Ease of Doing Business for MSMEs: The forthcoming amendment by the union government in the definition of small companies in the Companies Act would benefit around 1.2 million businesses or nearly 80 per cent of all active companies, as per official estimates, said a report by Mint.
The businesses will now be eligible for lower penalties and a simplified compliance regime, said a person adding that it will also be immensely beneficial for startups, said the report.
The ministry of corporate affairs on September 22 issued an order stating that a business with up to Rs 4 crore paid up capital and Rs 40 crore sales will be classified as a small company, compared to the earlier Rs 2 crore and Rs 20 crore in paid up capital and sales, respectively. The amendment aims to help small enterprises in elevating their businesses in a simplified regulatory regime.
Bringing 80 per cent of India Inc. under the definition of small companies facilitates ease of doing business and inspires businesses in the informal sector to get incorporated as companies.
A majority of companies operate in the informal sector in India, when there are 1.5 million active companies, the report added.
An official data based on a 2015-16 survey has shown that there were 63 million unincorporated non-agricultural micro, small and medium enterprises (MSMEs) in India, which are into manufacturing, trading and other services, representing about 110 million jobs.
According to the rules under the Companies Act, entities that qualify as small enterprises do not need to submit cash flow statements as part of financial statements and are allowed to file an abridged annual return. In addition, they are also not required to mandatorily carry out auditor rotation.
In fact, a company secretary (CS) can file the annual return of small companies and if there is no CS, one of the directors of the company can endorse it. The auditor of a small company is not required to report on adequacy of internal financial controls and its operating effectiveness in his report.
The penalty regime and simpler compliance may help the companies to transform into the formal sector.
The change in small company definition is expected to reduce litigation over penalties and will provide a huge boost to the startup ecosystem, said a source, as per the Mint report.
The government is working towards strengthening technology-led statutory filing systems and compliance management systems so that there is real time oversight about the statutory filings by businesses. It will also help in real-time verification of the identity of persons filing documents on behalf of the companies.