Why You Should Not Look at Corporatisation as a Single Pill? This blog will help you understand the various advantages of Corporatisation in India
An entrepreneur starts a business through the incorporation of a corporate entity for two primary reasons. (i) limited liability, (ii) unlimited scalability. These two intentions are essential indicators of growth, expansion, funding, sustainability, and enhanced valuation. Moving from an unorganized sector to a formal, organized industry also gives a fillip to the entrepreneur in terms of a wider reach, branding, and marketability of the products and services. But incorrect advice by business advisors having vested interests, scare of compliances, fear of governmental scrutiny, and psychological blocks in formalizing business and audit processes are essential factors that deter an individual from transforming his business into a corporate structure.
Professional Tax: Professional Tax, for example, is applicable in Andhra, Assam, Bihar, Gujarat, Karnataka, Kerala, Madhya Pradesh, Meghalaya, Orissa, Sikkim, Tamil Nadu, Telangana, Tripura, West Bengal, Maharashtra, Jharkhand, Manipur, Mizoram, Puducherry, and Chhattisgarh. A state tax arises out of the ‘infrastructure’ provided by a State for an employee or a professional in that state. A concept is similar to a ‘toll’ on an expressway. Levied under Article 276(2) of the Indian Constitution, one does not realize that this provision goes against article 19(1) (g), the right ‘to practice any profession or to carry on any occupation, trade, or business. Thus, once is being taxed by the state for allowing or facilitating to exercise a fundamental right.
Frequent Changes in Enforcement Procedures: The country has approximately 12 active Lakh companies. According to the MCA Annual Report 2018-19, the ministry during the period, had issued 77 Notices and 10 General Circulars as part of the administration of Companies Act 2013, approximately one change every four days on an average. One can imagine the enormous pressure and difficulties that the corporate sector would have faced during the period. The world applauded the achievement that India made by abolishing a host of archaic laws on indirect taxation and bringing in a unified Goods and Service Tax regime. However, being nascent legislation fraught with a host of legacy issues, the implementation of GST Law is embroiled in a series of glitches. Deficiencies in the filing system, difficulties in obtaining GST input credit, frequent changes in the periodicity of filing returns, and claiming input credit are issues that the industry faces.
The diversity of Licencing: Once a company or LLP is registered, the other registrations required are as follows: (i) PAN Registration, (ii) GST Registration, (iii) Local Body Registration, (iv) Various registrations under labor laws, (v) Udyog Aadhar registration, (vi) Business/ manufacturing registration like FSSAI, (vii) Import/Export Licence if required, (viii) FEMA filings & registrations in case of FDI, (ix) Special economic zone related registration if applicable, and the list gets extended depending on the type of product or service offered. Despite these labyrinths of registrations instituted by the Licence Raj of yesteryears, the country has been able to make a quantum jump in the ease of doing business in India.
The need to Ostracize Corruption: “Belitski, Chowdhury, and Desai (2016) investigate the interaction between Corruption and corporate income tax rates across a panel of 72 economies in the period 2005–11 and find that higher tax rates consistently discourage entry. They also find that Corruption offsets the negative influence of high taxes on entry. Rocha, Ulyssea, and Rachter (2018) find that reducing taxes once registration costs have been eliminated reduces firm informality in Brazil; however, this effect comes mainly from the registration of existing firms and not from the creation. Of new formal businesses.” The enforcement agencies of the Government use the strict and rigid provisions of law to elicit quid pro quo from people in business and corporates for criminal exonerations and exceptions, and the phenomenon is not limited to taxation as explained above. While the Government of the day has been relentlessly engaging technology to streamline processes with a primary view to weed out corrupt practices of the officials, it calls for a socio-cultural transformation by the business community to shun Corruption as a pillar of doing business.
Conclusion: There is a strong hesitation among small business owners to get into a corporate mode, despite several advantages and benefits of a corporate structure of the business. The primary reason is that of the multiplicity of compliances and enforcement of redundant laws. The petty officialdom in India acts in an extreme bureaucratic manner, and the entrepreneurs are put to a lot of difficulties. Under the leadership of Modiji, the Government at the center has taken a lot of measures to discard many redundant laws. But still, the mindset of the bureaucracy has not changed.
1) How has Corruption affected SME enterprises in India?
Corruption has been a menace in conducting business in India. Corruption had in the past encouraged non-compliances because the business entities were confident of getting away with non-compliance. However, after 2014, the scenario has considerably improved, and compliance enforcement has become more effective. On the other hand, petty Corruption to get legitimate approvals, etc., from various government offices has drastically reduced, as the Government has made most of the approvals online and non-face.
2) What is the relevance of Profession Tax?
This is a redundant tax requirement that is against the spirit of the Indian Constitution, which guarantees the right to work. This should be abolished.
3) How is a corporate type of firm more beneficial for an SME?
Corporate structure (i.e., a company) has many benefits. Investments can be sought from external parties. The liability of the shareholders is limited to their shareholding. The scalability is very high as compared to other types of firms. Once converted to a public limited company, one can obtain a company listing in a stock exchange through an IPO.