Govt. amends definition of small companies to reduce compliance burden

Move to help 1.2 million businesses migrate to the formal sector.

The Ministry of Corporate Affairs has brought in an important amendment to the Companies Act, 2013 that will enable 1.2 million businesses across the country to be classified as small businesses and hence enjoy the financial and other government benefits, multiple media reports say.

The Companies Amendment Rules, 2022 was notified by the Ministry on September 22. It revises the definition of a small company in terms of both paid-up capital from INR 2 Crores to INR 4 Crores, and turnover, from INR 20 Crores to INR 40 Crores. The revision is to promote ease of doing business for small companies and reduce the compliance burden on them, says this article in Tax Guru.

The government seems to be on a warpath to create a favorable business environment, as just last year, it had increased the threshold for the definition of a small company from INR 50 Lakhs in paid-up capital to INR 2 Crores, and INR 2 Crores in turnover to INR 20 Crores, which benefited more than two lakh companies according to a government assessment, a report in Mint says.

The Companies Act gives special privileges to the government to raise the limits of sales and paid-up capital, “as per the growth trends in the economy”, subject to the limits of the law, the Mint report says. As per the law, the maximum threshold for paid-up capital is INR 10 Crores, and the maximum sales limit is INR 100 Crores, the report says. 

Some of the advantages of falling under the category of small businesses include lesser penalties, the right to hold only two board meetings in a year, and the ability to file an abridged annual return rather than a detailed one. Small companies also need not report their cash flow, or report salaries on an individual level - the reporting is limited to directors and persons holding key management positions.

On the regulatory tax compliance side, being identified as a small company means the annual report can be signed off by a company secretary or a director. There is no need to comply with mandatory rotation of auditors and the auditor does not need to certify the efficiency of financial controls and their effectiveness, the Tax Guru says. 

The loosening of the grip of the regulatory regime, which is the factor that causes the most hindrance for companies to register themselves as MSMEs despite the benefits provided by the government, is a welcome sign, as it will ensure that 80 percent of companies operating in India now have the opportunity to enter the formal sector, a report in FEAspire says. 

A big advantage for startups to register as small companies is the reduction in penalties in case of any oversight, which will also save the trouble of lengthy and costly litigation processes, the FEAspire report adds.

While reducing the compliance burden, the government has also focused on progressively increasing reporting under key regulations, to improve the pace of formalization in the economy, the Mint report says, citing the GST law. Greater formalization has worked as a win-win situation, as it has led to higher tax compliance, the report says.