Regulation Of Small Firms

Recently Government announced Rs. 10,000 fund for startup India campaign. Mainly startup companies are registered as small firms and more prone to the administrative action as compare to the big corporate. These issues of regulation should be properly managed and addressed. Moreover, no regulation of small firms is the best regulation.
Analysis:

• The Companies Act 2013 did introduce the concept of a "small company". But, it is repressive for small companies. For example, under Section 74, if any businessman take loan from his wife, there is a provision of penalty up to Rs 10 crores, or seven years imprisonment. This aberration has since been smoothened out, after a two-year imposition. But still, private placement, and loans, the life lines for a start-up, are subject to unwanted regulation. For example, shares cannot easily be issued to a new investor or NRI investor, and amounts have to be credited to a separate bank account. A company secretary has to be appointed to upload a plethora of forms using a digital signature, and to keep track of a barrage of government missives variously called Acts, amendments, rules, notifications, circulars and statutory registers. These barriers cost time and money and should be removed, except where essential for statistical purposes.
• The PAN, the Permanent Account Number, should suffice as single-point identification for small companies. But, a company has to separately apply for a Tax Account Number (TAN) to pay TDS (tax deducted at source), and a TIN (Tax Identification Number) to pay sales tax. And to Customs for an Exporter code. And a Service Tax code, an Excise code, and so on. Experience shows that moving processes online can well complicate matters. You have to scan copies of supporting documents and upload them online. All these departments come under one roof, the finance ministry and it would be beneficial if all clearance done through PAN only
• In case of tax payments, there are enough and more tax returns to file. Excise duty, service tax, sales tax, income tax, TDS. The penalties for late payment are perverse. Late filing of TDS, which is monthly after 15 days, entails a fine of Rs 200 per day. No matter if the company's turnover is Rs 1 crore or Rs 10,000 crores. For late sales tax filing it is Rs 5000 even for a day's delay (20 days allowed here). Penalties should be proportional to amount of default, and not number of days' delay. Also, for small companies, the payment cycle ought to be made quarterly, if not six-monthly, and one month's time allowed from closing to pay the amount.
• Lastly, start-ups have very limited access to bank finance, even for financing of receivables and inventory. Some banks have a conservative policy of providing loans only after three years following account opening, the very period when a start-up is in need of funds. Others do give loans, at market interest rates, treating such loans as risky, competing with finance companies. The overall mood of cutting down on non performing assets in the banking system acts as another brake. In essence, loans are available to start-ups only against the security of fixed deposits, or on mortgage of fixed assets. Accounting standards do not help. A company making losses is classified by auditors as not a "going concern". By this standard no e-commerce company in India would qualify as a going concern for bank support.

By: Vishal