The compliance injection to safeguard India’s MSMEs

Every economy and its literature around industrial organisations globally acknowledges and promotes the importance associated with MSMEs to the growth of the nation’s economy. 

In fact, during the G20 Summit 2023 and Delhi Declaration, hopes were raised for the position of MSME by introducing talks of simplified regulatory procedures and increasing access to affordable capital. 

MSMEs are vital to the Indian economy, and the Delhi Declaration acknowledged them as “natural engines of growth.” This acknowledgement from global leaders, including our Prime Minister Narendra Modi, is a welcome step, especially for India, where MSMEs make up the majority of the businesses. 

In a 2017-18 annual report, the MSME ministry stated that the sector accounts for 45% of the manufacturing output and 40% of the total exports of India. However, the leaders also recognised the challenges MSMEs and startups face in developing countries, particularly with access to information. 

This makes it imperative for MSME owners to pay close attention to compliance to stay on top of profitability and gain ground in India’s revamped business expansion race.

The compliance web

The Indian business landscape is intricately woven with a complex web of regulatory compliances. With the number of rules and acts going into four digits, the compliances run into tens of thousands. For an MSME, understanding and navigating this labyrinth of compliance can be a daunting task. 

These compliance requirements span multiple categories, including taxation, labour, secretarial, environment, health and safety, and more. Moreover, they exist at various levels—central, state, and municipal—and take various forms, such as licenses, registers, returns, and statutory payments. 

To add to the complexity, keeping up to date with such regulatory requirements and changing laws is an issue. A company has to engage resources merely for their compliance, which might not be enough given the scale and industry of the MSME. 

An MSME, with a single warehouse and corporate office in a single state, has to contend with a staggering 648 compliance requirements annually. 

Shockingly, 34.8% of these requirements carry imprisonment clauses—distributed between state and union laws, with state laws accounting for the majority. The documentation required includes registrations, approvals, licenses, permissions, consent orders, and certifications, among others, leading to a web of complex and overlapping compliance obligations. 

The stakes are high for MSMEs when it comes to compliance. Failing to adhere to one or more regulatory requirements can lead to monetary penalties. However, more severe infractions can result in imprisonment, ranging from one month to several years. Given these risks, MSMEs must address compliance issues effectively.

Technology as a saviour

Over the last few years, technology has played a crucial role in providing cost-effective solutions to various business problems. Unfortunately, MSMEs are yet to fully utilise the benefits of digitalisation. 

The G20’s High-Level Principles on Digitalisation of Trade Documents rightly pointed out the challenges in this transition, including the lack of digital infrastructure, limited connectivity, high adoption costs, and a skills gap. 

It has to be acknowledged that, though slowly, MSMEs are adopting ERP packages, accounting software, and payroll systems to manage production, inventory, accounting, and payroll efficiently. However, they still use age-old manual methods such as Excel sheets to track compliance, which are not only inefficient and time-consuming but also prone to errors.

Over the last few years, the regulatory technology (reg-tech) sector has made significant strides in addressing such compliance challenges. Initially, reg-tech players largely focused on direct and indirect taxes, offering solutions to simplify tax compliance. 

However, with advancements in technology, this sector has come up with comprehensive platforms that support businesses with centralised compliance repositories, real-time regulatory updates, reminders, alerts, regular reporting, and more. 

As MSMEs continue to dominate the business landscape, addressing their compliance challenges becomes paramount for India's economic prosperity. MSMEs can effectively navigate the compliance maze, unlock their full potential, and contribute significantly to achieving ‘Atmanirbharta’ in its true sense by embracing innovation, technology, and government support.

Rajesh C is the Chief Marketing Officer of Aparajitha Corporate Services