MSME | Compliance reform can give huge relief to small businesses

The shadow cast by the ongoing pandemic is deeper and longer lasting than before. Business and consumer confidence have been hit, and with ambiguity over the rate of vaccination across India, there is considerable uncertainty over the year ahead.

Small firms are reeling — on one hand, they are dealing with disruptions in markets and supply chains, and on the other, their employees and families have been wracked with COVID-19. While the government and the Reserve Bank of India (RBI) have been coming out with measures to relieve the financial stress, firms have also asked for relief on the compliance front.

Several representations have been made to extend the tax compliance deadlines by at least three months. The Federation of Indian Micro and Small and Medium Enterprises has a slew of requests, including fresh legislation giving protection against prosecution due to non-compliance up to March 2022, review of the NPA norms, ensuring that credit rating is not affected and most importantly, ensuring that no MSME should be shut due to compliance-related rigidity.

The high compliance burden on Indian businesses is well known and goes beyond tax compliances. The fact that micro and small businesses suffer disproportionately has also been well documented. According to a Mahratta Chamber of Commerce, Industries and Agriculture-Avantis Regtech report, 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 MSME 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.

Clearly, the smaller the company, the greater the strain on the owner, who can spend up to a third of their working hours on compliance management — time that could have been spent more productively in operations instead.

Avantis Regtech, a TeamLease company, has put the spotlight on the size of the 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 — Avantis puts the number at more than 4,000 so far this year.

Understanding the complexities of compliance takes another toll as consultants are engaged to make sense of the legalese in the rules. Though in-house digitisation of accounts and records is becoming essential, with its associated costs, 65 percent of compliance remains paper-based — calling for duplication of effort. Conversations with small business entrepreneurs reveal that there is no intent to evade the law, however given the complexity of regulation, entrepreneurs invariably end up facing delays and lapses in compliance.

There are several specific suggestions for rationalisation and simplification of the rules already shared by industry representatives. For instance, removing the requirement of separate GST registration in every single state that a business operates in will ease the process of scaling up of operations. There are good practices already put in place by some states, which should be followed by others: for instance, Telangana, Karnataka and Puducherry have rationalised, simplified and digitised the inspection process, replacing the always present threat of surprise inspections by multiple authorities. Late last year, Maharashtra reduced pre-establishment licences from 70 to 10 for the hospitality sector.

In 2019, a National Ease of Doing Business Policy was proposed, putting the onus on government departments to justify the compliance requirements they place on businesses, in terms of actual costs and time spent. The finance ministry has taken the lead, working on a time-bound schedule towards digitisation, faceless assessment, and decriminalisation of several offences.

This thrust towards cutting the regulatory overload has to spread to other ministries at the Centre, especially the Ministry of Labour and Employment, and all the state and local governments.

The current intent is to reduce the compliance burden by 6,000 processes by August 15. To translate such intent into speedy implementation, the initiatives must be run in mission mode, with the central government actively collaborating with industry associations and regulatory technology companies through the journey. Behind every compliance of the Centre, there are at least two more compliances at the state level — so the same must be done at the state level as well.

What we await now is the announcement of such working groups with timelines and dashboards with periodic updates of their progress.