Govt looks to scrap minor penalties for MSMEs in ease of doing business push

“There are provisions from the MSMED Act that are likely to be a part of the Jan Vishwas Bill 2.0, and section 27 has been discussed for this,” said the first official cited above, speaking on the condition of anonymity.

The Jan Vishwas Bill 2.0, announced by finance minister Nirmala Sitharaman in her FY26 budget speech, will include 100 laws to be decriminalised. It follows the first edition of the Bill, passed in 2023, which removed criminal penalties from nearly 180 provisions in Indian laws.

The decriminalisation, when it happens, is likely to help India’s 6.5 crore registered MSMEs save on valuable capital by plugging the leaks of minor penalties. These MSMEs contribute about 30% to the country’s total economic output and about 45% of total exports.

The second official said stakeholder discussions are underway and that some provisions from the MSMED Act that legislate minor penalties for MSMEs may be included in the new Bill.

Section 27 calls for MSMEs to be penalised for non-disclosures related to business operations to state or central governments. It enlists penalties in the range of ₹1,000-10,000 for MSMEs in three cases.

• In case the enterprise fails to furnish information required by the state or central government, it is liable for a ₹1,000 penalty.
• Repeat violations can attract a penalty up to ₹10,000.
• Buyers, typically a larger business, should state in their annual statement of accounts the principal amount and the interest on it which is unpaid as on the day of the audit, or risk paying a ₹10,000 penalty

An email query sent to the MSME ministry on 4 July remained unanswered till press time.

Easing burden

The decriminalization of laws is essential for MSMEs as it directly contributes to reducing the compliance burden, according to Sameer Gogia, executive director, Deloitte India.

“For MSMEs, which often operate with limited resources, the fear of facing criminal penalties for minor violations can act as a significant deterrent to growth and innovation. Criminalizing minor errors or failures to comply with regulatory requirements may expose these businesses to unnecessary legal risks and financial burdens, which they are ill-equipped to handle,” he said.

Multiple industry bodies which represent Indian MSMEs indicated that enhancing ease of doing business is of utmost importance, as these enterprises have to go through complex procedures and long delays to register their business formally.

Vinod Kumar, president of the India SME Forum, which represents about 97,000 MSMEs, said that these enterprises also do not have capital to maintain robust compliance teams, as most smaller businesses are one-person proprietorships or partnerships.

Proprietorships made up nearly 80% of the goods and services tax (GST) payers in the country as of June 2024, while partnerships made up about 10%, according to data released by the government on seven years of the implementation of GST.

Indian MSMEs also face a credit crunch, often due to complex regulations, and are penalised for violations. “These businesses are required to comply with numerous laws, taxes, and filing requirements that are difficult to manage due to their limited resources,” said Gogia of Deloitte India.

“This makes it hard for them to maintain consistent and accurate financial documentation, a critical component for accessing credit from formal financial institutions,” he added.