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Editorial Notes

[Editorial Notes] Challenges to Ease of Doing Business in India

There could be structural reasons for India remaining out of the top 50 nations in the ease of doing business, but the biggest challenge is regulatory.
By IASToppers
September 13, 2019

Contents

  • Introduction
  • Reason for India’s low rank
  • Solution
  • Conclusion

Challenges to Ease of Doing Business in India

For IASToppers’ Editorial Simplified Archive, click here

Introduction

  • The World Bank’s Ease of Doing Business 2019 report ranked India 77th among 190 countries (23 place improvement from 2018).
  • To achieve its ambition of becoming a $5 trillion economy by 2024-25 and doubling that in the next eight years, India certainly needs to ranks higher in the ranking.

Reason for India’s low rank

  • Apart from structural reasons, the biggest challenge is regulatory.
  • It is too difficult for businesses and individuals to handle the regulatory mechanism because of overreach by enforcing agencies, often imparting direct and indirect tax laws. This is what has come to be known as “tax terrorism”.
  • India-based investment consultants often cite some laws and their enforcement as big impediments to ease of doing business in India.
  • Among them are the Income-Tax (I-T) Act, the Goods and Services Tax (GST) Act, the Prevention of Money Laundering Act (PMLA), the Prohibition of Benami Property Transactions Act, the Companies Act, 2013 and the Foreign Exchange Management Act (FEMA), 1999 and even the laws governing corporate social responsibility (CSR).

 

Companies Act

company-act-iastoppers

  • The provisions of the Companies Act on grant of bail when fraud is alleged are on par with the provisions governing bail on the charge of drug running.

FEMA

  • FEMA was created to remove the element of criminality in foreign exchange controls and to introduce an expensive civil penalty regime.
  • However, FEMA’s objectives have been undermined by introducing criminal law provisions in FEMA and that too through a Finance Act, passed as a Money Bill, without debate in both Houses of Parliament that brought in FEMA.

fema-india-iastoppers

Tax Laws

  • There is lack of trust between tax administrators and taxpayers. That’s mainly because tax laws are prone to the subjective interpretation of tax officers which causes undue hardships to taxpayers and leaves scope for corruption.
  • Many transactions, undertaken for genuine commercial reasons, are subjected to adverse tax consequences.

Prevention of Money Laundering Act (PMLA), 2002

  • PMLA was formed to address global concerns over money laundering offences such as drug trafficking, human trafficking and terror.
  • PMLA is essentially a secondary legislation. The primary legislation gave the basis for the charges under PMLA. These offences were placed in a schedule called ‘scheduled offences’.
  • Now, the schedule kept growing over time. Even violations such as failing to make an open offer for a listed company’s shares when one takes over substantial ownership is now a scheduled offence under PMLA.
  • Hence, the legislation became, from countering serious offences to interfere with legitimate businesses and freeze accounts and impound properties.
  • However, the recent amendments to PMLA rules have codified the framework for face-to-face digital KYC which eliminates the need for any paperwork, and also allows for a ‘live’ photograph of the customer to be used as identity proof.

GST, anti-profiteering law

  • Compliance with the GST laws is raised as one of the biggest areas of concern by the trade.
  • The GST law was designed as a facilitator for the business and anti-profiteering as a consumer protection provision.
  • However, the implementation of GST has moved away from GST being an economic agenda to other aspects. The actions under the anti-profiteering provisions have yet to benefit the consumer.
  • GST has plagued with systemic issue due to structural problems such as the issues related to the functioning of the GST Network and the unavailability of alternative options for resolution of problems.

gst-iastoppers

Benami transactions

  • The benami law, aimed at punishing the common practice under which a property is held by proxies for the real owners, is one of the major concerns.
  • In practice, these transactions were applied with retrospective effect. Many transactions done under prevailing customs also got caught under this.
  • Further it is causing lots of difficulties to genuine people as administrators are indiscriminately applying these provisions.
  • Assets get attached and redressal in Indian legal system takes an unduly long time.
  • Though the intention of the law is good, Implementation of the law leads to harassment of genuine/honest citizens.

CSR laws

  • The law mandates that firms with a net worth of at least ~500 crore or revenue of ~1,000 crore or net profit of ~5 crore should spend at least 2% of their three-year annual average net profit on corporate social responsibility activities.
  • Parliament recently passed amendments to the Companies Act under which unspent CSR allocations would have to be transferred to a fund specified by the government.
  • It mandates that if the CSR expense is not incurred then the company will have to transfer the funds to a separate bank account. In the current times of slowdown, this will squeeze cash flow available with the company.
  • Further, companies which are in losses will still have to make the contribution as criteria is based on average of past three years’ profits.

Solution

Government should,

  • Focused on stabilising the current GST rather than make more changes.
  • Reconstitute the sectoral committees to look into the issues faced by businesses and find a workable solution.
  • Enable various mechanisms existing within the law to check evasion.
  • Make tax laws more simple, lower the backlog of tax litigation and encourage alternative dispute resolution processes.
  • Discouraged Tax collection targets and focused on good quality assessments.
  • Focus on taking away the discretionary powers given to the tax authorities and substituted with process- and technology-driven solution.

Government recently roll back an enhanced surcharge on foreign portfolio investors (FPIs). The removal of tax free havens is a good move, but it can work well only if India is a lower taxed country which treats both domestic and foreign investors at par and offers attractive rates of tax.

Conclusion

  • The pain point of every business owner is the compliance burden which often involved duplicity of efforts.
  • For example, incorporating a company, obtaining regulatory licenses/permits, and obtaining sanction of various regulators to approve a scheme of arrangement is a tedious task nowadays and can be streamlined.
  • However, the latest statement by the India Prime Minister on taking measures to ensure honest taxpayers are not harassed is quite motivating.
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Editorial Notes Mains 2020
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