By Ritesh Kumar Singh
Smaller business entities are often associated with the informal sector and widely believed to dodge taxes and bypass tough labour regulations. However, an increasing number of firms engaged in consultancy, research and advisory, and other knowledge intensive services – often with substantial portion of their sales as exports – are part of the country’s formal sector.
Though such firms have fewer employees compared to large firms, they are registered with registrar of companies (RoC) and GSTIN network, and are usually tax compliant. Yet, they are subject to several disadvantages that big businesses don’t have to face and that affect their cost competitiveness and growth prospects. The result is lower investment and loss of thousands of potential jobs.
Nurturing this sub-segment of the formal sector will aid economic growth, improve tax to GDP ratio and create good jobs that the government has been trying to achieve through its formalisation attempts. While demonetisation jolted the informal sector dependent on cash, heavy indebtedness has been troubling large corporations, while the compliance burden is suffocating the smaller business sub-segment of the formal economy.
Reducing compliance burden and associated costs for small businesses is a low hanging fruit that need not be postponed for the future, if we’re serious about achieving our $5 trillion dream by 2024. While low interest rates or low cost credit won’t hurt small business entities, it’s not the ‘cost of credit’ but availability of institutional credit that is hampering their growth prospects. While investors insist on their incorporation as private limited companies, banks don’t like the idea of limited liability set ups.
A large number of firms in this sub-segment deal in services, but the banks’ credit appraisal and disbursal system is more suited to manufacturing firms. Thus, when a newly incorporated consultancy services company approached the country’s second largest public sector bank by market cap for a loan, the bank refused to oblige saying that the value of company’s tangible assets should be at least ten times the loan value.
Personal guarantee of the company’s directors with Cibil scores of 800 was no help either. Banks look for ownership of land, factory sites or stock in trade as collaterals that small service companies with few assets may not be able to furnish, and thus are denied bank credit.
Delayed payment from larger private and public sector companies is a common irritant for smaller firms supplying goods and services to them. Many smaller firms do export but our banks have been fleecing them by extracting exorbitant forex conversion charges that could be as much as 3%. No wonder, India’s global export share is so low compared to its size and potential.
For getting export incentives, a company small or big must have Import-Export Code (IEC) from DGFT and RCMC (Registration Cum Membership Certificate) from a relevant export promotion council. However, many of our export promotion councils don’t distinguish between large companies and small companies when it comes to their membership charges.
The more complex the regulations and compliance requirements, the greater is the disadvantage small business entities which don’t have dedicated regulatory affairs teams or financial muscle to deal with them. The badly designed and poorly implemented GST regime is a big pain for smaller business entities and that may be the reason why so many of them have been avoiding it for long.
Irrespective of its turnover a small business entity has to file monthly, then quarterly, and if its revenue crosses Rs 2 crore annual GST as well. It has to file quarterly TDS returns. Then there is director’s e-KYC, audit and multiple financial reportings and filings with scary names such as AoC4, ADT1 and MGT7 that overwhelm smaller companies.
More rules mean more inspectors to deal with. All these filings and reportings shouldn’t be discouraging small entrepreneurs and professionals from starting their own ventures if we’re serious about expanding the formal economy, good jobs and tax base. So far it seems the major beneficiary of the GST regime are chartered accountants who are getting lots of work to do and make money in the process.
Regulatory experts say our complex rules induce small firms to remain small. It’s compliance burden and not high interest or tax rates that are choking smaller business entities. Hence, the solution doesn’t lie in reducing interest and tax rates or increasing subsidies that mostly benefit large corporates. Second, with banks in general preferring established big companies to lend to, small business entities – especially those in the services sector – are often denied bank credit.
Given this backdrop, two things – rationalising regulatory requirements and easy (not necessarily cheap) credit – will help small businesses. Reducing compliance burden will help small firms save a lot of time and money that could be used for marketing their products and services. To ease access to bank credit, the government should further strengthen its flagship programme, PSB Loan in 59 minutes portal by encouraging private banks to join it or have their own loan portals.
Instead of monthly and quarterly GST, and quarterly TDS filings, we should adopt annual filings, say for entities with turnover of less than Rs 2 crore per annum, though payment of GST and TDS can continue as usual so that government finances are not affected. This is the minimum that the government could do to really help small businesses. Implementing these suggestions won’t require much money but only intent.
(The writer is a business economist with Indonomics Consulting)