The smaller the firm the higher is the disproportionate burden on owners for compliance management.
Micro, Small and Medium enterprises are the growth engines of the Indian economy, contributing about 30% of the country’s gross domestic product (GDP). In terms of exports it accounts about 40% of the overall exports on the country. Such enterprises also play an important role in employment generation, as they employ about 110 million people across the country especially in rural India.
Specifically, Micro and Small Enterprises play a critical role in driving the nation’s socio-economic growth, but there is a major barrier that the industry faces from the regulatory arm in form of a number of unnecessary compliances.
For instance, Avantis Regtech, a TeamLease company, has put the spotlight on the size of this challenge. Indian companies have to grapple with more than 1,500 Acts, 69,000-odd compliances and more than 6,000 filings in a year. There are continuous updates too which were around a ballpark figure of 4,000 for the year 2019.
Not only is the absolute number of compliances high but so are the efforts as one needs to get permits from several departments and offices. A typical Manufacturing MSME set-up would need at-least need No Objection Certificates (NOC) from Electric department, Sewage Department, Traffic & Co-ordination department, Fire office and Tree Authority.
India stands at 158th rank (with a DTF score of 68.42) on the ease of starting a business parameter. All comparable economies, the South Asian Regional Average, stands above India’s.
The behemoth India INC compliance regime revolves around major categories like, Finance & Taxation (103 Acts, 692 Filings & 9,000+ compliances), Commercial (102 Acts, 301 Filings & 4,000 compliances), Labour (460 Acts, 14,000 Filings & 27,000+ compliances) Secretarial (54 Acts, 86 Filings & 2,000 compliances) and Industry specific permits (274 Acts, 385 Filings & 12,000+ compliances.
Specifically addressing Small & Medium industries, a report by Mahratta Chamber of Commerce, Industries and Agriculture concludes a typical MSME in Maharashtra with one office and a factory, around 100-150 employees and turnover around Rs 10 to 20 crore, has to obtain 27 different types of registrations in order to start operations; of these, 15 are from the Centre and 12 from the state government.
Every year, the same firm has to handle around 364 compliances—that’s more than one per working day. The bulk of these, 192, are labour-related compliances, and 13 different inspectors can visit anytime, unannounced to ensure compliance.
The smaller the firm the higher is this disproportionate burden for owners who need to spend almost 1/3 of their working hours on compliance management which could have been productively spent on expanding their business.
Other critical processes like tendering are also largely unfavourable for small players as most of such rules and regulations are influenced by organisations like FICCI, ASSOCHAM, etc., which are run by large companies and naturally have a conflict of interest. It’s not just the setting up of business which is difficult, the closure is even more challenging, which keeps on stretching for years. Incorporation Documents, Accounting Information, Legal Liabilities, NOC from creditors, NOC from regulatory bodies are some of the many details which need to submitted while applying for liquidation, each of which takes from a few weeks to months’ time.
Not only is time cost a major hinderance for but so are fines. For instance, MSME Form 1 is a mandatory compliances for the specified companies which are defined in MSMED Act. These specified companies file the MSME Form 1 on a half-yearly basis to the MCA (Ministry of Corporate Affairs). Failure on filing the form attracts a penalty of Rs 25,000 to Rs 300,000 and/or the concerned officer of the company will be liable for imprisonment up to six months.
As Covid infections swept across the globe, the entire world went through disruptive changes and work from home became an emerging trend to support the livelihood of citizens. Even in such a situation as per Indian Companies Act having a physical registered office address is a compulsory requirement for setting up any company. In situations when people are barely able to make up for their costs, such regulations act as a major hindrance for small players.
Although the Government’s intentions are benign but there is an urgent need to evaluate things in a better manner so as to provide a smooth business environment to small players, the most critical of which is to start distinguishing between Micro, Small & Medium enterprises as each of their needs are vastly different. Having negligible compliances and least tax rates for Micro Enterprises with minimum follow-up interference is the first step of breeding entrepreneurship in a real sense.
Rajesh Mehta is a leading consultant & columnist working on Market Entry, Innovation & Public Policy. Sandesh Dholakia is the founder & CEO at Case Ace and the Asia Pacific Chairman at International Finance Students’ Association (IFSA).