Ease of Doing Business: Reducing the Compliance Burden on MSMEs

How can the minefield of regulatory filings and processes be rationalised?

When it comes to the ease of doing business, the landscape for MSMEs is fraught with the pitfalls and mazes of a large number of compliance procedures. While it is often assumed that MSMEs do not have as much to worry about when it comes to compliances, the truth is quite different.   

The fact is that the burden of compliance for MSMEs is quite inconsistent with the resources they have at their disposal. While a large enterprise might employ a department to handle the compliances and filings, the MSMEs can scarcely afford to do so. Indian MSMEs need to deal with 27 licenses, registrations, permissions and consent orders on average. They can be hauled up by no less than 20 different inspectors under various laws. Meeting these requirements is not easy, it calls for work with multiple consultants. As if this were not enough, there is a high opportunity cost, taking time and resources away from skill development, technology up-gradation or other value-adding activities.  

MSMEs face their first obstacle during the incorporation. For opening most bank accounts in India, you would still need a physical letterhead along with the traditional rubber stamp. A physically signed letter from the board is a must. Once incorporated, the MSMEs need to get physical registrations under a number of acts from the state government agencies. This is why many MSMEs prefer to run as sole proprietorships in India. The next hurdle MSMEs face is when they have close to 10 employees on their payroll. Employees State Insurance Act (ESIC), 1948 requires that firms with 10 or more employees must mandatorily register and make monthly payments for the social security of their employees.   

To further illustrate this let us take a hypothetical, yet typical enterprise: if it were to operate in the state of Maharashtra with an office and a factory of about 150 employees, with a turnover in the range of Rs 10-20 crore, this company would be required to deal with 364 compliances in a year across 27 different acts. It is one short of a compliance a day! In legislation that beats the reason, the consequences of non-compliance not only include severe financial penalties and jail terms. By a conservative estimate, the annual cost of compliance for a typical MSME is around Rs 12 lakhs. MSMEs are forced to deal with professionals (CAs, CSs, EHS consultants and lawyers) for end-to-end managed services.   

To reduce the existing compliance burden on MSMEs there is a need for a three-pronged framework of rationalisation, decriminalisation and digitisation.  

Rationalisation: India’s regulatory ecosystem has a universe of over 1,500 Acts, 69,000 Compliances and 6,600 filings and intimations. It is important to reduce the number of applicable Acts and Compliances on MSMEs. To do this, we must identify and eliminate duplication in statutory record keeping. Let us take the maintenance of wage registers: there are at least five different acts that require its maintenance in different formats. Similarly, at least four different acts require the maintenance of an accident register (fatal, non-fatal). Depending on the Act being enforced, an inspector can question the entrepreneur on salary data, leave and attendance data, health and safety records to name a few. To rationalize this, the relevance of compliances must be reviewed through the lens of legality, necessity, and proportionality. There should be stakeholder consultation and analysis of costs and benefits of compliances on all stakeholders. Only those compliances which pass all three criteria should be retained.  

Decriminalisation: There are no less than 8,000 provisions with possible jail terms in Indian laws, many of which are applicable to MSMEs. Simple procedural oversights or delays can land entrepreneurs in jail. Things are made worse with the ambiguity in the interpretation of the law. A thorough review of criminalisation should be undertaken at a national level on proportionality and equivalence. The intention to commit fraud should be seen differently from inadvertent non-compliance or honest mistakes.  

Digitisation: MSMEs spend a lot of time in paper-based, manual filings. License renewals require in-person submission of paperwork to the concerned authorities at a government department. These applications must be accompanied by certificates issued by other government departments, such as registration certificate, Articles of Association, Memorandum of Association, Fire NOC, Electrical NOC, Consent to Establish, Consent to Operate, Factory License etc. There needs to be a minimum of three to four in-person follow-ups before the work is done. The need of the hour is a secure digital vault of all government-issued documents for ready reference. Digital tracking of applications should be available to avoid in-person visits to various departments.   

While the government has adopted measures to reduce the compliance burden by means of simplification, elimination and decriminalisation of some laws much more have to be done before there is a transformation in the ease of doing business.