How Small Companies enjoy lower Tax Compliance in India?

Every Startup or business setup as a company tend to start small for few years before launching itself as a major, viable company. Govt of India, amended the "Small Company" definition by increasing the turnover limit and paid-up capital to include most of the companies under Small Company definition.

Know more on new IT, ROC rules for Small Companies to ease the compliance burden.

This document covers

How Small Company Definition changed over the time?
Benefits of being a "Small Company"

1. How Small Company Definition changed over the time?

The concept of small company was introduced under Section 2(85) of the Companies Act was further amended to reduce compliance burden on small companies. The Ministry of Corporate Affairs (MCA) revised the definition of "Small Company" to facilitate Ease of doing business and reduce compliance burden as the small companies contribute to growth and employment in significant manner.

The new "Small Company" categorised based on the maximum paid up share capital and the turnover of the previous financial year (FY)

Period	Max. Paid Up Share Capital	Turnover
till 31st Mar 2021	50 Lakhs	2 Crores
from 01st Apr 2021 to 14th Sep 2022	2 Crores	20 Crores
from 15th Sep 2022 (NEW)	4 Crores	40 Crores

78,543

Estimated number of active companies whose turnover between Rs.1 and Rs. 40 Crores per IT Returns filed in FY 2020-21, who may get benefitted from the new rules.

120,222

Estimated number of active companies whose turnover recorded NIL (Zero) per IT Returns filed in FY 2020-21, who may also get benefitted in case such companies are filing their taxes and compliance.

2. Benefits of being a "Small Company"

Being a small company will help the companies in reducing their compliance burden and they can increase their focus on developing the business instead of compliance. Below are the some of the benefits of small company

1. Number of Board Meetings

Every company is required to hold 4 board meetings in a year. But in case of small companies, 2 board meetings per year are sufficient. The time gap between 2 board meetings should not be less than 90 days.

2. Cash Flow Statements

Generally Financial statements includes cash flow statements also. But Small Companies are exempted from preparing Cash Flow Statements.

3. Mandatory rotation of Auditor not required

Auditor needs to be rotated (changed) for every 5 years for the companies other than small companies. Small Companies are exempted from rotating Auditor for every 5 years. They can continue the same auditor

4. Reporting of Internal Controls

An Auditor of a small company is not required to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report.

5. Certification not required

Annual returns of the small companies can be signed by the director of the company instead of practicing professionals

6. Abridged Annual Return

Small companies can prepare director report in abridged (shorter format). MGT 7A has been prescribed by MCA towards Annual return by Small Companies / OPC

7. Lesser penalties for small companies

While this is subjective, Govt of India committed to provide the relief for small companies to file their compliances and close if needed. While such benefits available for DIPP accredited Startups, the latest announcement is a big relief to founders, MDs and entrepreneur.

The definition of small company is specific to each company and the company status might change depending on the turnover and paid-up capital of every year. Hence the companies needs to determine the status every year.