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Digital Tools and Formalisation of Small Businesses
Context:
A large part of India’s economy still operates in cash, with many small businesses preferring to remain informal to avoid taxes, as becoming formal taxpayers increases liabilities without offering significant benefits. This has kept businesses small and outside the formal system for years.
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- However, things are gradually shifting. Over 13 million businesses are now registered under the Goods and Services Tax (GST), 70% of which are small and medium-sized enterprises (SMEs).
- As a result, GST revenue has risen by more than 50 basis points as a share of GDP since 2018.
- Additionally, the number of income-tax returns filed increased by 80%, from 38 million in 2013-14 to 69 million in 2020-21.
- Gross tax collections have grown fourfold since 2009-10, outpacing GDP growth, which increased 3.6 times in the same period.
Role of digital tools to formalise small businesses
- Unified Payments Interface (UPI): It allows small businesses to conduct transactions seamlessly, enhancing digital flow of money and reducing reliance on cash transactions, which is crucial for formalisation.
- E-commerce Platforms: The rise of e-commerce platforms has enabled small businesses to reach a wider audience.
- Initiatives like the Open Network for Digital Commerce (ONDC) aim to create a more inclusive e-commerce ecosystem, allowing small retailers to compete with larger players.
- Udyam Registration: It is a significant initiative by the Government of India aimed at formalising micro, small, and medium enterprises (MSMEs). It provides various benefits and support to these businesses, enhancing their operational capabilities and access to resources.
Case Study: Ninjacast
Ninjacast is a digital platform that provides tools for MSMEs to manage their operations more effectively. It leverages data analytics to help businesses optimise their processes, improve customer engagement, and enhance overall performance. The platform focuses on integrating various data sources to provide actionable insights tailored to the needs of small businesses.
- Social Media Tools: Platforms like Facebook and WhatsApp are widely used by small businesses for marketing and customer engagement.
- Digital Training Programs: Organisations like Ideas42 have developed mobile-based training programs that provide entrepreneurs with essential management skills through interactive voice response (IVR) systems.
- Fintech Solutions: Financial technology (fintech) companies provide various services, including access to credit, digital banking, and financial management tools.
- Cloud-Based Management Tools: Tools for inventory management, customer relationship management (CRM), and accounting software help streamline operations for small businesses.
- Marketplaces and Aggregators: Digital marketplaces allow small businesses to sell their products online, providing them with a platform to reach customers beyond their local areas.
Lesson for other countries
- In an article for the International Monetary Fund’s Finance and Development magazine, Kamya Chandra, Tanushka Vaid, and Pramod Varma argued that other countries can learn from India’s experience. The authors propose a three-step strategy for other countries:
- First, reduce entry barriers to the formal financial system, making it easier for small businesses to participate by using digital tools like business IDs, digitally signed licences, and fast payment systems. This would lower the effort required to enter the formal economy.
- Second, align incentives so small businesses see the value of joining the formal system.
- For example, allowing businesses to use their digital records as proof of cash flow can help them secure formal credit at better rates.
- Lastly, offer tax incentives to encourage formalisation.
- In India, businesses were offered income-tax rebates for purchasing from registered suppliers, prompting more companies along the supply chain to formalise.
