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.
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.