How to help small businesses: Cut heavy costs of regulatory and tax compliance, make credit available
Smaller business entities are often associated with the informal sector and widely believed to dodge taxes and bypass tough labour regulations. However, an increasing number of firms engaged in consultancy, research and advisory, and other knowledge intensive services – often with substantial portion of their sales as exports – are part of the country’s formal sector.
Though such firms have fewer employees compared to large firms, they are registered with registrar of companies (RoC) and GSTIN network, and are usually tax compliant. Yet, they are subject to several disadvantages that big businesses don’t have to face and that affect their cost competitiveness and growth prospects. The result is lower investment and loss of thousands of potential jobs.
Nurturing this sub-segment of the formal sector will aid economic growth, improve tax to GDP ratio and create good jobs that the government has been trying to achieve through its formalisation attempts. While demonetisation jolted the informal sector dependent on cash, heavy indebtedness has been troubling large corporations, while the compliance burden is suffocating the smaller business sub-segment of the formal economy.
Reducing compliance burden and associated costs for small businesses is a low hanging fruit that need not be postponed for the future, if we’re serious about achieving our $5 trillion dream by 2024. While low interest rates or low cost credit won’t hurt small business entities, it’s not the ‘cost of credit’ but availability of institutional credit that is hampering their growth prospects. While investors insist on their incorporation as private limited companies, banks don’t like the idea of limited liability set ups.