
No small scale or ancillary industrial undertaking referred to above shall be a subsidiary of or controlled by any other industrial undertaking. When the same person as a proprietor sets up two or more undertakings, each is considered to be controlled by the other.
When two or more undertakings are set up as partnership firm under the Indian Partnership Act and one or more partners are common to the undertakings, each shall be considered controlled by the other.
When the industrial unit is set up by companies under the Companies Act, one unit shall be considered as controlled by the other if the equity holding of the other in it exceeds 24 percent and when the same person holds the position of the Managing Director for both the companies.
In the new industrial policy of 1991 the Government has permitted domestic, medium and large scale units and FERA companies or foreign companies incorporated outside India to hold up to 24 per cent of the equity in these companies provided there is no net outgo of free foreign exchange on the import of raw materials, capital goods, or royalty payments in the project proposed by such a unit.
Realising that large number of small-scale units hardly distinguish manufacturing from trade and services, small business and services came to be included in the sector. After the Reserve Bank of India classified priority sectors and accorded special status for preferential lending, further distinctions came into being.