Million Small Businesses: The Union Ministry of Corporate Affairs has changed the definition of “Small Companies”. According to the new definition, companies with paid up capital of at least 4 crores, and an annual sales turnover of at least 40 crores, will now be classified as “small companies”. This limit was 2 crores for capital, and 20 crores for sales turnover, in the older definition. The increased limits will not only classify 1.2 million businesses as “small companies”, but also encourage businesses to get legally formalized.
Small Companies have good news!
On September 22, the Ministry of Corporate Affairs issued an order revealing that a firm with up to Rs 4 crore of paid up capital and Rs 40 crore of annual sales turnover will be categorized as a “small company” henceforth. The previous definition had Rs 2 crore and Rs 20 crore of paid up capital and sales turnover as the threshold limits, respectively. The amendment strives to encourage small businesses in growing under a simpler regulatory environment.
Including 80% of Indian corporations. in the definition of small companies, is a leap towards the formalization of the Indian economy, as most of these companies would be encouraged to register as small companies and avail a number of benefits provided to such companies by the government. According to official estimates, 90% of Indian businesses operate in the informal sector.
The Companies Act requires organizations that qualify as small companies to produce cash flow statements as part of their financial statements and to file their regular annual and tax returns. Furthermore, these small companies are not required to mandatorily appoint new auditors every year, as the requirement for the other companies go.
Practically, the annual returns of a small company can be filed by an independently practicing company secretary (CS), and in the absence of an independently practicing CS, any one of the company’s directors can approve it. In the auditor’s report of a small company, there is no requirement to mention the strength of internal financial status and management procedures of the company. The penalty regime and simplified compliance may help firms in switching to the formal sector.
Initiatives to Promote Small Companies
A change in the definition of small company is likely to decrease penalties faced by such companies for the non-fulfillment of compliances, and offer a significant boost to the startup environment in India.
The government is trying to improve technology-led statutory filing systems and compliance management systems so that company’s statutory filings can be monitored and evaluated in real time. It will also aid in the real-time identification of individuals filing paperwork on behalf of corporations.