guest column | Legal
Follow the
Rules of the Game
The rise of the SME sector in India can be attributed to the entrepreneurial
spirit of the Indian educated masses. The Government too, has been
promoting it through various regulatory measures.
Seema Jhingan
O
ften considered the nucleus
of expanding
industrialisation in India,
small and medium enterprises
(SME) have seen a prodigious rise
in the recent past. The ascent of
SME sector is mainly attributable to
the decline of licensing raj
requiring lesser operational
licensing requirements for
businesses in India, and
exponential rise in entrepreneurial
spirit of the Indian educated
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Small Medium Entrepreneur | january 2012
masses. Recent past has also seen
the SMEs expanding internationally,
assuming national and economic
significance.
The government has paid
considerable attention to the
development of SME sector in
India, regulated and minimised the
permits and registrations, ensured
reasonable flexibility in operation
of the sector and offered certain tax
holidays to promote small
businesses. Statutes such as the
Micro, Small & Medium Enterprises
Development Act, 2006 have also
been enacted to facilitate promotion
and development and enhance the
competitiveness of SMEs engaged
in the manufacture and production
of goods or provision of services.
SMEs can operate under various
structures in India, viz. companies,
partnership concerns,
proprietorship concerns, limited
liability partnerships, etc. Although,
a ‘company’ may not be a popular
form of business entity amongst
smaller entrepreneurs due to the
requirement of annual and periodic
filings with the Registrar of
Companies, it is the most
recommended owing mainly to its
transparency, protection against
unlimited liability for its
stakeholders and flexible structure,
allowing easy expansion and
investment by third party investors
for growth. Companies in the SME
sector are usually limited by shares,
closely held by members of the
entrepreneur’s family or group of
people. A company is a distinct
legal, corporate and taxable entity
and distribution of dividend by a
company is not taxable in the hands
of its shareholders.
There are certain licenses and
registrations that every SME should
obtain for carrying out its business
activities. For example, obtaining a
permanent account number (PAN)
is not only mandatory in terms of
the Income Tax Act, 1961, that
ensures tax deduction at source at
lower applicable rates, but it is also
required at various steps in the
operation of the business, like
quoting on invoices, claiming
refund for tax deducted at source
and opening of a bank account.
Further, every SME which
deducts or collects tax at source on
payments made to its employees or
third parties also need to obtain a
tax deducted at source account
number (TAN). TAN must be
obtained within one month of the
end of the month in which tax was
deducted. TAN has to be quoted in
all challans/certificates issued in
accordance with tax deduction and
returns delivered to the income tax
authority.
Every business establishment
including a private company is
required to be registered under the
Shops and Commercial
Establishments Act applicable in
the state where its office(s) is
situated, within 90 days from the
date of commencement of business.
The registration is mandatory in
most states for protection and
regulation of the workforce in the
SME except in certain cases where
it is exempted by the Act itself.
If sale of any product/goods is
contemplated, business entities are
also required to obtain registrations
under the Central Sales Tax Act,
1956 (for inter-state sales
occasioning movement of goods
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Small Medium Entrepreneur | january 2012
from one state to the other or
effected by a transfer of documents
of title to the goods during their
movement from one state to
another), and the applicable state
Vat Acts (for sales within the state).
Application for registration is to be
made within 30 days from the date
of liability to pay tax under
respective Acts.
The government has categorised
a catena of services as taxable
services and regularly revises the
applicable guidelines vide
amendments to the Finance Act
every financial year. SMEs
providing any such services whose
aggregate value of taxable services
provided in a financial year exceeds
the stipulated amount is required to
obtain registration for service tax.
There are various employee
beneficial statutes enacted by the
Legislature under which
registrations have been mandated
for the employers (e.g. SMEs), if the
threshold of persons employed
exceeds the stipulated number
under the relevant statute. The
employees’ provident fund (EPF)
provides for establishment of a
While regulations and
registrations may mean
more compliance, these
assist in structured and
consistent growth and
augmentation in the SME
sector and consequently,
India’s economy.
compulsory provident fund, family
pension fund and deposit linked
insurance fund for the benefit of
employees in establishments. For
financing these schemes, the
Central Government has established
a fund to which both the employer
and the employees are required to
contribute their shares. Registration
under EPF is applicable and
mandatory for establishments
employing more than 20 persons.
Likewise, the employees’ state
insurance scheme (ESI) provides
workers medical relief, sickness
cash benefits, maternity benefits to
women workers, pension to the
dependent of the deceased
workmen and compensation for
fatal and other employment injuries
including occupational diseases, in
an integrated form through a
contributory fund. Registration
under ESI is applicable to
establishments where 20 or more
persons are employed. Establi­
shments registered under the ESI
are exempted from the provisions of
the Maternity Benefit Act and
Workmen’s Compensation Act.
Brand awareness and
recognition is the foundation for
success for every enterprise. One of
the most essential characteristic of
any business is its intellectual
property which sets it apart from
the rest. Infringement or misuse of
intellectual property such as
trademarks, designs, literary work,
patents, etc. is punishable under
applicable statutes. It is
recommended that every SME
applies for registration of its
trademarks, brand names, logos,
designs, patents, etc. to secure its
intellectual property rights and
avoid misuse of its goodwill by its
competitors.
Apart from the foregoing, there
are certain sector specific licenses
and registrations that may be
required by a SME depending on its
business activities. For example,
obtaining an importer-exporter code
is mandatory for undertaking any
commercial import or export of
goods and a multimodal transport
operator license is required for
every entity engaged in transport of
goods by any two modes: road, sea
or air.
While regulations and
registrations may mean more
compliance, these assist in
structured and consistent growth
and augmentation in the SME
sector and consequently, India’s
economy.
Author is a Senior Partner at
LexCounsel, Law Offices, has more
than 17 years of experience. She
is recognised for her capability of
structuring innovative investment models and
has considerable transactional experience in
representing corporations on regulatory and
licensing issues, complex acquisitions and
divestments, investment structuring and exits,
collaborations and debt/equity funding, tax
structuring and related documentation.