[Opinion] Expansion of Small Company in line with Government’s Ease of Doing Business Initiative

[2022] 142 taxmann.com 380 (Article)

Introduction

‘Small company’ is defined under section 2(85) of the Companies Act, 2013 (18 of 2013). The definition has undergone amendment by the Companies (Amendment) Act, 2017 (w.e.f. 9-2-2018). Earlier, an amendment has also been carried out (w.e.f. 13-2-2015) by the Companies (Removal of Difficulties) Order, 2015 in view of powers enumerated under section 470 of the 2013 Act.

With effect from 1-4-2021, the definition under section 2(85) is to be read with Rule 2(1)(t) of the Companies (Specification of Definitions Details) Rules, 2014. This Rule has recently been amended with effect from 15-9-2022by the Companies (Specification of Definitions Details) Amendment Rules, 2022 vide MCA Notification No. GSR 700(E), dated 15-9-2022.

Which company can be described as a ‘small company’?

(1) Definition stood between 1-4-2014 and 12-2-2015:
At that time, ‘small company’ meant that company whose either paid-up share capital had not exceeded Rs. 50 lakhs or that company whose turnover as per its last P&L account had not exceeded Rs. 2 crores.

Thus, to qualify as a ‘small company’, either of the above conditions had to be fulfilled, i.e., the conditions are non-cumulative in nature.

For example, if a company’s paid-up share capital was Rs. 25 lakhs and turnover more than Rs. 2 crores (upper limit is unrestricted), then such company qualified to be a ‘small company’ since paid-up capital is less than the permissible limit. Even if that company’s paid-up share capital was more than Rs. 50 lakhs (any number) and turnover up to Rs. 2 crores, then also such company qualified to be a ‘small company’ since turnover is without the limit.

Between and including those dates, no higher limit had been prescribed either for the paid-up share capital or for turnover vide Rules. However, an outer (or maximum) limit has been enumerated in the statutory provision which should not be breached in prescribing the higher limits, if any. Thus, for paid-up share capital, maximum limit had been prescribed was of Rs. 5 crores and for turnover, Rs. 20 crores.

(2) Definition stood between 13-2-2015 and 8-2-2018:
The definition of the ‘small company’ has been amended (w.e.f. 13-2-2015) by the Companies Removal of Difficulties Order, 2015 due to the difficulties arisen in this regard as companies which, though, met one of the criteria but exceed the monetary limit in respect of second criteria excessively (or even minutely) are also getting classified as ‘small companies’.

Thus, between 13-2-2015 and 8-2-2018, to qualify as a ‘small company’, both the criteria, i.e., paid-up share capital not exceeding Rs. 50 lakhs and turnover not exceeding Rs. 2 crores, must be satisfied simultaneously. In other words, only those companies would have qualified to be a ‘small company’ in that period only if its paid-up share capital had not exceeded Rs. 50 lakhs and turnover had not exceeded Rs. 2 crores.

Between and including those dates, no higher limit had been prescribed either for the paid-up share capital or for turnover vide Rules. However, an outer (or maximum) limit has been enumerated in the statutory provision which should not be breached in prescribing the higher limits, if any. Thus, for paid-up share capital, maximum limit had been prescribed was of Rs. 5 crores and for turnover, Rs. 20 crores.

(3) Definition stood between 9-2-2018 and 31-3-2021:
With effect from 9-2-2018, by the Companies (Amendment) Act, 2017, the definition has been amended on twin counts:—

Firstly, the outer limit of prescription had been amended for both the criteria. For paid-up share capital, it had been raised to Rs. 10 crores (from 5 crores); and for turnover, it had been raised to Rs. 100 crores (from 20 crores). This was of little importance since no rules had been prescribed in that meantime by the Central Government.

Secondly, turnover outlook had been amended. Earlier, turnover had to be seen as per the company’s last P&L account; but after the amendment, turnover had to be seen as per P&L account for the immediately preceding financial year of the company. Thus, for FY 2020-21, turnover had to be seen of FY 2019-20.

Thus, after making the above amendments, ‘small company’, for the then period, meant that company whose paid-up share capital had not exceeded Rs. 50 lakhs and whose turnover as per P&L account for the immediately preceding financial year had not exceeded Rs. 2 crores.

(4) Definition stood between 1-4-2021 and 14-9-2022:
Amending the Companies (Specification of Definitions Details) Rules, 2014, by the Companies (Specification of Definitions Details) Amendment Rules, 2021 with effect from 1-4-2021, the higher limits of paid-up share capital and turnover, for the purposes of definition of ‘small company’, had been prescribed vide inserting clause (t) to Rule 2(1) of the 2014 Rules.

Thus, between 1-4-2021 and 14-9-2022, ‘small company’ meant that company whose paid-up share capital had not exceeded the prescribed limit of Rs. 2 crores and whose turnover as per P&L account for the immediately preceding financial year had not exceeded Rs. 20 crores.

On and from 1-4-2021, the outer limit of prescription has gained importance due to the fact the power to prescribe the higher amount has been exercised in lieu of section 2(85) by the Central Government.

This move, as per Hon’ble Finance Minister’s Budget Speech (2021-2022),

“will benefit more than two lakh companies in easing their compliance requirements”.

(5) Definition applicable with effect from 15-9-2022:
Again, amending the Companies (Specification of Definitions Details) Rules, 2014, by the Companies (Specification of Definitions Details) Amendment Rules, 2022 with effect from 15-9-2022, the threshold limits for paid-up share capital and turnover, for the purposes of definition of ‘small company’, have been doubled, i.e., increased to Rs. 4 crores (from Rs. 2 crores) and increased to Rs. 40 crores (from Rs. 20 crores) in case of paid-up share capital and turnover, respectively.

Therefore, on and from 15-9-2022, ‘small company’ means a company whose paid-up share capital had not exceeded the prescribed limit of Rs. 4 crores and whose turnover as per P&L account for the immediately preceding financial year had not exceeded Rs. 40 crores.

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