Imagine you have worked out the best recipe ever for homemade chocolate chip cookies. They taste heavenly – not just to you and your mom, but to everyone else you have shared them with – including some food bloggers and chefs. You do some rudimentary market research and find that if you can keep the price reasonable these cookies could sell like hot cakes! You beg, borrow and steal – mostly borrow –just about enough to start a factory to make a few thousand cookies every week. You think you are ready for business, when a lawyer friend asks you an innocuous question: “Hey, have you sorted out your compliance requirements?” And, with that the cookie crumbles!
On running from pillar to post
A minimum of 17 different registrations, licences and approvals to start a small manufacturing unit with a small outlet for sales! Exactly the same number as that of a FMCG company with fifty factories and a few hundred million dollars of PAT. It turns out that the Indian regulatory system, despite its various schemes for small businesses and start-ups, does not really provide any significant assistance in removing their barrier to enter the world of commerce. From the Factories licence; to the Food Business Operator (FBO) licence; to environmental clearances, all procedures are pretty much uniform for the largest to the smallest Units of Indian business, which makes the cost of compliance as a percentage of their revenue disproportionately higher for smaller businesses.
Add to that, the inordinate delays and frequent visits to the department that are required for obtaining a license or permit. West Bengal, for example, boasts of registering a factory in 65 days and approving the site plan in 50 days in their official website. Compare that with Singapore where it takes 7[1]!
When we delve a little deeper, we find that there have been initiatives that have been thought of for small business. However, they have mostly not seen the light of day.
Let’s take the Small Factories (Regulation of Employment and Conditions of Services) Bill, 2014 for example, which was drafted for factories employing less than 40 workers. Apart from exempting small factories from 14 central labour laws, it also intended to allow registration and de-registration of small factories electronically. And it was not just pro-employer. The proposed law mandated employers to open of zero balance accounts for all workmen; it had provisions requiring salaries to be paid into such accounts electronically within the seventh of the month; and also, it specifically prohibited discrimination against women during recruitment, transfers and training. Unfortunately, more than three years after it was floated, the Bill remains in the draft stage, with no line of sight on when it will be passed. And, this is
not the only such instance. Despite many global giants citing the lack of compliant suppliers as a roadblock for setting up industrial units in India, the deterrents to starting up far outweigh the incentives.
Let numbers do the talking
So, what can India do to change this? Quicker turnaround for well thought out legislations like the one mentioned above to start with. But, there is a lot more that can be done. Given below are a few recommendations that we have collated basis our research on what other countries are doing. As you will see by reading these, none of these are likely to unduly queer the pitch in favour of small businesses or impact the quality of the products.
1.Quicker Time for Starting Up
OECD global average exhibits that it takes approximately 27 days for starting a business in India. Compare that with the world average of 12 days[2] and the unbelievable one day in Singapore.
So, what does Singapore do differently? For a small manufacturing unit it takes just three 3 basic licenses – the Food Shop License[3], the Halal certification (in case you wish to serve Muslims)[4] and Goods and Services Tax (GST) registration[5]. Also, the cherry on the cake is that all these licenses can be applied from one website at one go. Far removed from the apparent “single-window clearances” in India, where from one window which is the e-biz website, one needs to navigate through various other department websites to apply for licences with Inspectorate of Factories, Municipal Corporation, Department of Labour and Employment and others.
Going back to earlier example of that factory in West Bengal, which takes 115 days to start, we tried to understand why it takes that long. There is just one documented step for granting a license – a scrutiny of the application by the Director of Factories of the area. Why should a scrutiny, especially for a small business or start-up, take close to four months? Unless this period is reduced to less than a month, there will never be a real incentive to start a business for that fictional cookie maker cited at the beginning of this article. They would rather go work for a large company and earn a fixed monthly income while dreaming of what could have been if they had taken the entrepreneurial plunge.
2.Tax Incentives
Starting one’s own business is a substantial risk in itself and paying taxes for a newly established business can never be an incentive for setting up one. No matter what the business, selling of goods/services always attracts taxes. However, as a small business, coping with taxes can be a challenge. For this reason, governments establish schemes and incentives to boost businesses and in turn assist economic development of the country. In India, only a small subset of businesses set up in certain areas such as a special economic zone or software Technology Park can fetch tax exemptions on profits. Start-ups eligible to tax exemptions under the Start Up India Scheme are also only a minority considering the requirement of being a ‘business involving innovation of new products/processes driven by technology or intellectual property’ to be considered a “start-up” in the first place.
Singapore and the United States of America, on the other hand, have devised tax exemptions and incentives to assist not only businesses but employees engaged in these businesses as well. USA has, for example, created the Small Business Health Care Tax Credit to encourage small employers to pay at least half the cost of single coverage for their employees. The credit is focussed on helping employers of small businesses that primarily employ low and moderate-income workers, where the number of full time employees is 25 and below.
Singapore places special emphasis on encouraging SMEs as they provide 50% of its economic output and 70% employment of the country[1]. To propel SMEs, it provides full exemption to start ups under the Start-up Tax Exemption Scheme for the first 3 years and partial exemption of S$152,500 for income up to S$300,000 to SMEs. Further, the IRAS also developed the Business and IPC Partnership Scheme, where companies can avail a tax deduction of 250% on salaries and expenses that they pay to their employees in case the company sends its employees to volunteer and extend their services to Institutions of Public Character.
Which leads us to think, why can’t India adopt some of these. For example, many small businesses probably do not make that much profit in the first two to three years. There direct tax burden, therefore, might not be that high and providing them tax incentive during this period might not be that beneficial. Instead, what might help is if the government can exempt employees of these businesses from direct tax for a period of say, five years. It will incentivise better talent to join these organisations, thereby improving their quality of products and services. That, in turn, will help them compete better in the marketplace.
And that’s how the cookie crumbles
It is time that the legislators recognize that MSMEs have comparatively limited resources to deal with regulations, thus making it taxing for them to keep up with the expectation that they will abide by the blanket regulations, evenly meant for all players in the industry. In order to reduce the number of obstacles to business growth and also to make this process less burdensome for MSMEs, India Inc is in need of a reformed process of granting of licenses and is yet to come up with easier ways of interacting with regulators, among others.
To sum up, there is no dearth of schemes for small businesses in India. Unfortunately, most of them have not been thought through fully, making them operationally unviable or not real incentives for innovative start-ups, many of whom have preferred to set up their business in Singapore or the Silicon Valley. If the government really wants that situation to change, it will have to bring in a completely separate regulatory regime for small businesses and recognise that one size does not fit all.
For further queries or clarifications, please feel free to contact us at inquiries@lexplosion.in
Authors:
- Ananya Shukla (Legal)
[1] Ministry of Manpower Singapore Government
[2] OECD, 2017
[3] National Environment Agency, Government of Singapore
[4] Islamic Religious Council of Singapore, Government of Singapore
[5] Inland Revenue Authority of Singapore
[6] OECD, June 2017
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