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Less than 34 lakh MSMEs register on Udyam in 11 months; experts say compliance burden reason for low enrollment

Most small enterprises do not register and declare their existence because they find it more suitable to stay away from the compliance structure. Add to it the hazards of facing income tax scrutiny


Micro, Small and Medium Enterprises (MSMEs) have been less than enthusiastic about registering with the new portal, Udyam Registration.

Why? The fear of compliance and the dread of the income tax net, say experts.

Almost a year since the new registration portal, Udyam Registration for Micro, Small and Medium Enterprises came into being on July 1, 2020, only 33.95 lakh MSMEs have registered on it as of June 23, 2021.

On June 26, 2020 the Ministry of Micro, Small and Medium Enterprises issued a notification changing the definition of MSMEs and introducing a new process for enrollment known as Udyam Registration.

The notification stated that the existing MSME registrations, Udyog Aadhaar Number (UAN) or Enterprise Memorandum (EM), would be invalid after March 31, 2021.

The notification had announced that all existing enterprises already registered under UAN need to re-register in Udyam under the new system by the cut-off date of March 31, 2021.

However, on June 17, the MSME Ministry extended the validity of Udyog Aadhaar Memorandum (UAM) to December 31, 2021.

MSMEs, which self-certify their existence by registering on the government portal, are eligible for a wide variety of benefits ranging from interest rate subsidy on bank loans, to exemption under direct tax laws and concession in electricity bills, among others.

The extension of the validity deadline would facilitate MSMEs registered to avail benefits of the provisions under various existing schemes and incentives, including priority sector lending benefits of MSME.

There are an estimated 6.3 crore MSMEs, as per the National Sample Survey, 73rd Round (2015-2016).

About 1.02 crore MSMEs are registered till date under UAM, the old scheme.

Commenting on the slow pace of registrations under both the erstwhile system (UAM) and the ongoing Udyam, a functionary of Rashtriya Swayamsevak Sangh (RSS)-affiliated Union of Small and Medium Enterprises, speaking on the condition of anonymity said, "Most MSMEs do not register and declare their existence because they find it more suitable to stay away from the compliance structure. If they register, they would have to declare a lot of details like turnover, which they do not wish to do."

To incentivise more MSMEs to register on Udyam, the government has even eased the registration process by removing the mandatory GSTIN.

Earlier GST registration was mandatory for Udyam, but now it stands exempted for those units which are not eligible for GST registration.

The Udyam portal, like the Udyog Aadhar, is a free, paperless online and instant registration portal. Under the Udyam registration process, Aadhaar is made mandatory for entrepreneurs, whereas companies must provide their GSTIN and PAN along with the Aadhaar number.

According to a former chairperson of MSME Council in a industry body, MSME  units do not want to expose their existence and come under the radar of the compliance structure as it would lead to added compliance costs.

The person noted that many do not register simply because they do not wish to reveal their existence - it helps in evading taxes and other responsibilities.

"There are several reasons for the low registration," said Ranjeet Mehta, an MSME expert.

"There is a lack of awareness about the registration system and the various benefits, which are attached to it. While the MSMEs in the Tier 1 cities and those in industrial hubs are aware, many others don't even know about Udyam,” he points out.

Like others, Mehta believes that ``the fear of added compliance costs makes the MSMEs wary of registering as they find it to be burdensome."

``Another reason for low registrations is MSMEs do not wish to come within the ambit of income tax authorities as the entities would have to declare their transactions and turnover,” he said.

Vinod Kumar, President India SME Forum, assigned several reasons for the overall lack of registrations.

Due to the mandatory GST criteria, many micro enterprises, whose turnover is lesser than Rs 40 lakh, could not register on Udyam as they did not fulfil the GSTIN criteria, he said.

Like the others, Kumar too believes many MSMEs do not wish to be caught up with the compliance burden and added costs that accompany it.

"Most MSMEs feel that they are better off without registering as the compliance costs would be much greater than the benefits that they could avail post registration. Hence even under Udyog Aadhaar, only the 1 crore MSMEs registered were keen to avail the benefits," he observed.

Add to compliance is the reluctance to come under the income tax radar, said Kumar.

"A number of MSMEs find it incentivising when they stay small and perform their transactions in cash because if they register they would be required to provide their income, turnover and other such details to the authorities,” he observed, much like the other experts.

A ministry official, speaking on the condition of anonymity said, " Registrations are low because a lot of MSMEs are not aware about Udyam. Hence the government increased the validity of Udyog till December. Several initiatives are also being undertaken to increase awareness." Maybe, that is a way out.