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Th I tit t f Ch t d A t t f I di

A BIRDS EYE VIEW OF MICRO,

SMALL & MEDIUM ENTERPRISES(MSMEs) AND SMALL & MEDIUM

PRACTITIONERS IN INDIAN

ECONOMY

Committee for Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF&SMP)


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A Birds Eye View of Micro,Small & Medium Enterprises(MSMEs) and Small & Medium

Practitioners in IndianEconomy

Committee for Capacity Building of CA Firms and

Small & Medium Practitioners(CCBCAF&SMP)The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)

New Delhi


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The Institute of Chartered Accountants of India

All r ights reserved. No part of this publication may be reproduced, stored in aretrieval system, or transmitted, in any form, or by any means, electronicmechanical, photocopying, recording, or otherwise, without prior permission,in writing, from the publisher.

DISCLAIMER:

The views expressed in this book are those of author(s). The Institute of Chartered

Accountants of India may not necessar ily subscr ibe to the views expressed by the

author(s).

The information cited in this book drawn from various sources while every efforts

have been made to keep the information cited in this book error free, the institute or

any office do not take the responsibility for any typographical or clerical error whichmay have crept in while compiling the information provided in this book. Further, the

information provided in this book are subject to the provisions contained under

different acts and members are advised to refer to those relevant provisions also.

Edition : January, 2012

Committee/Department : Committee for Capacity Building of CA Firmsand Small & Medium Practitioners(CCBCAF&SMP), ICAI

E-mail : [email protected]

Website : www.icai.org

Price : ` 100/- (including CD)

ISBN : 978-81-8441-514-8

Published by : The Publication Department on behalf of theInstitute of Chartered Accountants of India,ICAI Bhawan, Post Box No. 7100, IndraprasthaMarg, New Delhi - 110 002.

Printed by : Sahitya Bhawan Publications, Hospital Road,Agra-282 003.

January/2012/500 Copies


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Foreword

Small and medium sized enterprises (SMEs) represent over 90% ofenterprises in most countries, worldwide. They are the driving force behind alarge number of innovations and contribute to the growth of the nationaleconomy through employment creation, investments and exports.

The conditions of Market and Regulatory environment within which SMEs areoperating is constantly changing and as a corollary, the requirement forbusiness advisory services is the need of the hour. Government regulatorychanges in the requirements for audit is probably the most pertinent issue,

but other factors are also affecting the demand for advice and support suchas the need to meet other regulatory requirements as well as coping withthreats and opportunities in the marketplace. This presents new challengesand opportunities for the providers of advice and services. Accountants arein a strong position to fulfill the needs of SMEs, but it is important that theadvice and services the Chartered Accountants provide are fit for purpose

and of high quality.

Small & Medium Practitioners play a significant role in providing businessadvisory services to the SMEs in Indian Economy. I am glad to know that theCommittee for Capacity Building of CA Firms and Small & MediumPractitioners (CCBCAF & SMP) of our Institute has brought out the book onA Birds Eye view of Micro, Small & Medium Enterprises (MSMEs) and

Small & Medium Practitioners in Indian Economy.

I congratulate the Committee for its efforts in the release of this book andplace on record my appreciation for the contributors and hope that thispublication would help the members in enhancing their Knowledge base inthe practice portfolio.

January 27, 2012 CA. G. RamaswamyNew Delhi President, ICAI


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Preface

The object of this study is to raise awareness about the significance of Micro,Small and Medium Enterprises (MSMEs), their contribution to Indianeconomy, relevant laws governing such enterprises and relationship withSmall and Medium Chartered Accountant Practitioners (SMPs). Evidently theMicro, Small and Medium Enterprises (MSMEs) have significant market placeand expanding in area of manufacturing and services. Their markets aredynamic and range of regulatory requirements for business is growing.MSMEs constitute the overwhelming majority of private sector in India.However, because of limited capability and in-house expertise, theyfrequently seek external advice and support. Such advice and support are

required at reasonable financial cost but owner-managers are reluctant tospend time.

SMPs are the most popular source of external advice and support to MSMEs.Historically the MSME-SMP relationship is regarded as being underpinnedwith need for MSMEs to have statutory audit and taxation, advisory workeven though these jobs are foundation for subsequent advice and support.This study describes the compliance and non-compliance areas where SMPscan provide services to MSMEs, and reasons for requirement of suchservices. Attention given for preparedness of SMP by The Institute ofChartered Accountants of India (ICAI) and specially by Committee forCBCAF & SMP also forms part of this study. I hope this book on A BirdsEye view of Micro, Small & Medium Enterprises (MSMEs) and Small &

Medium Practitioners in Indian Economy will be a very useful supportmaterial for MSMEs and SMPs.

I place on record my deep sense of gratitude of CA. K.L. Jhanwar & histeam includes partners and articled assistants particularly Shivangi Kabra,Vinayak Malpani and Shefali Gangwal for preparing the basic draft of thispublication thereby sharing his relevant experience and expertise amongstmembers. I appreciate the efforts put in by the members of CCBCAF & SMPand officials of CCBCAF & SMP Secretariat, who have provided necessarysupport for publishing the aforesaid book.

January 25, 2012 CA. Vijay Kumar Garg

ChairmanCommittee for Capacity Building of CA Firms

and Small & Medium Practitioners, ICAI


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Contents

S.No. Topic Page No.

Foreword by President, ICAI iii

Preface by Chairman, CCBCAF & SMP v

Part- A Micro Small and Medium Enterprises (MSMEs)

1. Background 32. International Scenario 53. National Scenario 64. Statutory Recognition 75. Classes of Enterprises 86. Other Important Provisions 97. Performance of MSMEs 118. Comparison of the Micro and Small Enterprises (MSEs)

Sector with the overall industrial sector 13

9. Contribution of MSMEs in the GDP 1410. Employment in the MSME sector 1511. Charts showing other statistics of the sector 1612. Major issues concerning the MSME sector 1913. Policy Initiatives by Government 2014. Linkage with potential challenges likely to be

addressed in the 12th plan 2115. Nature of activity by MSME 2216. Type of Organization 2317. Type of Management/ Ownership 24Part- B Small and Medium Chartered Accountants

Practitioners (SMPs)

1. International Scenario 272. National Scenario 283. Presence and position of MSME sector and SMP 304. Expectation of MSMEs from SMPs 315. Business Support Services by SMPs(a) Non- Compliance Areas

(i) Project Finance(ii) Due Diligence

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viii

(iii) Insurance Area(iv)

Insurance Litigation(v) Risk Assessment

(vi) Performance Measurement Services(vii) Business Performance Improvement(viii) Long Term Strategic Partner(ix) Arbitration and Conciliation(x) Information Technology and Computer

Software Related Services

(xi) Services for Carbon Credit Mechanism(xii) Services required for Environmental

Laws

(b) Compliance/ Statutory Work(i) Preparation of Statutory Financial

Accounts

(ii) Audit of Accounts(iii) Compliance of Tax Laws

I) Direct Tax Income-Tax Wealth Tax House and Property Tax International Tax Service

II) Indirect Tax

Sales Tax Service Tax Customs Excise Value- Added Tax Anti- Dumping Duties

(iv) Labour Laws Contract Labour (Regulation &

Aboli tion) Act,1970 and Rules

Employee State Insurance Act,1948

Employees Provident Fund andMiscellaneous Provisions Act,1952

Payment of Bonus Act, 1965


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ix

Payment of Gratuity Act, 1972

Payment of Wages Act, 1936 Workmens Compensation Act,

1923

(v) The Foreign Contribution (Regulation)Act, 2010

6. Credit Availability to MSME And Support of SMP 477. Preparation And Presentation of Financial Statements

by MSME 48

8. Format of Financial Statements 509. Inherent Limitation of SMPs 5110. Measures of Preparedness of SMP to Serve MSMEs 5211. Publications by CCBCAF & SMP 5312. Reasons for use of SMPs services by MSMEs 5713. Conclusion 5814. Appendix I- Format of Balance Sheet of Non-

Corporate Manufacturing Entities 59

15. Appendix II- Statement of Profi t& Loss of Non-Corporate Manufacturing Entities 61

16. Appendix II I- Format of Balance Sheet of Non-Corporate Trading Entities 68

17. Appendix IV- Statement of Profit& Loss of Non-Corporate Trading Entities 70

18. Appendix V- Forms of Fund Flow Statement for Non-Corporate- Borrowers 77

19. Appendix VI -Audit Report for Non- Corporate-Borrowers 81

20. Appendix VII-Competency Programmes for SMPsarranged by CCBCAF & SMP 84


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Micro, Small, and MediumEnterprises (MSMEs)


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Chapter 1

Background

The National Commission for enterprises in unorganized sector (2007)states: There is no doubt that this Shining India has expanded in the pastand is still expanding at a very high rate. But this picture is spoiled byvirtually stagnant consumption expenditure and miserable working and livingcondition of 77 percent of our population who are poor and vulnerable..This is the India of the common peoplewhom growth process has, byand large, bypassed. Planning Commission special group provided theanswer on how to rectify the situation The only answer to the situation is toincrease productivity and job quality of the sector. It means all attemptsshould be made to implement those policies which will release the basicgrowth constraints.

According to the Industrial Policy Resolution of 1956, Small scaleenterprises provide immediate large scale employment; they offer a methodof ensuring a more equitable distribution of national income as they facilitatean effective mobilization of resources of capital and skill which mightotherwise remain unutilized. Some of the problems that unplannedurbanization tends to create will be avoided by the establishment of smallcenters of industrial production all over the country. The Policy Resolutionput forth four arguments in favour of small enterprises.

1. The Employment Argument2. The Equality Argument3. The Latent Resources Argument4. The Decentralization ArgumentThe Report of the Second All India Census of Small Scale Industries citesFinancial Problems as the reason for closure of 35 percent of the units. Thefinancial disability of small enterprises is beyond doubt. Considering the vitalrole of small enterprises within the Indian economy, the total amount of loansgranted to small enterprise firms is a very small part of the total loans to

Indias large industrial and business sector.


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A Birds Eye View of MSMEs and SMP in Indian Economy

4

TABLE 1: Reasons for Closure of Small Sector Units

S.No. Reasons Percent1. Financial Problem 34.7

2. Marketing Problem 14.4

3. Raw Material Problem 5.6

4. Disputes among owners 3.7

5. Natural Calamity 3.4

6. Labour Problem 2.2

7. More than one reason combined 16.5

8. Other reasons 19.4

Total 100.00

Source: The Report of the Second All India Census of Small Scale IndustrialUnits


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Chapter 2

International Scenario

United Nations also recognizes Micro, Small and Medium Enterprises(MSMEs) as engines of economic growth. United Nations Conference onTrade and Development (UNCTAD) is also supporting SMEs. The UNCTADgroup also states that SME sector plays an important role in economic

development:

It constitutes a major source of employment It provides most of the essential goods and services to the society

It generates significant domestic and export earnings SME development emerges as a key investment in poverty reduction

efforts

At the same t ime:

Access to finance is one of the key obstacles to SME development Lack of guidance in the area of financial reporting by SMEs

specifically at international level

The UNCTAD group recognized the need for a simple, understandable anduser-friendly accounting reporting system by SMEs.


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Chapter 3

National Scenario

On May 9, 2007, the Ministry of Small Scale Industries and Ministry of Agroand Rural Industries were merged to form the Ministry of Micro, Small andMedium Enterprises (MSMEs). This Ministry now designs policies andpromotes/facilitates programmes, projects and schemes and monitors their

implementation with a view to assisting MSMEs and helping them scale up.

In the advertisement, given by the Ministry of Micro, Small and MediumEnterprises published on eve of Jawaharlal Nehrus 122nd birthday,

milestones given are:

1. 261 lacs MSME in the country2. Provide employment to over 600lacs persons3. Manufactures more than 6000 products4. Total fixed investment of 5lacs crores in registered units alone5. Contribute 45 percent of total manufacturing output6. Accounts for 45 percent of exports7. Contributes 6 percent of GDPThe advertisement also gives information of recent initiative:

Central Ministries/ Departments/ PSUs to procure 20 percent of annualpurchases from MSEs mandatorily which includes 4 percent (20% of20%)procurement from SC/ST MSEs.


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Chapter 4

Statutory Recognition

Micro, Small and Medium Enterprises Development Act was notified in 2006to address policy issues effecting MSMEs as well as the coverage andinvestment ceiling of the sector. Salient features of the Act include:

Setting up of a National Board for MSMEs Classification of Enterprises Advisory committees to support MSMEs Measures for promotion development and enhancement of MSMEs Schemes to control delayed payments to MSMEs Enactment of rules by State Governments to implement the MSMEs

Act, 2006 in their respective states.


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Chapter 5

Classes of Enterprises

Industries (Development and Regulation) Act, 1951 had classified smallindustries. By superseding this law, Micro, Small and Medium EnterprisesDevelopment Act, 2006 (MSME Act,2006) classifies enterprises vide section7 as proprietorship, Hindu undivided family, association of persons, co-operative society, partnership firm, company for any undertaking by whatevername called:

a) In the case of enterprise, engaged in the manufacture or production ofgoods pertaining to any industry specified in the first schedule to the

Industries (Development and Regulation) Act,1951, as-

(i) A micro enterprise, where the investment in plant and machinerydoes not exceed twenty- five lakh rupees;

(ii) A small enterprise, where the investment in plant and machinery ismore than twenty- five lakh rupees but does not exceed five crorerupees; or

(iii) A medium enterprise, where the investment in plant and machineryis more than five crore rupees but does not exceed ten crorerupees;

b) In the case of enterprise, engaged in providing or rendering ofservices, as-

(i) A micro enterprise, where the investment in equipment does notexceed ten lakh rupees;

(ii) A small enterprise, where the investment in equipment is more thanten lakh rupees but does not exceed two crore rupees; or

(iii) A medium enterprise, where the investment in equipment is morethan two crore rupees but does not exceed five crore rupees;


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Chapter 6

Other Important Provisions(MSME Act 2006)

Delayed Payments to Micro and Small Enterprises:

Section 15:

Where any supplier supplies any goods or renders anyservices to any buyer, the buyer shall make paymenton or before the date agreed upon between him andthe supplier in writing or, where there is no agreement

in this behalf, before the appointed day:

Provided that in no case the period agreed uponbetween the supplier and the buyer in writing shallexceed forty- five days from the day of acceptance orthe day of deemed acceptance.

Liability of buyerto make

payment.

Section 16:

Where any buyer fails to make payment of the amountto the supplier, as required under section 15, the buyershall, notwithstanding anything contained in anyagreement between the buyer and the supplier or in

any law for the time being in force, be liable to paycompound interest with monthly rests to the supplier onthat amount from the appointed day or, as the casemay be, from the date immediately following the dateagreed upon, at three times of the bank rate notified bythe Reserve Bank.

Date from whichand rate atwhich interest ispayable.

Section 17:

For any goods supplied or services rendered by thesupplier, the buyer shall be liable to pay the amountwith interest thereon as provide under section 16.

Recovery of

amount due

Section 22:

Where any buyer is required to get his annual accountsaudited under any law for the time being in force, suchbuyer shall furnish the following additional information

Requirement tospecify unpaidamount with


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in his annual statement of accounts, namely:-

(a)

The principal amount and the interest duethereon (to be shown separately) remainingunpaid to any supplier as at the end of eachaccounting year;

(b) The amount of interest paid by the buyer interms of section 18, along with the amounts ofthe payment made to the supplier beyond theappointed day during each accounting year;

(c) The amount of interest due and payable for theperiod of delay in making payment (which havebeen paid but beyond the appointed day duringthe year) but without adding the interest

specified under this Act;(d) The amount of interest accrued and remaining

unpaid at the end of each accounting year; and

(e) The amount of further interest due and payableeven in the succeeding years, until such datewhen the interest dues as above are actuallypaid to the small enterprise, for the purpose ofdisallowance as a deductible expenditure undersection 23.

interest in theannualstatement ofaccounts.

Section 23:

Notwithstanding anything contained in Income Tax Act,

1961, the amount of interest payable or paid by anybuyer, under or in accordance with the provisions ofthis Act, shall not, for the purposes of computation ofincome under the Income Tax Act, 1961, be allowed asdeduction.

Interest not to

be allowed asdeduction from

income.


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Chapter 7

Performance of MSMEs

The Office of the Development Commissioner (MSME) provides estimates inrespect of various performance parameters relating to the Sector. The timeseries data in respect of the Sector on various economic parameters isincorporated in the following Table 2. It may be mentioned that data withrespect to MSMEs have been collected/compiled for the first time in 2006-07and hence include both the industry and service sectors. Till the year 2005-06, data in the Table 2 refer to micro and small scale industry only.

TABLE 2. MSMEs Performance: Units, Investment, Production,

Employment & Exports

Production

(Rs. Crore)

SL.

No.

Year Total

MSMEs

(lakh

numbers)

Fixed

Investment

(Rs.

Crore)Current

Prices

Employ-

ment

(lakh

person)

Exports

(Rs.

Crore)

73.51 106923 84413 174.84 177841. 1992-93

(4.07) (9.24) (4.71) (5.33) (28.10)

76.49 115795 98796 182.64 253072. 1993-94

(4.07) (5.63) (17.04) (4.46) (42.30)

79.60 123790 122154 191.40 290683. 1994-95(4.07) (6.9) (23.64) (4.79) (14.86)

82.84 125750 147712 197.93 364704. 1995-96

(4.07) (1.58) (20.92) (3.42) (25.46)

86.21 130560 167805 205.86 392485. 1996-97

(4.07) (3.82) (13.60) (4.00) (7.62)

89.71 133242 187217 213.16 444426. 1997-98

(4.07) (2.05) (11.57) (3.59) (13.23)

93.36 135482 210454 220.55 489797. 1998-99

(4.07) (1.68) (12.41) (3.46) (10.21)97.15 139982 233760 229.10 54200

8. 1999-00(4.07) (3.32) (11.07) (3.88) (10.66)

9. 2000-01 101.1 146845 261297 238.73 69797


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(4.07) (4.9) (11.78) (4.21) (28.78)

105.21 154349 282270 249.33 7124410. 2001-02(4.07) (5.11) (8.03) (4.44) (2.07)

109.49 162317 314850 260.21 8601311. 2002-03

(4.07) (5.16) (11.54) (4.36) (20.73)

113.95 170219 364547 217.42 9764412. 2003-04

(4.07) (4.87) (15.78) (4.31) (13.52)

118.59 178699 429796 282.57 12441713. 2004-05

(4.07) (4.98) (17.90) (4.11) (27.42)

123.41 188113 497842 294.91 15024214. 2005-06

(4.07) (5.27) (15.83) (4.37) (20.76)261.01 500758 709398 594.61 182538

15. 2006-07(111.48) (166.20) (42.49) (101.62) (21.50)

272.79 558190 790759 626.34 20201716. 2007-08

(4.51) (11.47) (11.47) (5.34) (10.67)

285.16 621753 880805 659.35 N.A.17. 2008-09

(4.53) (11.39) (11.39) (5.35)

298.08 693839 982919 695.38 N.A.18. 2009-10

(4.53) (11.59) (11.59) (5.47)

Source: Annual Report 2010-11 Ministry of MSME, Government of IndiaThe figures in brackets show the percentage growth over the previous year.The data for the period up to 2005-06 is of small scale industries (SSI).Subsequent to 2005-06, data with reference to micro, small and mediumenterprises (MSMEs) are being compiled.


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13

Chapter 8

Comparison of the Micro and SmallEnterprises (MSEs) Sector with the

Overall Industrial Sector

The MSE sector has maintained a higher rate of growth vis--vis the overallindustrial sector as would be clear from the comparative growth rates ofproduction for both the sectors during last five years as incorporated in the

Table 3

TABLE 3: Comparative Data on Growth Rates of MSE Sector

Year Growth rates of 2001-02

base IIP (%age)

Over all Industrial Growth

rates of sector (%age)#

2002-03 8.68 5.70

2003-04 9.64 7.00

2004-05 10.88 8.40

2005-06 12.32 5.20

2006-07 12.60 11.60

2007-08 13.00* 8.50

2008-09 Not Available 2.80

2009-10 Not Available 10.40*Projected IIP- Index of Industrial Production

#Source: Ministry of Statistics and Programme Implementation website-

http://www.mospi.gov.in


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Chapter 9

Contribution of MSMEs in the GrossDomestic Product (GDP)

TABLE 4:Contribution of MSEs in GDP

Contribution of MSEs (%) at 1999-2000 prices in

YearTotal industrial production

Gross Domestic

Product (GDP)

1999-00 39.74 5.86

2000-01 39.71 6.04

2001-02 39.12 5.77

2002-03 38.89 5.91

2003-04 38.74 5.79

2004-05 38.62 5.84

2005-06 38.56 5.83

2006-07 45.62 7.20

2007-08 45.24 8.00

2008-09 44.86 8.72

The data for the period up to 2005-06 is for small scale industries (SSI)

Source: Annual report 2010-11, Ministry of MSME, Government of India.


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Chapter 10

Employment in MSME Sector

Total employment in the MSE sector (including SSSBEs i.e. Small ScaleService Business Enterprises) in the country as per the Fourth Census ofMSEs with Reference Year 2006-07 was 594.61 lakh numbers. As per theestimates compiled for the year 2009-10, the employment was 695.38 lakh

persons in the sector.


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Chapter 11

Charts Showing other Statistics of theSector

a) Number of MSMEs

123.42

261.01272.79

285.16298.08

0

50

100

150

200

250

300

350

2005-06 2006-07 2007-08 2008-09 2009-10

No. of MSMEs

No. in lakhs

* Projected data for the year 2007-08 to 2009-10. ** Data for 2005-06 pertain

to small scale industries (SSI) only.

Source:Annual report 2010-11, Ministry of MSME, Government of India.

Year


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b) Employment in MSME Sector

294.91

594.61 626.34659.34 695.38

0

100

200300400

500

600

700800

Employment

Number in lakh person


to small scale industries (SSI) only.

c) Fixed Investment in MSME Sector

188113

500758558190

621753693835

0

100000

200000

300000

400000500000

600000

700000

800000

Fixed Investment

Value in Rs Crore


to small scale industries (SSI) only


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d) Production in terms of Gross Output in MSME Sector

497842

709398790759

880805982919

0

200000

400000

600000

800000

1000000

1200000

Production

Rs in crore at Current

Prices

* Projected data for the year 2007-08 to 2009-10. ** Data for 2005-06pertain to small scale industries (SSI) only.

Source:Annual report 2010-11, Ministry of MSME, Government of India.


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Chapter 12

Major Issues Concerning the MSMESector

Although Indian MSMEs are a diverse and heterogeneous group, they facesome common problems, which are briefly indicated below:

Lack of availability and timely credit; High cost of credit Collateral requirements; Limited access to equity capital; Problems in supply to government departments and agencies; Procurement of raw materials at a competitive cost; Problems of storage, designing, packaging and product display; Lack of access to global markets; Inadequate infrastructure facilities, including power, water, roads, etc; Low technology levels and lack of access to modern technology; Lack of skilled manpower for manufacturing, services, marketing, etc; Multiplicity of labour laws and complicated procedures associated with

compliance of such laws;

Absence of a suitable mechanism which enables the quick revival ofviable sick enterprises and allows unviable entities to close downspeedily; and

Issues relating to taxation, both direct and indirect, and proceduresthereof.


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Chapter 13

Policy Initiatives By Government

Ministry of MSME has considered certain factors while deciding outlines ofstrategy for development of the MSME.

1. External Factors2. Stakeholders3. Strength and weaknesses4. Need to learnWhile outlining the strategies, the Central Government has consideredmainly five aspects

1. Skill Development2. Markets3. Technology4. Infrastructure5. Credit AvailabilityThe Ministry of MSME has recently introduced ten innovative schemes underthe National Manufacturing Competitiveness Programme (NMCP) coveringentire gamut of manufacturing in the sector aiming to develop globalcompetitiveness among Indian MSMEs. These ten schemes are:

(i) Marketing Support/Assistance to MSMEs (Bar Code)(ii) Support for Entrepreneurial and Managerial Development of SMEsthrough Incubators(iii) Enabling Manufacturing Sector to be competitive through Quality

Management Standard & Quality Technology Tools (QMS/ QTT)

(iv) Building Awareness on Intellectual Property Rights (IPR) for MSME(v) Lean Manufacturing Competitiveness Scheme for MSMEs(vi) Mini Tool Rooms (MTR)(vii) Design Clinic Scheme for design expertise to MSMEs Manufacturing

sector (DESIGN)

(viii) Marketing Assistance & Technology Up gradation Scheme in MSMEs(ix) Technology and Quality Up gradation Support to MSMEs(x) Promotion of ICT in MSME Manufacturing Sector (ICT)These schemes under NMCP would get priority of the Ministry and wouldprovide competitive edge to the MSME units in future.


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Chapter 14

Linkage with Potential Challenges likelyto be Addressed in the 12th Plan

The following Twelve Strategy Challenges have been identified by thePlanning Commission for preparation of the XII Five Year Plan:

(i) Enhancing the Capacity for Growth(ii) Enhancing Skills and Faster Generation of Employment(iii) Managing the Environment(iv) Markets for Efficiency and Inclusion(v) Decentralization, Empowerment and Information(vi) Technology and Innovation(vii) Securing the Energy Future for India(viii) Accelerated Development of Transport Infrastructure(ix) Rural Transformation and Sustained Growth of Agriculture(x) Managing Urbanization(xi) Improved Access to Quality Education(xii) Better Preventive and Curative Health Care.


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Chapter 15

Nature of Activity by MSME

67.10 % of the enterprises in the registered MSME sector were engaged inmanufacturing/ assembling/processing, whereas 16.78 % of the units wereengaged in services activities as may be seen from the Table given below.The remaining 16.13 % of the enterprises were engaged in the repair and

maintenance.

Distribution by Nature of Activity No. in lakh

Manufacturing/ Assembling/ Processing 10.49 (67.10%)

Services 2.62 (16.78%)

Repairing & Maintenance 2.52 (16.13%)

Total 15.64 (100%)


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Chapter 16

Type of Organization

The table given below shows that 90.08% of the enterprises in the registeredMSME sector was proprietary concerns. About 4.01 % of the enterpriseswere run by partnerships and 2.78 % of the enterprises were run by privatecompanies. The rest were owned by public limited companies, Co-

operatives/ trusts or others.

Distribution by type of Organization: No. in lakh

Proprietary 14.09 (90.08%)

Partnership 0.63 (4.01%)

Pvt. Company 0.43 (2.78%)

Pub. Ltd. Company 0.08 (0.54%)

Cooperatives 0.05 (0.30%)

Others 0.36 (2.30%)


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Chapter 17

Type of Management/ Ownership

An enterprise (Manufacturing or Services) managed by one or more womenentrepreneurs in proprietary concerns, or in which she/ they individually or

jointly have a share capital of not less than 51% as partners/ share holders/Directors of Private Limited Company/ Members of Co-operative Society iscalled a Woman Enterprise. It was found that 13.72% (2.15 lakh) of the unitsin the registered MSME sector were women enterprises, whereas the shareof enterprises actually managed by women was also 13.72%.

No. of enterprises managed by No. in lakh

Male 13.49 (86.28%)

Female 2.15 (13.72%)

Total 15.64 (100%)

No. of women enterprises 2.15 (13.72%)


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Small & Medium CharteredAccountant Practitioners

(SMPs)


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Chapter 1

International Scenario

World over, it has been recognized that Micro Small and Medium Enterprises(MSMEs) have been continuously contributing a good amount to grossdomestic product and are a very large source of employment. The MSMEsare mostly in private sector. They always need continued service of small &medium practices (SMPs) as the MSMEs do not have in-house resources /expertise, something that SMPs can provide them. International Federationof Accountants (IFAC) also recognizes that MSMEs are in need of supportingservices of small & medium sized accountancy practices (SMPs).

It is also necessary to regulate and develop SMPs so that they can efficientlyprovide, with required skill, services to MSNEs in regulated manner. There aremajor constraints in operation for both MSMEs and SMPs in the areas of financing,market accessibility, regulatory challenges, and technological innovation.

IFAC has Small & Medium Practices Committee which works to addresschallenges considering needs of SMPs so as to enable them to renderservice to MSMEs in public interest. This committee looks to professionalinterest of SMPs who serve mostly the MSME sectors. This committeeensures that needs of the SMPs as MSMEs sector are considered whenstandards are formulated by standard setters. Concerned regulators aspolicy makers also look to the characteristics of MSMEs and SMPs whileframing the regulations and policies.

The SMP committee of IFAC has 18 volunteer members including a chairmanand a deputy chairman. The period of service as member can be 3 years andhe/she can serve up to 6 years . This committee comprehensively works toempower SMPs in organized manner in the following areas:

1. Implementation of standards,2. Practice management, and3. Business advisory.In SAARC region, small and medium enterprises also contribute significantlyto poverty reduction and inclusive growth. SMEs in all SAARC countries havemajor part of business providing the highest proportion of employment. Smalland medium size practices (SMPs) are also continuously providing significant

business support services to SMEs in SAARC region. SMPs have significantshare of the professional service market in many countries. SMPs have along relationship and are most approachable for services needed by SMEs inSAARC region.


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Chapter 2

National Scenario

Total membership of THE INSTITUTE OF CHARTERED ACCOUNTANTSOF INDIA (ICAI) is 1,76,574. Set up under an Act of Parliament i.e.Chartered Accountant Act, 1949, the position of its membership is as below:

Total members: 1,76,574

ACA: 1, 06,890(61%)

COP holders* 23,572(22%)

Non COP holders 83,318(78%)

FCA: 69,684 (39%)COP holders* 55,733(80%)

Non COP holders 13,951(20%)

* Includes CAs in service holding fulltime COP.

The Chartered Accountants in public practice running 46,671 firms spreadover the country, are mostly called small and medium practitioners (SMP).The position of these firms is as under:

Total firms: 48,671

Proprietary 34,462

Partnership

Partnership upto 5 partners 12866

Partnership upto 5-10 partners 1143



Total Partnership 14209

The Institute of Chartered Accountants Of India (ICAI) through its Committeefor Capacity Building of Chartered Accountants Firms and Small & MediumPractitioners (CCBCAF & SMP) which gives special attention to thedevelopment of Small and Medium Practitioners by providing essentialliteratures, arranging seminars, conferences, conducting courses, creating e-

library facility and Knowledge Portal, publishing brochures, books andresearch publication for purpose of enriching knowledge and workingcapacity of Small and Medium Practitioners.


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CCBCAF & SMP has a chairman, a vice-chairman. In addition, president andvice-president of The Institute of Chartered Accountants of India (ICAI) aremembers along with sixteen council members as member of the committeeand six other Chartered Accountants as co-opted members. President of theInstitute of Chartered Accountants of India (ICAI) has given terms ofreference for development of Small and Medium Practitioners (SMPs) as

under:

Developing ways and means to assist Small and Medium Practitionersto manage practice in efficient manner.

Strengthening networking rules to rejuvenate the practice portfolio ofSmall and Medium Practitioners.

Assisting Small and Medium Pract itioners in ident ifying new andexclusive areas of practice.

Developing and issue guidance relevant to practice areas of Small andMedium Practitioners.

Empowering Small and Medium Practitioners to apply technicalstandards in an efficient manner.

Assisting Small and Medium Pract itioners in improving their visibi lityamongst the business community and organizing programme inassociation with Chambers of Commerce.

Creating awareness amongst Small and Medium Practitioners aboutthe accounting, auditing and ethical standards through workshops,symposia etc.


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Chapter 3

Presence and Position of MSMESector and SMPs

4TH All INDIA Census of MSMEs conducted with reference period 2006-07was completed during 2010-11. Some important facts have emerged from thedata received from the States/UTs for registered part and extracted data-fileof Economic Census 2005 for unregistered MSMEs.

The size of the registered MSME sector is estimated to be 15, 63,974. Of thetotal working enterprises, the proportion of micro, small and medium

enterprises was 94.94%, 4.89% and 0.17% respectively.This comprises of 67.10% manufacturing enterprises and 32.90% servicesenterprises. At the same time,45.23% (7.07 lakh) of the units were located inrural areas. If we examine the position of availability of SMPs which providesservices to these MSMEs, a total of 48.671 practicing firms across thecountry involving 78,923 Chartered Accountants are located as under:

Availability of SMPs (No.)

Partnership Firms

S.

No.

Places

Proprietary

Firms No. of

Firms

No. of Members

(Partners)

1. Metro cities i.e. Delhi,

Mumbai, Chennai,

Kolkata.

11,355 5,380 17,940

2. State Capitals ( other than

metro cities )3,611 2,185 7,316

3. District Head Quarter

( other than 1 & 2 above)15,409 5,662 16,517

4. Other rural areas

( other than all above)4,087 982 2688

Total 34,462 14,209 44,461

There are a sufficient number of Chartered accountants available for serving

the MSMEs in all parts of the country.


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Chapter 4

Expectations of MSMEs From SMPs

The expectations of todays user from the SMPs are Expertise, Experienceand Efficiency. However small and medium practitioners (SMPs) may nothave adequate manpower, may lack finance and may need soft skills toprovide to diverse needs of business clients. Further, MSMEs now expectdelivery of professional services at multi-locational areas through a SinglePoint Outlet. The SMPs, usually small in size, may not have requisiteexpertise in diverse areas. Further, with multinational CA firms in the field,SMPs face difficulty in procuring business in todays competitive businessenvironment.


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Chapter 5

Business Support Services by SMPs

It is widely recognized that MSME draw upon business support services ofprofessional accountants particularly from SMPs, in the area of-

1. Non- compliance2. Compliance/Statutory work1. Non- Compliance Areas

MSMEs market in India is very dynamic, and the regulatory environment

which governs MSMEs operations is also constantly changing and, as acorollary, the demands of business advisory services are being evolved.MSMEs themselves are different in size, age, sector, location, and growthprofile and are run by owners, managers with different capabilities andmotivation. Such factors inevitably influence the requirement of externalservices which are being sought from SMPs. MSMEs are mostly owned byproprietors, partnership, or private limited companies or organizations ofsimilar nature, which are said to be Family Owned Businesses. But marketconditions are chaotic, and in order to maintain growth/ strong hold onmarket, financial strength and other such factors for running the enterprises,the next generation of these MSMEs is waking up to the new paradigms ofmarketing nationally or internationally, availing financial facilities in domestic

or foreign currencies so as to accelerate their growth, considering affordableexposure to the best available opportunities in the world. SMPs are generallyvery close as family friends in providing services, which can be called asmanagement consultancy services in the following areas-

1. Financial management planning and financial policy determination.2. Capital structure planning and advice regarding raising finance.3. Working capital management.4. Preparing project reports and feasibility studies.5. Preparing cash budget, cash flow statements, profitability statements,

statements of source and application of funds etc.

6. Budgeting including capital budgets and revenue budgets.7. Inventory management, material handling and storage.8. Market research and demand studies.


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9. Price fixation and other management decision making.10. Management accounting system, cost control and value analysis.11. Control methods and management information and reporting.12. Personnel recruitment and selection.13. Setting up executive incentive plans, wage incentive plans etc.14. Management and operational audit.15. Valuation of shares and business and advice regarding amalgamation,

merger and acquisition.

16. Business policy, corporate planning, organization development, growthand diversification.

17. Organization structure and behavior, development of human resourcesincluding design and conduct of training programmes, work study, job-description, job- evaluation and evaluation of workloads.

18. System analysis and design, and computer related services includingselection of hardware and development of software in all areas ofservices, which can otherwise be rendered by Chartered Accountant inpractice and also to carry out any other professional services relatingto EDP.

19. Quality Audit.20. Environment Audit.21.

Energy Audit.

Project Finance

A large number of Chartered Accountants in pract ice are involved in projectfinancing, consultancy to their clients and liaisoning with the differentfinancial institutions. Chartered Accountants are playing a leading role in thesociety and are considered as finance advisors, who assist their clients inevery field relating to finance, tax, accounts and banking. Chartered

Accountants, who desire to deal in such line of activi ty, should know all thefinancial institutions that provide finances.

Due Diligence

Due Diligence is a term that is often heard in the corporate world these daysin relation to corporate restructuring. Due Diligence can be sub-classified intodiscipline-wise exercises. It may be mentioned here that these sub-classifications should not to be seen as totally mutually exclusive to eachother. If considered mutually exclusive, it might result in a less-than-effective


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evaluation of the entity. The sub- classification of due diligence exercise

could be as follows:

Commercial or Operational Due Diligence Financial Due Diligence Information systems Due Diligence Legal Due Diligence Environmental Due Diligence Personnel Due DiligenceInsurance Area

MSME themselves do not have knowledge of assessing the risk relating to

potential loss of profit on account of machinery breakdowns, fire, naturalcalamities, transit losses, workmen compensation, accidental losses andother such similar areas. SMPs have wide knowledge of such risk of theprobable losses and work as advisors to the MSMEs for returning insurancerisk at comparative prices. SMPs can play a vital role in designing theinsurance products and advice for premium, rebates which fulfill the need of

associate industry/ enterprise

Insurance Litigation

The Chartered Accountants can render their professional expertise in thequantification of claims, both personal injury and business interruptionclaims. They may also render their services in determining the consideration

of liability involving accountants negligence and for other professionalnegligence cases. They may also provide their knowledge in rendering

assistance of fidelity insurance disputes and insurance accounting disputes.

Risk Assessment

In todays volatile business environment, organizations face a wide array ofcomplex business risks. These risks come in the form of many issues suchas regulatory compliance, litigation, competitive market pressures, changingtechnology, investors demands etc. Managers and investors are concernedabout whether entities have identified the full scope of these risks andevaluate whether adequate precautions are taken to mitigate these risks. Inthe absence of in-house expertise, SMPs can ensure that identification of

business risk of the entities is comprehensive and can also evaluate whetherthe entities have an appropriate system in place to effectively manage the

risk.


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Performance Measurement Services

Performance measurement incorporating non-financial criteria such ascompetitive performance, resource performance, process performance andenvironmental performance represents a new but complementary support bySMPs. Likewise, demands for risk-based measures of value and other newapproaches in assurance, present a further expanding area of businesssupport service.

Business Performance Improvement

Corporates increasingly face more complex business issues and need torapidly change to keep pace with todays dynamic market. As competitiongrows and a larger number of industries head for a shakeout, improvingbusiness performance (efficiency and effectiveness) is a survival imperative.

Meeting the rising expectations of key stakeholders in companies has led toa greater focus on ensuring better returns on investment.

Having addressed all obvious areas of improvement, companies are nowincreasingly looking to develop more innovative ways to improveperformance on lead- time, cost, quality and service related parameters.Most management teams realize that developing and implementingimprovement initiatives take up a significant amount of their time and efforts.By engaging Chartered Accountants as consultants, they are able to ensurethat the initiative does not lose steam after the initial hype, as so oftenhappens when the initiatives are taken up internally. Chartered Accountantscan assist the management in providing the following services:-

Improving customer satisfaction Reducing process cycle cost Enhancing quality of delivered services.Long-term Strategic Partner

SMPs can belong term strategic partners. They can provide sound businessadvice to minimize business risk. The right advice from an impartialprofessional can be the difference between success and failure. Chartered

Accountants in publ ic pract ice have the skills, knowledge and experience toimprove the business practices. A Chartered Accountant can be the businesspartner for the long haul, continuously adding values to the business.

Arbitration and Conciliation

Among the Small and Medium Chartered Accountant Practi tioners, a numberof SMPs have wide range of experience about social customs, Hindu laws,


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business practices and commercial laws and all other relevant laws andregulation, human behavior which are essential of working as arbitrator. Anumber of Chartered Accountants are members of Indian Council of

Arbitration (ICA). An MSME can draw the services of arbitration from SMPs.For the MSME, arbitration is a quick alternative dispute resolution medium atreasonable cost and time.

SMPs can also take up various roles under the Arbitration and ConciliationAct, 1996 as listed below:

1. Drafting of Arbitration Agreement.2. Representing either of the party (plainant and defendant) to the

dispute in the arbitral proceedings.

3. Assisting Arbitrator in drafting arbitral award.4. Assisting both parties to Court of Law.5. Assisting in preparing submissions to arbitrator.6. Member of Arbitral Tribunal.7. Assisting Trade and Industry associations in setting up Alternate

Dispute Redressal (ADR) mechanism.

8. Acting as arbitrator in Micro and Small Enterprises Facili tation Counci lu/s 18 of Micro, Small and Medium Enterprises Development Act,

2006.

9. In some legislation, redressal of dispute or particular kind of disputesare mandatorily to be resolved through Arbitration for e.g. In Clause14of First Schedule to the Limited Liability Partnership Act, 2008- Alldisputes between the partners arising out of the limited liabilitypartnership agreement which cannot be resolved in terms of suchagreement shall be referred for arbitration as per the provisions of

Arbitration and Concil iation Act,1996.

10. Assisting India Judiciary u/s 89 of Code of Civil Procedure 1908,where there is possibility of settling of dispute through arbitration.

Information Technology and Computer Software Related Services

SMPs are now fully equipped with a certain level of expertise in informationtechnology to establish IT System and to solve their problems. A few areas in

which SMPs can fruitfully serve the MSMEs are enumerated below:

1. System Development Life Cycle

Requirement definition


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System selection System development and implementation Functional testing Environment system/ data migration Post implementation review

2. Information Security

Risk assessment Review of application controls Disaster recovery and business continuity

3. Performance Measurement And Monitoring

4. Emerging Standards

5. E-Governance

Risk analysis Training Preparation of documents

6. Other Areas

Preparation of policies Review of IT Organization Structure Risk analysis Framing of long- term and shortterm plans Internal control assessment Continuous and concurrent auditing External assurance Contractual agreements Selection of software tools Outsourcing Incident identification and intrusion detection system Disaster recovery planning Document retention plans


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Audit of quality check Audit of application controls Audit of emerging technologies Physical, logical and environment controls IT Budgeting Web trust assurance

Service for Carbon Credit Mechanism

Carbon credits are key component of national and international emissionstrading schemes that have been implemented to mitigate global warming.They provide a way to reduce green-house effect emissions on the industrial

scale by capping total amount emissions and letting the market assign amonetary value to any shortfall through trading. MSMEs have very littleknowledge of Certified Emission Reductions (CERs). Credits are issued byClean Development Mechanism (CDM) Executive Board for emissionreduction achieved by their projects. Ministry of Environment and Forests isthe nodal agency for climate change issues in India. SMPs can renderfollowing services under Carbon Credit Mechanism:

1. Conceptualizing the Clean Development Mechanism (CDM) Project.2. Quantification of green house gases (GHG) Carbon Footprint.3. Selection of Cleaner technologies for New projects.4. Project risk analysis.5. Registration of project- both national and international level.6. Obtaining Host country approval.7. Preparation of Project Concept Note.8. Preparation of Project Design Document.9. Selection of Methodologies and Baseline.10. Legal and regulatory advice during negotiations with host country

Designated National Authority (DNA)

11. Advice on the appointment of independent validators.12. Assistance to achieve registration of the project by the CDM ExecutiveBoard.13. Assistance in getting verif ication done by Designated Operational

Entity (DOE).


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14. Ensure Compliances.15. Assisting various Ministries associated with National Action Plan onClimate Change (NAPCC).16. Carbon Finance.17. Energy Audit under The Energy Conservation Act, 2001.18. Advice on investment in carbon credit.19. Accounting advisory services.20. Taxation advisory services.Services Required for Environmental Laws

Services for environmental laws are rapidly expanding, driven by various

government regulations and a movement by business and industry to reduceenvironmental liabilities associated with their operations. Some of theopportunities are:

1. Give opinion on viability of various projects, technologies to preventpollution and clean up polluted resources.

2. Obtain consents under the various environmental regulations and alsoensure that the conditions of the consent order are complied with on aregular basis.

3. Research, identify and analyze different sources of pollution todetermine their effects on the environment and find alternative ways to

handle projects in an environmentally sensitive manner.

4. Obtaining Consents under the Water Pollution Act, 1974 and AirPollution Act, 1981.

Under the provisions of these Acts, entrepreneur running orestablishing any industry or process and discharging effluent/emittingpollutants into any water resources or on land/air and polluting therebythe environmental water/ air is required to obtain consent.

5. Submitting Application form for obtaining No Objection Certificate(NOC) from the Pollution Control Boards.

6. Environmental Clearance and Environmental Impact Assessment (EIA).2. Compliance/ Statutory WorkSMPs have developed their multi disciplinary and skills based over andabove the book- keeping. MSME make use of their services to ensurecompliance with various laws and regulations. Such major areas are:


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(i) Preparation of Statutory Financial Accounts

SMPs have the competence to support MSMEs in preparation of financialstatements required under any law which the MSMEs cannot do on their ownbecause of the absence of in-house expertise with them. This is traditional

work being executed since long by the SMPs.

(ii) Audit of Accounts

Various lawsrequire audit of accounts to be done by Chartered Accountants,e.g. under Companies Act, Income Tax Act. Some of the MSMEs in businessare incorporated under the Companies Act, 1956. Such MSMEs are requiredto get their accounts audited under the provisions of Companies Act, 1956.Similarly, various provisions under the Income Tax Act also require audit offinancial statements particularly under section 44AB of the Income Tax

Act,.1961. An assessee carrying on business or profession and having totalsales turnover or gross receipts exceeding the specified limit required to gethis accounts audited by a Chartered Accountant .In the case of MSMEs,SMPs are mostly conducting such audits. Under the Income Tax Act, anumber of other sections also require audit/certification of the statements byChartered Accountant. Some of these sections are 35D, 35E, 44AD, 80I,80IA. Sometimes SMPs are also undertaking audit under section 142(2A) ofthe Income Tax Act,.1961. MSMEs run by Co-operative Societies and other

societies are also required to get their accounts audited.

(iii) Compliance of Tax Laws:

Direct Taxes

(i) Income Tax: SMPs are widely perceived to be the best equippedprofessionals to render all types of line and service function in the area oftaxation. They can actively contribute as line managers in all areas oftaxation, tax planning and tax management. The SMPs are best fitted for alltypes of advisory and consultancy services in taxation. In fact tax planning isbecoming a highly specialized service which can be the exclusive preserve ofSMPs. Outsourcing is the order of the day and SMPs are well-placed to givethis essential value-addition. The tax audit has been exclusively given toChartered Accountants where most of the SMPs are involved as statedabove. There are nearly two dozen certifications to be done by SMPs underthe various provisions of the Income Tax Act. They can also render a useful

service in verifying whether the deductions given under the provisions ofSection 10A & 10B have been correctly claimed.

(ii) Wealth Tax: Though the area of application of Wealth Tax has beenconsiderably pruned, SMPs can still render useful service in the matter of


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Review of contracts and agreements to help mitigate the overallincidents of service tax.

Conducting service tax health checks in order to determine the servicetax implications on client operations, gauge compliance with legalprovisions and suggest tax planning opportunities.

(iii) Customs: SMPs can provide advisory relating to various aspects ofcustoms law and applicable regulations, covering rates of duties, exemption,valuation planning, classification assistance and assessments. Some otherareas where SMP can render services include inter alia:

Rendering advice and wide range of custom procedures anddocumentation requirements, including those relating to import andexport of goods, clearance of imports, warehousing, duty entitlements,

to name a few.

Assisting clients on the polic ies and procedures set down under theExport-Import Policy, such as licensing requirements.

Providing the right guidance to enable the clients to make the most ofways in which benefits are available to specific entities/projects or tounits in specified areas, as well as confections available under variousexport promotion schemes.

(iv) Excise: SMPs can render advice on a wide range of issues relating tothe excise duty implications and provide the right guidance to enable clientsto make the most of excise duty concessions and relief. SMPs can beparticularly useful in valuation matters, CENVAT audit, Modvat proceduresand the departmental excise audit.

(v) Value Added Tax: Members of the profession in offer services suchas rendering advice on a wide range of issues relating to VAT implications oncross-border transactions, assisting in claiming VAT input credits,suggestions on the right strategy to minimize the global VAT incidence etc.

(vi) Anti-Dumping Duties: SMPs can render services like analysis of theexisting anti-dumping proceedings, preparation and filling of complaint withthe Directorate General of Anti-Dumping (DGAD), and complianceprocedures relating to these proceedings etc.


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(iv) Labour Laws

(i) Contract Labour (Regulation & Abolition) Act,1970 and RulesObjective & Applicability Compliance requirements

This Act regulates theemployment of Contract Labourin certain establishments andprovides for its abolition incertain circumstances. Itapplies to every establishmentor contractor wherein 20 ormore workmen are or wereemployed on any day of the

preceding 12 months ascontract labour.

Working conditions ofworkmen

Adequate facil ities likedrinking. water, canteenetc. for workmen.

Adequate facil ities forwomen workers also.

Maintenance of registersas required under the Act.

Submission of returns.(ii) Employee State Insurance Act, 1948

Objective & Applicability Compliance requirements

This Act provides for theprovision of benefits toemployees in case of sickness,maternity and employmentinjury. All employees includingcasual, temporary or contractemployees drawing wages less

than Rs.6500 per month arecovered. .

Remittance of contributionevery month.

Maintenance of registers. Submission of returns as

per provisions of the Act.

(iii) Employees Provident Fund and Miscellaneous Provisions Act, 1952Objective & Applicability Compliance requirements

The PF Act provides for thecompulsory institution ofcontributory provident funds,pension funds and deposit-linked insurance funds foremployee. This Act applies toindustries specified in

Schedule I employing 20 ormore persons and any otherclass of establishment with 20or more persons notified by theGovernment.

Payment of contributionevery month.

Maintenance of registers. Submission of returns as

per provisions of the Act.


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(iv) Payment of Bonus Act, 1965Objective & Applicability Compliance requirements

The object of the Payment ofBonus Act is to provide for thepayment of bonus (linked withprofit or productivity) to personsemployed in certainestablishment and mattersconnected therewith. This Act isapplicable to every factory andto every establishment wherein20 or more workers are

employed on any day during anaccounting year.

Payment of bonus inaccordance with theprovisions of the Act.

Submission of returns.

(v) Payment of Gratuity Act, 1972Objective & Applicability Compliance requirements

The Act provides for a schemefor the payment of gratuity toemployees engaged infactories, mines, oilfields,plantation, ports, railwaycompanies, shops, or otherestablishment.

The Act enforces the paymentof gratuity, a reward for longservice, as a statutory retiralbenefit. Every employeeirrespective of his wages isentitled to receive gratuity if herendered continuous service of5 years or more than 5 years.

Payment of gratuity toemployees leavingestablishment aftercompletion of 5 years.

Notice of opening toconcerned labourauthority.

Display required under theAct.

Maintenance of registersof allocable surplus,bonus, etc.

Submission of annualreturns.

(vi) Payment of Wages Act, 1936Objective & Applicability Compliance requirements

The Act ensures payment ofwages in a particular form atregular intervals withoutunauthorized deductions. It is

Payment of wages withoutany unauthorizeddeductions.

Maintenance of registers


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applicable to any factory, anyrailway establishment and anyindustrial or otherestablishment like tramwayservice, motor transportservice, air, oilfield, plantation,workshop, or otherestablishment producing,adapting or manufacturing anyarticle, establishment engagedin construction, developmentand maintenance of buildings,roads, bridges or canals,

navigation, irrigation or watersupply, transmission,generation and distribution ofelectricity/ power and any otherestablishment notified by theCentral or a State Government.

of fines, deductions,advance, wages etc.

Displays as per theprovisions of the Act.

Submission of annualreturns.

(vii) Workmens Compensation Act, 1923Objective & Applicability Compliance requirements

The Act aims to provideworkmen and their dependents,compensatory payment, in case

of accidents arising out of andin course of the employmentand causing either death or

disablement of workmen.

The Act applies to factories,mines, docks, constructionestablishment, oilfield,plantation and otherestablishment listed inSchedule II & III of the Act butexcludes establishments

covered by the ESI Act.

Provision ofcompensation in case ofaccident.

Submission of returns asstipulated under the Act.


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(v) The Foreign Contribution (Regulation) Act, 2010

Regulates receipt and spending of foreign funds. Ministry of Home Affairshandles registration under the Act.

Any person having a defin ite cultural, economic, educational, relig ious orsocial programme shall accept foreign contribution only after obtaining acertificate of registration under section 11 (1) of The Foreign Contribution(Regulation) Act, 2010.

Persons other than above can accept any foreign contribution only afterobtaining the prior permission of the Central Government under section 11(2) of The Foreign Contribution (Regulation) Act, 2010.


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Chapter 6

Credit Availability to MSME and Supportof SMP

Credit availability is low for this sector. In terms of numbers, MSMEscomprise 95% of the total industrial units. Yet only 8% of the total bank creditfinds its way into this sector. Credit to MSME falls under the category ifpriority sector lending. In the 11 th Five Year Plan, the Planning Commissionestimated that MSME/ unorganized sector would require funds of Rs2,99,000 crores. A Small and Medium Chartered Accountant practitioner hasBusiness Competency whereas MSMEs particularly do not have in house

provision of across-the-range of such competency. SMPs can help in CapitalStructure, Capital Budgeting, Risk Assessment, long term financing, shortterm finance, SMPs understand the subject of finance, important concepts,terms and conditions, different financial products, financial instruments.Overall knowledge of SMPs in regard to credit facilities available at FinancialInstitutions and Banks indeed helps MSMEs in decision making in respect ofalternative available source of finance.


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d. Overdraft- secured or unsecured;e. Loans against Book Debts/ L.M. Pledge;f. Bill discounting facility; andg. Any other credit facil ity (other than term loans, guarantees, letter of

credit etc.).


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Chapter 8

Format of Financial Statements

The financial statements will have to be prepared in the formats which havebeen approved by RBI. Two separate formats have been approved. Theseformats are separate for Manufacturing non-corporate entities and Tradingnon- corporate entities. Since then financial reporting pattern has beenchanged globally. Companies are required to prepare their financialstatements in the form and contents given in schedule VI (Part I & II) to theCompanies Act, 1956. Recently, formats and requirements given in scheduleVI (Part I & II) to the Companies Act, 1956 were revised by CentralGovernment keeping in view recent developments in financial reportingenvironment. Accordingly revised formats incorporating changes as beingmade in the revised Schedule VI are prepared and given in the relevantappendix.

Financial Statements Appendix

Form for Non- Corporate Manufacturing MSMEs

Balance Sheet I

Profit and Loss Account II

Form for Non- Corporate Trading MSMEs

Balance Sheet III

Profit and Loss Account IV

Form for Fund Flow Statement V

Audit Report for Non Corporate Borrower VI


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Chapter 9

Inherent Limitations of SMPs

Majority of SMPs are sole practitioners or small partnerships Less qualified, senior or experienced staff Excessive dependence on articled students and mid level staff Capacity limitations preclude quality assurance Resource constraint precludes specialization in practice areas

(IAS/IFRS and ISA, IT or Tax work.

Inadequacy of capital base and limited accessibility to finance

Non affordability of technological innovations Limited database or information availability (particularly compared to

Big 4s or largest firms)


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Chapter 11

Publications, IT Tools and VariousInitiatives Undertaken by

CCBCAF & SMP

CCBCAF & SMP has provided following publication and IT tools tostrengthen the SMPs so as to make them equipped for providing timelybusiness support to MSMEs with required skills.

1. About the Committees Exclusive website www.icai.org.in

ICAI under the aegis of the Committee for Capacity Building of CA Firms andSmall & Medium Practitioners (CCBCAF & SMP) has developed a Websitenamely www.icai.org.in, where the Firms and Practitioners may create theirportals as per the norms laid down by the Council of the Institute ofChartered Accountants of India. The website provides a platform for the CAFirms to upload their firms details and gives them an opportunity to reachout to the members and CA firms practicing worldwide. More than 3000 CAFirms already created their websites in the Committees exclusive website

www.icai.org.in.

2. ICAI-Tax Suite: Tax Compliance Software

CCBCAF & SMP has arranged to provide the Tax Compliance software

namely ICAI-Tax Suite for the Practitioners & Firms, which combines facilityfor Income Tax, TDS, Audit Reports, Project Report/ CMA, Form Manager,

AIR (Annual Information Return), Service Tax and Document Management.The ICAI- Tax Suite software was launched on 1st July, 2011. The ICAI-TaxSuite software is free of cost for 2 years for the Practitioners & CA Firms.The aforesaid software already circulated to all the CA firms free of cost aswell as uploaded in the Committee website http://icai.org.in/regdownload.html

3. ICAI-ROC: MCA-21 Compliance Software

CCBCAF & SMP has arranged to provide the MCA-21Compliance softwarenamely ICAI- ROC for the Practitioners & Firms, pertaining to managesecretarial requirements & generates forms as per MCA21 Requirements.

This software also provides the members the facility to prepare Auto filling ofeForms, Shares Records/Certificates, Meetings & Minutes,Resolutions/Drafting, Annual Return forms and maintain your Registers andReports etc. The ICAI- ROC software was launched on 1st July, 2011. The


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ICAI-ROC software is free of cost for 2 years for the Practitioners & CAFirms. The aforesaid software already circulated to the CA firms/Practitionerson special written request received from them as well as uploaded in theCommittee websitehttp://icai.org.in/regdownload.html?downloadmode=ICAIROC

4. Minimum Recommended Scale of Fees

CCBCAF & SMP has taken a major initiative for prescribing the MinimumRecommended Scale of Fees for the professional assignments done by themembers of ICAI. The recommendation is about the fee to be charged as perthe work performed for various professional assignments and the amountquoted under respective heads of professional work. The fee has beenrecommended separately for metro and non-metro Cities. The details of theMinimum Scale of Recommended Fees are available athttp://www.icai.org/post.html?post_id=7252

5. Quick Insight to the Chartered Accountant Profession

CCBCAF & SMP has published a publication on the Quick Insight to theChartered Accountant profession, which will be circulated among the CAFirms. The Quick Insight contains the various provisions pertaining to DirectTax & Indirect Tax, Accounting & Auditing Standards, LLP, MCS & otherservices, list of Mandatory Statements and Standards on Audit as well asrelevant information pertaining to the CA profession. The detail of the QuickInsight is available at http://www.icai.org/post.html?post_id=7696

6. Revision of Guidelines for Networking

CCBCAF & SMP has considered practical difficulties in consolidation of CAFirms formation of Networking. CCBCAF & SMP has appropriately finalizedthe revised Guidelines of Networking facilitating members and firms for itseasy adoption. The detail of the Revised Guidelines of Networking isavailable at http://www.icai.org/post.html?post_id=7710

7. ICAI-XBRL software

CCBCAF & SMP has launched the XBRL software referred as ICAI-XBRLsoftware on 6th January, 2012 at Chennai during the InternationalConference for MCA mandate XBRL Filing. ICAI-XBRL software is a solutionfor converting Financial information of the Company in XBRL format as perMCA mandate. The ICAI-XBRL software will be available to all CA firms free

of cost for 2 financial years. The details about the arrangement of the ICAI-XBRL software is available at www.icai.org.in


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The Interactive Meeting was very successful extending technical knowledgeon capacity building measures and bringing the participants to join hands forforming networks.

13. Meeting with the Chair, SMP Committee, IFAC

CA. Vijay Kumar Garg, Chairman, CCBCAF & SMP had a meeting with Mr.Giancarlo Attolini, Chair, SMP Committee, IFAC on 7th January, 2012 forenhancing the practice portfolio of the Practitioners in Global scenario,particularly in India.

14. Forthcoming publications of the Committee

CCBCAF & SMP proposes to publish the following publications for enrichingthe knowledge base of the Practitioners:

(a)

A book on Basics of Service Tax & Scope for Profession.(b) A book on Guide to Management of Practice for Small and

Medium Sized Practitioners.

15. Arrangement of online access to Transfer Pricing Database

It helps to enable members to have access to qualitative database for doingcomparative study for transfer pricing. The database is complemented withpowerful analytical software tools to enable extensive query and search.

16. Audit toolkit containing software namely K-doc & e-secretary

The Committee has compiled ready-to-use illustrative checklists for variousareas of professional needs such as Accounting Standards, Audit Manual,

CARO, Bank Branch Audit, Tax Audit and illustrative formats for day to dayIncome Tax Correspondence etc. It will help members in efficient audit

documentation and Knowledge & Contact Management.

17. Arrangement of Professional Indemnity Insurance from New India

Assurance Co. Ltd., Mumbai for members of ICAI.

18. Specailised Loan Scheme from the Corporation Bank for

members of ICAI.


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Chapter 12

Reasons for Use of SMPs Services byMSMEs

Overall view suggesting some of the reasons relating to the SMPs

1. Availability2. Competency3. Faithfulness4. ResponsivenessMSMEs cannot afford the cost of in-house range of managerial expertiserequired to run the business effectively including financial management.Geographical accessibility of SMPs to MSMEs makes the latter feel satisfied,as owner-managers prefer face to face meetings with advisors. Many SMPsare within proximity to their clients and it puts them in a stronger position to

serve local MSMEs visa-a- vis regional offices of larger practices.

Technical competency rather than a qualification is more important forcontinuation of relationship between SMPs and MSMEs. Paper qualificationis not that relevant. ICAI continuously makes arrangements for sharpeningand upgrading the competency level of SMPs. The main reason for use ofexternal accountant as source of advice is for their technical competencies

and expertise for statutory audit, taxation matters and other complianceservices. In a number of cases, MSMEs draw upon SMPs for their financialmanagement skills. Demonstration of technical competency is important incontinuation of the relationship.

SMPs appear to be well placed to benefit from number of dimensions of trust.Faithfulness is one of the characteristics of SMPs. Their profession isregulated by Chartered Accountant Act, 1949 and Code of Ethics togetherwith guidelines of the council of The Institute of Chartered Accountants ofIndia. Such regulations provide continuous professional development,confidentiality, practice standards, discipline and enforcement. Suchinstitutional regulations are not prevalent amongst other advisors.Faithfulness also develops from ongoing relationship. Speed of delivery ofadvice is crucial and that attribute is sometimes more significant than evenqualification and competency. Timeliness of the SMPs interventions is acrucial consideration with MSMEs for seeking their services and plays a keyrole in maintaining the relationship between MSMEs and SMPs.


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Appendix II

Statement of Profit and Loss of Non-corporate Manufacturing Entities

Name of entity:

For the period:

Particulars Note

no.

Figures

of

current

year

Figures

of

previous

year

Sales

Less: Excise duty

Less: Returns

Less: Cost of Production

Add: Excess of closing stock over openingstock of finished goods

Gross Profit

Add: Other incomes (other thanexceptional and other items)

Total Income (A)

Less: Expenses

I) Finance CostII) EmployeeIII) Other expenses (other than

depreciation, to be specified)

Total Expenses(B)

Profit before exceptional andextraordinary items and depreciation (A-B)

Less: Exceptional items

Extraordinary items

Profit before tax and depreciation

Less : depreciationProfit Before Tax

Less: Provision for Tax

Net Profit after Tax

20

21


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b) Liability in respect of any plant & machinery or any other assetpurchased on deferred payment basis.

c) Others ( give details )6. Long Term Provisions

a) Provision for employee benefitsb) Contingency provisionsc) Others ( specify )7. Short term borrowings

a) Classify borrowings from(i) Banks(ii) Related parties(iii) Others

b) Specify whether borrowings are secured or notc) Specify nature of securities ( if any )8. Principal due within 12 months out of non-current liabilities

a) Current maturities of long term debtb) Current maturities of finance lease obligations9. Other current liabilities

These are to be classified as:

a) Interest accrued and not dueb) Interest accrued and duec) Income received in advanced) Advance from customere) Others (Specify, if material )10. Short term provisions

They are to be classified as:

a) Provision for employee benefitsb) Provision for taxation ( provision less advance tax or TDS as per

contra )


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11. Statutory liabilities

Statutory liabilities include:a) Taxes , duties , levies etc. dueb) Provident fund and E.S.I. obligationsc) Others ( give details )12. Fixed assets

a) For each asset to be shown separately:Opening balance

Add: Acquisition during the period

Less: Disposal during the period

Gross block at end

Less: Opening depreciation / amortization (intangibles )

Depreciation for the current period

Net carrying value

b) Where the assets have been revalued, the revalued figures to beshown. Each balance sheet for the first five years subsequent to thedate of revaluation to stat

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