Why India's labour laws keep MSMEs from scaling up
Maintaining compliance with labour laws is a complex process for MSMEs. It requires a specialised team with adequate knowledge of legal and compliance requirements.
More than 40 million micro, small, and medium enterprises (MSMEs) drive the Indian economy towards growth, positioning India as the fifth-largest economy in the world by nominal GDP. MSMEs are classified based on annual turnover. The MSME sector is vast in number and widely spread across the nation, contributing significantly to the development and growth of the urban and rural population.
The central and state governments have notified several subsidiary benefits, incentives, and exemptions for the MSME sector to encourage its growth. MSMEs are provided with schemes like the Credit Linked Capital Subsidy Scheme for technology upgradation, the Credit Guarantee Scheme, ISO 9000 certification and reimbursement schemes, participation in international fairs, the Purchase and Price Preference Policy, the Prime Minister's Rozgar Yojana (PMRY), and more. States such as Tamil Nadu have introduced capital subsidy schemes, while the Karnataka government has implemented the SIDBI Promotional and Development Scheme, among other initiatives, to promote MSMEs in their respective states.
Approximately 24 crore people are employed under MSMEs in India, which accounts for nearly 38% of the total employment in the country. Labour being a concurrent subject under the Indian Constitution, both the state and central governments regulate compliance. For startups and MSMEs to grow, it is essential for the government to facilitate and scale up the applicable labour laws. MSMEs operate without sufficient knowledge of labour law compliance, which can lead to disputes and fines. In the early stages of an MSME, paying fines to government authorities can impact investments and business growth.
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Meanwhile, MSMEs are often identified for non-compliance with labour laws. In many instances, MSMEs are required to pay hefty fines for identified non-compliance. The Indian regulatory system has not yet been simplified to ease business operations in the country. Multiple registrations, remittances, returns, and registers must be maintained at both the state and central levels. The complicated compliance environment makes MSMEs more vulnerable, as they are smaller in size and easily accessible by regulatory authorities.
Maintaining compliance with labour laws is a complex process for MSMEs. It requires a specialised team with adequate knowledge of legal and compliance requirements. The areas of knowledge necessary include applicability, registration, document maintenance, exemptions, filing of returns, remitting applicable contributions, self-certification, and more. Even the non-maintenance of a single register can result in a fine. Several registers must be maintained in the prescribed format, and over 14 authorities are empowered under labour laws to conduct inspections.
Court verdicts related to the failure of labour law compliance by contractors/sub-contractors or the failure to implement an effective monitoring system play a vital role in helping MSMEs avoid non-compliance and fines. Recent rulings from high courts are alarming and clarify that the principal employer is liable for non-compliance regarding third-party engagements, even if the principal employer exceeds expectations for its own employees. The failure to monitor third-party employees makes the principal employer responsible and liable to compensate. An effective monitoring system, supported by technology, is essential for MSMEs to avoid non-compliance and maintain a peaceful business environment. The governance, risk, and compliance (GRC) role is also crucial for MSMEs to maintain compliance and mitigate risk.
MSMEs primarily focus on reducing operating costs and increasing profitability. While reducing compliance costs can lead to penalties in many instances, MSMEs also serve as role models for implementing new practices, such as moonlighting, paternity leave, garden leave, part-time employment, independent consultants, gig worker engagement, and more. MSMEs are constantly coming up with innovative proposals, thinking outside the box under labour laws. This is a major reason why, in India, labour laws often prevent MSMEs from scaling up.
Large-scale organisations have established processes, and unions typically hold the power to negotiate with employers to secure applicable benefits for workers within the organisation. However, MSMEs do not have the option of unions for negotiations. Indian labour laws often prevent MSMEs from scaling up, as they must maintain compliance to benefit the 38% of employees in the country. Being a defaulter under Indian labour law is considered a criminal offence. Even the non-maintenance of a single register can lead to criminal cases and criminal proceedings against the director of the MSMEs. Without proper knowledge and technology, achieving 100% compliance is difficult for MSMEs. However, with the support of a tool that provides adequate knowledge, maintaining compliance becomes more feasible. A lack of awareness regarding compliance changes also poses a significant risk for MSMEs. This is one of the reasons for Indian labour laws often prevent MSMEs from scaling up.
(Munab Ali Beik is head of compliance advisory at Core Integra.)
Edited by Kanishk Singh