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BUDDHA ACADEMY TIKAMGARH (MP) || ☺ || CPCT_Admission_Open

created Nov 21st 2019, 09:58 by ddayal2004


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Smaller business entities are often associated with the informal sector and widely believed to dodge taxes and bypass tough labour regulations. However, an increasing number of firms engaged in consultancy, research and advisory, and other knowledge intensive services often with substantial portion of their sales as exports are part of the country's formal sector.
 
Though such firms have fewer employees compared to large firms, they are registered with registrar of companies and GSTIN network, and are usually tax compliant. Yet, they are subject to several disadvantages that big businesses don’t have to face and that affect their cost competitiveness and growth prospects. The result is lower investment and loss of thousands of potential jobs.
 
Nurturing this sub-segment of the formal sector will aid economic growth, improve tax to GDP ratio and create good jobs that the government has been trying to achieve through its formalisation attempts. While demonetisation jolted the informal sector dependent on cash, heavy indebtedness has been troubling large corporations, while the compliance burden is suffocating the smaller business sub-segment of the formal economy.
 
Reducing compliance burden and associated costs for small businesses is a low hanging fruit that need not be postponed for the future, if we're serious about achieving our $5 trillion dream by 2024. While low interest rates or low cost credit won't hurt small business entities, it's not the cost of credit but availability of institutional credit that is hampering their growth prospects. While investors insist on their incorporation as private limited companies, banks don't like the idea of limited liability set ups.
 
A large number of firms in this sub-segment deal in services, but the banks' credit appraisal and disbursal system is more suited to manufacturing firms. Thus, when a newly incorporated consultancy services company approached the country's second largest public sector bank by market cap for a loan, the bank refused to oblige saying that the value of company's tangible assets should be at least ten times the loan value.
 
Personal guarantee of the company's directors with Cibil scores of 800 was no help either. Banks look for ownership of land, factory sites or stock in trade as collaterals that small service companies with few assets may not be able to furnish, and thus are denied bank credit.
 
Delayed payment from larger private and public sector companies is a common irritant for smaller firms supplying goods and services to them. Many smaller firms do export but our banks have been fleecing them by extracting exorbitant forex conversion charges that could be as much as 3%. No wonder, India's global export share is so low compared to its size and potential.

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