Follow the Rules of the Game

Often considered the nucleus of expanding industrialisation in India, small and medium enterprises (SME) have seen a prodigious rise in the recent past. The ascent of SME sector is mainly attributable to the decline of licensing raj requiring lesser operational licensing requirements for businesses in India, and exponential rise in entrepreneurial spirit of the Indian educated masses. Recent past has also seen the SMEs expanding internationally, assuming national and economic significance.

The government has paid considerable attention to the development of SME sector in India, regulated and minimised the permits and registrations, ensured reasonable flexibility in operation of the sector and offered certain tax holidays to promote small businesses. Statutes such as the Micro, Small & Medium Enterprises Development Act, 2006 have also been enacted to facilitate promotion and development and enhance the competitiveness of SMEs engaged in the manufacture and production of goods or provision of services.

SMEs can operate under various structures in India, viz. companies, partnership concerns, proprietorship concerns, limited liability partnerships, etc. Although, a ‘company’ may not be a popular form of business entity amongst smaller entrepreneurs due to the requirement of annual and periodic filings with the Registrar of Companies, it is the most recommended owing mainly to its transparency, protection against unlimited liability for its stakeholders and flexible structure, allowing easy expansion and investment by third party investors for growth. Companies in the SME sector are usually limited by shares, closely held by members of the entrepreneur’s family or group of people. A company is a distinct legal, corporate and taxable entity and distribution of dividend by a company is not taxable in the hands of its shareholders.

There are certain licenses and registrations that every SME should obtain for carrying out its business activities. For example, obtaining a permanent account number (PAN) is not only mandatory in terms of the Income Tax Act, 1961, that ensures tax deduction at source at lower applicable rates, but it is also required at various steps in the operation of the business, like quoting on invoices, claiming refund for tax deducted at source and opening of a bank account. 

Further, every SME which deducts or collects tax at source on payments made to its employees or third parties also need to obtain a tax deducted at source account number (TAN). TAN must be obtained within one month of the end of the month in which tax was deducted. TAN has to be quoted in all challans/certificates issued in accordance with tax deduction and returns delivered to the income tax authority.

Every business establishment including a private company is required to be registered under the Shops and Commercial Establishments Act applicable in the state where its office(s) is situated, within 90 days from the date of commencement of business. The registration is mandatory in most states for protection and regulation of the workforce in the SME except in certain cases where it is exempted by the Act itself.

 If sale of any product/goods is contemplated, business entities are also required to obtain registrations under the Central Sales Tax Act, 1956 (for inter-state sales occasioning movement of goods from one state to the other or effected by a transfer of documents of title to the goods during their movement from one state to another), and the applicable state Vat Acts (for sales within the state). Application for registration is to be made within 30 days from the date of liability to pay tax under respective Acts.

The government has categorised a catena of services as taxable services and regularly revises the applicable guidelines vide amendments to the Finance Act every financial year. SMEs providing any such services whose aggregate value of taxable services provided in a financial year exceeds the stipulated amount is required to obtain registration for service tax.

There are various employee beneficial statutes enacted by the Legislature under which registrations have been mandated for the employers (e.g. SMEs), if the threshold of persons employed exceeds the stipulated number under the relevant statute. The employees’ provident fund (EPF) provides for establishment of a compulsory provident fund, family pension fund and deposit linked insurance fund for the benefit of employees in establishments. For financing these schemes, the Central Government has established a fund to which both the employer and the employees are required to contribute their shares. Registration under EPF is applicable and mandatory for establishments employing more than 20 persons.

Likewise, the employees’ state insurance scheme (ESI) provides workers medical relief, sickness cash benefits, maternity benefits to women workers, pension to the dependent of the deceased workmen and compensation for fatal and other employment injuries including occupational diseases, in an integrated form through a contributory fund. Registration under ESI is applicable to establishments where 20 or more persons are employed. Establi­shments registered under the ESI are exempted from the provisions of the Maternity Benefit Act and Workmen’s Compensation Act.

Brand awareness and recognition is the foundation for success for every enterprise. One of the most essential characteristic of any business is its intellectual property which sets it apart from the rest. Infringement or misuse of intellectual property such as trademarks, designs, literary work, patents, etc. is punishable under applicable statutes. It is recommended that every SME applies for registration of its trademarks, brand names, logos, designs, patents, etc. to secure its intellectual property rights and avoid misuse of its goodwill by its competitors.

Apart from the foregoing, there are certain sector specific licenses and registrations that may be required by a SME depending on its business activities. For example, obtaining an importer-exporter code is mandatory for undertaking any commercial import or export of goods and a multimodal transport operator license is required for every entity engaged in transport of goods by any two modes: road, sea or air.

While regulations and registrations may mean more compliance, these assist in structured and consistent growth and augmentation in the SME sector and consequently, India’s economy.