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Govt relaxes small company criteria for ease of doing biz

17 Sep 2022

A business with up to ₹4 crore paid-up capital and ₹40 crore sales will be classified a small company

The government has relaxed the criteria to classify a business as a small company, opening the benefits of easier reporting and compliance norms to a wider section of India Inc.

An order by the corporate affairs ministry issued late Thursday doubled the paid-up capital and sales threshold for a business to be termed a small company for regulatory purposes. Under the new classification, a business with up to ₹4 crore paid up capital and ₹40 crore sales will be classified a small company, against the previous caps of ₹2 crore and ₹20 crore respectively. The move enables smaller companies in their growth phase to retain their simplified regulatory regime.

The ministry said in a social media post that the revision is meant to facilitate ease of doing business further and to reduce compliance burden on “small companies." Small companies are also covered by a lesser penalty regime for defaults.

The ministry said the annual return of a small company can be signed by its company secretary, or where there is no company secretary, by a director of the company. Besides, an auditor of a small company is not needed to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report.

These entities need not prepare a cash flow statement as part of their financial statement. They are also allowed to file an abridged annual return. There is no requirement of mandatory auditor rotation either.

The Companies Act allows the government the flexibility to raise the threshold of sales and paid-up capital as per the growth trend in the economy, subject to limits specified in the law. The maximum paid-up capital that can be prescribed under the law in this regard is ₹10 crore and maximum sales that can be prescribed in ₹100 crore.

The increase in threshold is expected to benefit many companies, given that a large part of the economy is driven by small companies. When the government raised the paid-up capital and turnover threshold last year from ₹50 lakh and ₹2 crore to ₹2 crore and ₹20 crore respectively, it was assessed that more than 200,000 companies benefited.

Small companies are required to disclose only the total pay given to their directors and key managerial personnel, unlike other companies which have to disclose this at the individual level. Unlike other companies which need to hold four board meetings in a year, small companies need to hold only two.

While the government’s emphasis on ease of doing business is reducing the rigors of compliance in certain areas, in certain other key regulatory areas where the government believes compliance can be improved, disclosure requirement is going up, especially on reporting of transactions in the economy. The government has considerably scaled up the reporting requirements for businesses under GST laws. The increased formalization of economic activity has also led to an increase in tax compliance.

The government is of the view that easing regulatory rigours for small businesses would go a long way in boosting economic activities as these firms are major employment generators, especially in rural areas. The doubling in limits of paid-up share capital and turnover for the small companies is a welcome step, as it will allow more companies, including start-ups to avail of the benefits available to a ‘small company’ under the Companies Act, said Navin Kumar, partner at law firm Cyril Amarchand Mangaldas. “Such facilitative steps, though incremental, will have a positive effect on the Indian start-up ecosystem and will help it grow further," said Kumar.


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