Centre revises definition of small companies to boost ease of doing business
2 min read 16 Sep 2022, 11:12 AM ISTThe increase in threshold is expected to benefit many companies given that a large part of the economy is driven by small companies
PremiumNEW DELHI: The Ministry of Corporate Affairs has relaxed the threshold for paid-up capital and turnover of a company for being eligible for simplified reporting and compliance regime meant for small companies.
The new threshold accommodates companies twice as large as those currently considered small for this benefit.
As per an order from the ministry, a company with ₹4 crore worth of paid up capital and ₹40 crore in sales will be considered a small company for regulatory purposes hereon. Earlier the limit was capped at ₹2 crore worth of paid-up capital and ₹20 crore in sales. The move will enable smaller companies in their growth phase to retain simplified regulatory regime.
In a social media post, the ministry said the revision was 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 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 required to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report, the ministry added.
These entities need not prepare cash flow statement as part of their financial statement. They are also allowed to file an abridged annual return. Besides, there is no requirement of mandatory rotation of auditors in their case.
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 last year raised the paid-up capital and turnover threshold 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 formalisation of economic activity has also contributed to an increase in tax compliance
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