Don't regulate small firms (Start- ups ,GS 3 ,Business Standard )

The outcome of the Start-Up meeting held on January 16 in Vigyan Bhavan raises expectations that the Budget will be friendly to small start-ups. The prime minister announced the launch of a Rs 10,000-crore start-up fund. He also affirmed that even a five-person start-up contributes to the economy. These are welcome pointers, as also the promised revival of the long defunct credit guarantee scheme. This article argues that regulation can be done away with for small firms, while ensuring efficient revenue collection. The benefits far outweigh the costs. Four major roadblocks that need to be cleared are identified.

Most small firms are already self-regulated. They focus on their business and fear getting caught, and so the law is an effective deterrent. A single notice from sales tax orincome tax or a visit by an inspector is cause for misery. On the other hand, top corporate honchos would disdain even hearing about such notices.

The state's neglect of small enterprise is by no means deliberate. Large-scale irregularities attract all the attention. These include major scams in the financial and corporate sectors, as also the stock market. To curb the deviants, the state has turned increasingly regulatory in several areas. This has resulted in regulation for big corporates extending to small firms. In failing to differentiate between the two, the baby gets thrown away with the dish water. State agencies, with the notable exception of the RBI, have in fact been tightening the screws. The RBI can serve as a model for reform, a process which started even before FEMA (Foreign Exchange Management Act) in 1999. The RBI is accessible across India, transparent, and at least in small matters, quick.

The road map is simple. There are just four blocks to clear:

The Companies Act 2013 did introduce the concept of a "small company". But aside from some petty procedural benefits, there is no help for a small company. For example, one damp squib has waivers of reporting on what is called "cash flow" and reporting on CSR(Corporate Social Responsibility). The Act was largely a reaction to the Sahara scam but for a small company, it was repressive. For example, under Section 74, an entrepreneur's wife could not give a loan to his start-up. Indeed, he was even debarred from taking a loan from his wife to invest in the company - the penalty was a fine of up to Rs 10 crores, or seven years imprisonment, for the crime of keeping a start-up alive. 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 (imagine a start-up having to open multiple bank accounts and the related paperwork and KYC formalities just to receive some funds). 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. How is that paperless? Surprisingly, all these departments come under one roof, the finance ministry. Why cannot the PAN number alone suffice and link to all data bases? The National Informatics Agency, it would seem, is unable to do its job. Private software companies have done a commendable job in departmental computerisation for government. The time has come for them to be entrusted with the integration of data bases and streamlining of processes.
Coming to tax payments, there are enough and more tax returns to file. Excise duty, service tax, sales tax, income tax, TDS. One cannot contest this. But 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). A Rs 1 crore company cannot afford such punitive fines every month-end or quarter, as the case may be. Such penalties are regressive. 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.

After the 1991 economic reforms took root, no break-through initiatives have been taken for development. For a developing economy, 25 years in expectation of the next wave is a long wait. The hope is that 'Make in India' is not mere rhetoric. Implementation of these suggestions will be a step forward.