Red tape stifles small businesses, India’s job engine

Ritesh Kumar Singh highlights India’s youth unemployment crisis, emphasizing the need for small business support over corporate incentives. Simplifying tax systems and reducing regulatory burdens are vital for fostering entrepreneurship and job creation.

Ritesh Kumar Singh, the founder and chief executive of Indonomics Consulting based in New Delhi, highlighted a concerning issue in a statement to Nikkei Asia. He pointed out that nearly a quarter of India’s youth are facing unemployment, a situation that could undermine the recovery of consumer spending within the country. This, in turn, poses a risk not only to economic growth but also has the potential to cause political instability.


Backing small businesses, known for their labour-intensive nature, could create numerous job opportunities for the younger population. However, the government’s emphasis on attracting substantial investments from major corporations such as Tesla and Apple means that policy reforms beneficial to small enterprises are receiving minimal focus in New Delhi.
The initiatives undertaken by Prime Minister Narendra Modi’s government to encourage investment from large corporations—including lowering corporate income tax and providing incentives tied to production—are not resulting in substantial employment generation.
This lack of significant job creation is attributed to the success of sectors like the digital economy, which do not require a large workforce. Moreover, the push from stock markets for companies to optimize revenue per employee is leading these large businesses to invest more in automation technologies that reduce the need for human labour.
In India, small businesses encounter challenges not typically faced by larger corporations, particularly when it comes to securing bank loans. A significant number of these small enterprises operate in the service sector, putting them at a disadvantage since the credit assessment processes of Indian banks, especially those that are state-owned, tend to favour manufacturing sectors and tangible assets.
Moreover, small businesses disproportionately shoulder higher compliance costs. While registering a new business has become simpler, winding down an unsuccessful one is still a complex process. Additionally, for a limited liability partnership or a private limited company, changing the registered address from one state to another in India can be excessively burdensome.
Despite the implementation of the national goods and services tax (GST) in 2017, which was intended to establish a unified tax system across India, companies are still required to register in each of the country’s 28 states separately.
The complexity of having multiple tax rates, along with a growing accumulation of ambiguous regulations and guidelines open to various interpretations, gives tax inspectors leverage, which they sometimes use to demand bribes. Small businesses, like their larger counterparts, are entitled to receive refunds for the GST paid on business inputs for exports. However, navigating this refund process can be particularly challenging for them.
In 2017, an important modification was made to the Income Tax Act, which streamlined regulations while ensuring tax revenue was not affected. This amendment permits independent or self-employed professionals to calculate their income tax on 50% of their business earnings without having to keep detailed financial records, up to an annual revenue limit of 5 million rupees (Rs 50 Lakhs ).
However, these individuals are still obligated to enrol in the GST system if their income exceeds 2 million rupees (Rs 20 Lakhs), and in some regions, the threshold is as low as 1 million rupees. Additionally, while manufacturers are required to register for GST only when their revenue exceeds 4 million rupees, service-oriented businesses must do so at the 2 million rupee revenue mark.
Broadening the scope of the Income Tax Act amendment to include all types of self-employed individuals and increasing the GST registration threshold to 5 million rupees could motivate more individuals to launch their businesses, potentially leading to the creation of thousands of new jobs.
At present, the frequency of GST filings varies based on the business’s revenue and type, with certain businesses needing to submit returns monthly. Simplifying this by requiring all taxes, including GST, to be paid quarterly and filings to be made annually, similar to personal and corporate income tax returns, would reduce the compliance burden for businesses.
A commonly overlooked aspect is that the strategy behind Modinomics relies on a bureaucracy that is excessively controlling and lacks direct stakes, to implement reforms aimed at simplifying business operations. This approach misses the critical need for cutting down the expansive administrative apparatus of the country and limiting its arbitrary authority.
Additionally, with an emphasis on increasing tax revenues to shrink the budget deficit, the government under Modi has progressively increased its obligations for filing and reporting. This compels businesses to allocate more resources and finances on consulting services, accounting, and frequently, on bribes for regulatory inspectors, diverting attention away from business growth.
This approach is detrimental to entrepreneurial spirit, as it deters small businesses and novice entrepreneurs, thereby exacerbating the unemployment issue in India.
Regarding improving business operations, India could take cues from nations like Estonia. In Estonia, the processes for initiating and closing a business are straightforward, and the tax regulations are clear-cut. The nation’s uniform income tax rate of 20% for both individuals and corporations eases the tax calculation process and offers businesses a sense of financial stability as informed by Nikkei Asia media house
The tax reductions implemented by the Modi administration have been particularly aimed at corporations, which constitute only 10% of businesses in India. This leaves out limited liability partnerships, other partnership forms, and sole proprietorships entirely.
However, the issue of unemployment in India cannot be resolved solely by large corporations. Small businesses are a significant employment source, accounting for approximately 40% of the non-agricultural workforce in the country, which is about four times the employment provided by larger corporate entities.
The government frequently expresses its desire to foster entrepreneurship and job creation, which is a commendable goal. However, the reality of escalating compliance demands poses significant challenges for new entrepreneurs and small businesses.

In a market-driven economy, job creation is primarily the responsibility of businesses. To support this, the Indian government needs to reduce compliance obligations and effectively dismantle the pervasive culture of regulatory oversight, not just in theory but in practice as well. This is crucial if the Modi administration is genuinely committed to stimulating the dynamic forces of the Indian economy and generating employment opportunities for the millions of young people entering the job market.

(The author Girish Linganna of this article is a Defence, Aerospace & Political Analyst based in Bengaluru. He is also Director of ADD Engineering Components, India, Pvt. Ltd, a subsidiary of ADD Engineering GmbH, Germany. You can reach out to him at: [email protected])

(Views expressed in the article are of author’s own and do not reflect the editorial stance of Business Upturn)