500 micro cuts: Compliance burden weighs heavy on MSMEs that have to adhere to over micro regulations every year

The number of regulations that an entrepreneur has to comply with is much like a tangled web. And if they trip, it can prove costly. Sample this: failure to whitewash washrooms once every four months, or varnish woodwork in cafeterias, or display maternity benefits on a billboard can land an entrepreneur in jail. These are just a few of the 512 regulations that micro, small and medium enterprises (MSMEs) with a single factory in a state have to comply with annually on average, say experts, calling for urgent reforms. If recurring compliances such as provident fund or employees’ state insurance, which need to be observed monthly, are considered, the number surges to 1,649 on average. While 68% of the compliances are embedded in labour laws, making them difficult to change, 40% of them carry criminal liability, with imprisonment terms ranging from one to three years. “These micro-regulations act as stumbling blocks for micro and small enterprises without achieving any desirable outcome, making compliance a costly exercise for MSMEs, along with providing phenomenal armament to the inspector for underhand dealings,” says Rishi Agrawal, cofounder and CEO of TeamLease Regtech. Many of these mandatory requirements reflect the social and economic milieu that existed more than seven decades ago. “It is possible that these provisions (part of Factories Act, 1948), when framed, served a purpose, but now, in the 25th year of the 21st century, they have lost their relevance,” says Agrawal. While these impact manufacturing enterprises regardless of size, they pinch MSMEs more. “MSMEs often struggle with the time, cost and complexity of meeting various regulatory requirements, hindering their growth and development. The compliance burden remains disproportionately higher compared with large businesses,” says Anil Bhardwaj, secretary general, Federation of Indian Micro and Small & Medium Enterprises. Nikhil Anand Khurana, MD and CEO of Folks Motor, an MSME enterprise, cites a specific figure in this regard. “Our compliance cost, which includes complying with labour, finance, taxation and payroll and other rules, comes to Rs 2 lakh monthly,” he says. JAN VISHWAS 2.0 The demand for easing compliance burden comes at a time when the Centre is undertaking another exercise to decriminalise several laws. Appealing to the industry to come forward with their inputs on decriminalising laws regulating business and services, Piyush Goyal, minister of commerce & industry, said, “The idea is we will expand Jan Vishwas 2.0 in the next few days based on whatever inputs all of you give us. We have decriminalised 355 sections in Jan Vishwas Bill 2.0, I want to take it up to 1,355 so the select committee will be seeking suggestions.” The minister also hinted that provisions under Jan Vishwas (Amendment of Provisions) Bill, 2025, decriminalising laws, may have retrospective application, which will bring relief to stakeholders already embroiled in legal battles under various sections carrying criminal liability. Under the earlier Jan Vishwas (Amendment of Provisions) Act, 2023, 183 provisions in 42 acts related to 19 departments were decriminalised. Overall, more than 40,000 compliances have been eliminated or simplified and there is a concerted push to further reduce the burden of criminal liability in many laws. But this alone may not help, say experts.“There’s limited impact as states haven’t picked up on the decriminalising exercise or adopted labour codes,” says Agrawal. A small chemical manufacturing enterprise with a single manufacturing unit operating in Maharashtra faces 635 obligations, according to a TeamLease Regtech study. “A lot of effort is required to comply with labour, environment, taxation and financial regulations. Repetition of permission is another issue with local, state and central governments inspecting the same thing at times,” says Aniruddha Rajurkar, CEO, SAVA Healthcare. If the four labour codes—pertaining to wages, industrial relations, occupational safety and health, and working conditions—are implemented, they are expected to reduce 70-80% of compliance burden of smaller enterprises. “The four codes will subsume 29 acts and criminality will go down by 80% if these codes are adopted,” says Agrawal. Even states considered more investorfriendly, such as Gujarat and Maharashtra, have a long list of regulations for small enterprises, according to experts. The goods and services tax (GST) framework also requires a reset to ease compliance and boost formalisation, they say. As things stand, MSMEs are forced to hire professionals to comply with financial and taxation regulations, which adds to their costs. “The need for accounting professionals on the part of small enterprises arises from criminal liability that many tax laws carry if these enterprises report incorrect data, even if the mistake was inadvertent,” says DP Goel, co-chair, MSMEs Committee, PHD Chamber of Commerce and Industry. Many enterprises are choosing to remain small and informal as they desperately try to avoid the web of regulations which will apply to them if they grow bigger. This remains the case even as the government has amended the definition of an MSME to aid the segment’s growth, raising the cap for investment in plant and machinery and annual turnover for categorising MSMEs by 2.5 times and 2 times, respectively. A focused simplification and rationalisation of regulations could not just aid the growth of the sector but also boost the government’s formalisation drive, say experts. “Technology or software can bring down the compliance cost sharply for payroll and taxation regulations, akin to how people can file their own income tax on the portal without taking help from a third party,” says Agrawal. While industry executives have welcomed the GST rate rationalisation, they have asked for the setting up of a mechanism to utilise input credit. “Rationalisation of GST is an important reform. It will benefit a large number of consumers. However, there is a need to work out a mechanism to utilise the balance unspent input credit, as in many products GST becomes lower on the final product than on inputs,” said Bhardwaj. Further, the government’s focus on selfreliance in critical areas such as defence, space, renewable energy and semiconductors will give these enterprises a boost, as “it will allow widespread adoption of technology by MSMEs and also reduce the cost of new technology through intense competition in the MSME sector”, he says.