What are the issues for MSME and Startups in India ? and the possible solutions.

India is one of the fastest major growing economies in the world and the majority of growth comes from MSME and Startups but nowadays these sectors are facing the most issues and thousand of MSME and startups are shutting down their business because of the issue of the taxation system and other problems from the government side. let us discuss these problems in detail and try to find out its solution :

The increasing number of small firms part of the formal sector:

• Smaller business entities are often associated with the informal sector and widely believed to dodge taxes and bypass tough labor regulations.
• However, an increasing number of firms engaged in consultancy, research and advisory, and other knowledge-intensive services 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.

But they are disadvantaged compared to big businesses:

• Yet, they are subject to several disadvantages that big businesses don’t have to face.
• This affects their cost competitiveness and growth prospects and results in lower investment and loss of thousands of potential jobs.

The issue of small formal firms

Credit availability:

• While low-interest rates or low-cost credit do help small businesses, it is actually the 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 setups.
• A large number of firms in this sub-segment deal in services, but the banks’ credit appraisal and disbursal system is more suited to manufacturing firms.
• Banks look for ownership of land, factory sites, or stock in trade as collaterals that small service companies with few assets may not be able to furnish, and thus are denied bank credit.

Delayed payments by large companies:

• Delayed payment from larger private and public sector companies is a common irritant for smaller firms supplying goods and services to them.

Issues faced by exporters:

• High forex conversion charges:
• Many smaller firms do export but the banks are charging them exorbitant forex conversion charges.
• Such practices do not help India achieve a global export share that is in line with its size and potential.
• High charges for membership of export promotion councils:
• For getting export incentives, a company small or big must have Import-Export Code (IEC) from DGFT and RCMC (Registration Cum Membership Certificate) from a relevant export promotion council.
• However, many of our export promotion councils don’t distinguish between large companies and small companies when it comes to their membership charges.

Need to reduce compliance burden:

• The compliance burden is suffocating the smaller business sub-segment of the formal economy.
• The more complex the regulations and compliance requirements, the greater is the disadvantage of small business entities that don’t have dedicated regulatory affairs teams or financial muscle (like large companies) to deal with them.
• For example, they are required to do the director’s e-KYC, audit, and multiple financial reporting and filings (with scary names such as AoC4, ADT1, and MGT7) that overwhelm smaller companies.
• Case of GST:
• The badly designed and poorly implemented GST regime is a big pain for smaller business entities.
• Irrespective of its turnover, a small business entity has to file monthly, then quarterly, and if its revenue crosses Rs 2 crore annual GST as well. It has to file quarterly TDS returns.
• More rules mean more inspectors to deal with.

Need to nurture formal small firms:

• Nurturing this sub-segment of the formal sector will aid the government's goals from greater formalization, including:
• Economic growth
• Improved tax to GDP ratio and
• Creation of good jobs

Way ahead

• Reduced compliance burden: 
• Regulatory experts say our complex rules induce small firms to remain small.
• It’s actually the compliance burden more than the high interest or tax rates that are choking smaller business entities.
• All the filings and reportings discourage small entrepreneurs and professionals from starting their own ventures.
• Reducing compliance burden and associated costs for small businesses by rationalizing regulatory requirements is an easy step that could be immediately taken. It will help small firms save a lot of time and money that could be used for marketing their products and services.
• Instead of monthly and quarterly GST, and quarterly TDS filings, we should adopt annual filings, say for entities with turnover of less than Rs 2 crore per annum
• Ease of credit:
• Easy (and not necessarily cheap) credit will help small businesses.
• To ease access to bank credit, the government should further strengthen its flagship program, PSB Loan in 59 minutes portal by encouraging private banks to join it or have their own loan portals.

Conclusion:

• Rationalizing regulatory requirements and easy credit are the basic things that the government could do to really help small businesses.
• This is important to achieve our $5 trillion dreams by 2024.