ESHA SAHA
INTRODUCTION:
In the ‘Ease of Doing Business’ ranking of
189 countries, India has dropped from the 131st rank last year to 134th
in 2014.The very fact that it is easier to do
business in Nepal (105), Bangladesh (130),Pakistan (110)[1] than in
India, and that India is getting to be a tougher place to do business, is
alarming. For a country that claims to be a superpower by 2030, India performs
abysmally low on various ‘Ease of Doing Business’ parameters such as starting a business, dealing with construction
permits, getting electricity, registering property, paying taxes, trading
across border, enforcing contracts or resolving insolvency. However, in
this paper, I have analyzed the following four sectors: 1.Starting of business,
2. Enforcement of contracts, 3.Infrastructure (concentrating on roads and highways
sector) 4.Tax structure. In each sector certain policy measures have been
suggested to improve the process of starting up and doing business across the country.
1. STARTING A BUSINESS
Innumerous entry level barriers act as major
impediment in starting a business in India. There are 12 procedures involved in
starting a business in India, beginning from obtaining Director Identification
Number (DIN)[2]
to registering for employee’s provident fund and medical insurance. The
procedure for registering a company in India takes 27 days, costing 47.3%
of per capita income. The minimum paid up capital for Private and
Public Limited Company in India is Rs.1, 00,000/ Rs.5, 00,000 respectively
which is the highest in the South Asian Region. When compared with other
South Asian countries, India lags well behind in terms of starting a
business. Even though China has more procedures (13) than India (12), it must
be noted that the cost of these procedures is just 2% of per capita income. On
the other hand, start ups in Australia require 3 procedures and take 2.5 days,
costing just 0.7% of the per capita income. Even a country like Indonesia does
better than India in terms of number of procedures (10), per capita cost (20.5)
and minimum paid in capital (38.5). According to World Bank report on “Doing
Business 2014: India”, the government of India since 2009 has failed to
introduce any significant regulatory reforms in the sector apart from
establishing an online VAT registration system in 2011 and replacing the
physical stamp previously required with an online version. India has only partially succeeded in reducing the
administrative burden of paying taxes by abolishing the fringe benefit tax.
Exhibit 1: Start of doing business ranking of BRIC counties
India’s poor ranking in this parameter can be attributed to failure of Indian States to establish a one stop shop for application, procurement and clearance of various licenses. For e.g. in order to start a business one must procure multitude of clearances and licenses such as industrial license, compulsory license, environmental clearance license, factory license , shops and establishment license, import license, export license and central exercise license, trade license and various other types of licenses depending upon the nature of business etc. Thus, absence of one time shop has exacerbated the problems of entrepreneurs who often get caught up in red tape, lengthy investment and business approval processes.
However, in 2013, Department of Industrial
Policy and Promotion (DIPP) in collaboration with Infosys launched eBiz
project. The project intends to provide online single stop shop for all
business licenses, clearances, approvals, no objection certificates, permits
and even filing of returns so as to prevent the entrepreneurs running from
department to department filing forms and procuring clearances. The first phase
of the project was piloted in Andhra Pradesh, Delhi, Haryana, Maharashtra and
Tamil Nadu. While the portal in its first phase only provided information on
forms and procedure, the second phase of the project launched in 2014 has added
two more services such as industrial licenses and industrial entrepreneur’s
memorandum along with setting up of payment gateway by the Central Bank of
India. [3]
This ambitious project, if implemented
successfully, can go a long way in easing the process of starting business in
India. It must be noted that online approval and issuance of both Central and
State level clearances in a time bound
manner would be necessary for successful implementation of this project.
Another impediment to the implementation of this project is the likely
resistance of those departments that are used to running their services
manually or in the offline. Under the UPA government, the project faced a stiff
opposition from Ministry of Environment and forests, the Central Board of
Excise and Customs and the Central Board of Direct Taxes.[4] The reluctance of various departments to change their modus operandi via
digitization of their services has started to cast a cloud over the success of
this project. It has now become essential for the Ministry of Commerce and
Industry to actively promote the project at all State and local levels so as to
help India gain a competitive edge in the commercial and industrial market. In
addition to this, India’s federal structure characterized by
power sharing between States and the Center and decentralized decision making
process has attributed to the problem of varying business and economic
conditions across India’s 29 States and 7 Union territories. Thus, the Central
government must undertake consensus building measures to ensure that major
policies formulated at the Center gets implemented in pith and substance across
various States.
2.ENFORCEMENT
OF CONTRACTS
With regard to enforcement of contracts, India performs abysmally, ranking 186th out of 188 countries that were surveyed by the World Bank and International Financial Corporation. The Doing Business report notes that there are 46 procedures to be undertaken to enforce a contract in India, the time taken to enforce a contract is 1,420 days and the cost of enforcement of a contract is a whopping 39.6% of the claim which significantly undermines the rationality of pursuing judicial recourses[5]. The length of the time taken by Courts to decide cases combined with exorbitant litigation costs has encouraged firms to resolve disputes informally. The World Bank has repeatedly recommended that rules of civil procedure should be amended to restrict the number of adjournments judges can give and that judges must be allowed to impose strict time limits on the parties.
Many countries such as Poland have made progress
in enforcing contracts by introducing commercial courts of first instance and implementing
e-filing system. It is to be noted that specialized commercial court system
leads to greater specialization of judges- resulting in faster resolution,
cheaper contract enforcement, shorter court backlogs and increased efficiency.
Thus, India must seek to establish commercial division in High Courts to cater
exclusively to commercial disputes above a certain threshold value. India
should also consider implementation of electronic court case management system
that monitors and manages cases on court dockets from the filing of claims
until judgments are issued, which may lead to lower costs and faster disposal
of disputes[6].
For example, instead of physical delivery of court notice to the defendant, the
court may provide defendant notification service via email, SMS or telephone
contact, this will significantly reduce the period between filing of the case
by the plaintiff and the first hearing of the case. Thus, proliferation of
Commercial courts of first instance combined with E-filing, electronic case management
system, amendment to Civil Procedure Code to limit the number of adjournments
per case and disposal of cases in time bound manner can go a long way in
improving the business environment of this country.
2.1 Lack of effective Alternative Dispute Resolution
mechanism (ADR):
Most commercial agreements invoke arbitration
clause to seek quick and cost effective settlement of disputes but in India,
the Arbitration and Conciliation Act 1996 has failed to address disputes in
such manner. The Act is weak with regard to enforceability of awards granted by
Arbitrators and it has been observed that almost all awards are appealed against,
resulting in long drawn disputes that often last 3 to 10 years.
Alternate Dispute Resolution (ADR) in India has failed
to expedite the process of disposal and enforcement of contracts. Many
commercial lawyers have argued that failure to develop Arbitration as quick and
cost effective mechanism for resolution of commercial disputes can be directly attributed
to appointment of retired judges as arbitrators. According to them, retired
judges often fail to shed the trappings of “litigation mindset” which makes the
whole procedure formal, adversarial, expensive and inflexible. In addition to
this, astronomical fee charged by the judges (which is sometimes as high as Rs 18
lakh per sitting) has further eroded the faith of companies in Alternative
dispute resolution mechanism. The situation is quite different elsewhere. In fact, in the panels of arbitrators who may be
selected by those having disputes, maintained by the American Arbitration
Association, lawyers dominate in commercial fields of arbitration, college
professors make up the second largest group of arbitrators, while physicians,
dentists, accountants, managers and other professionals form the third largest
group of arbitrators.
It
is equally important to amend Section 34 of The Arbitration and the
Conciliation Act 1996, under which the Arbitration award can be challenged in
the court. There is an urgent need to "nullify" the decision of the
Indian Supreme Court in ONGC v Saw Pipes (2003) [http://indiankanoon.org/doc/919241/]
in which the court held that an award could be set aside on grounds of “public
policy” if it is contrary to Indian law. The broad implication of the term
“public policy” has exposed all awards to be questioned in courts and has made
commercial dispute resolution a time consuming and expensive process.
In
fact, United Kingdom mandates that arbitral awards can be challenged only on
the following three grounds:
1.
Lack of substantive jurisdiction of the Arbitration Tribunal.
2.
Serious irregularity affecting the Tribunal or proceedings.
3.
Error of law arising out of an award made in the proceedings.
Reforms
in the Arbitration Act (AA) are necessary to create a positive business climate
in the country. Such reforms will expedite the process of disposal of
commercial disputes in an effective manner.
3.INFRASTRUCTURE: Highways/Road Sector
While
the Prime Minister of the country has persistently asserted that development of
infrastructure is essential for economic growth, the private players in the
country plagued by time and cost overruns of these projects have become
increasingly wary of making heavy investments in this sector. It is estimated overall that the infrastructure sector
will require investment of $1 trillion out of which the government expects that
50% of the expenditure would be borne by private players through Public Private
Partnerships.
It is to be noticed that in the roads sector, the
National Highway of India authority was recently forced to replace build–operate-
transfer (PPP) model with the old EP&C model i.e. Engineering, Procurement
and Construction model as there were hardly any bidders for road building projects
on Build-Operate-Transfer (BOT) toll basis. Under an EPC contract, the
government funds the construction and the road developer only has to develop
the project in a stipulated period of time as opposed to BOT model under which the
concessionaire undertakes the entire responsibility of financing the project
and recoups it either through tolling rights or annuity. EP & C model
imposes a heavy financial burden on the government and is often reflective of
poor market health. This shift from BOT to EPC must be viewed in the context of
delay in previous projects and mounting debt pile of India’s biggest road
infrastructure companies owing to low traffic and related costs of development.
In 2011-12, NHAI had awarded a record 51 projects covering 6,700 km, of which
27 were awarded to developers on premium instead of the general practice of
seeking a capital grant from the Center known as Viability Gap funding[7].
It is to be noted that quoting a premium for a project
amounts to committing an annual payment to the government over a period of the
concession. Companies resort to offering a premium if they are confident that
toll revenues from the project will be able to offset their project cost.
However, 2012-end, the developers of Kishangarh-Udaipur-Ahmedabad and Shivpuri-Dewas
road projects sent "termination notices"to the government on the
ground of delay in regulatory approvals and 25 percent increase in the cost of
material required for building roads since the time the projects were awarded. While the government is responsible for present
situation, Companies too can be blamed for compromising on return on Equity by
shamelessly indulging in aggressive bidding without performing their due
diligence.
Exhibit 4 suggests that number of
bidders for projects was highest in 2011-12 and lowest in 2012.
Exhibit 5: Nearly 32 Bidders bid at premium and only 13 of them opted for viability Gap funding.
One of the major causes of delay in infrastructure projects is tendering of the project by the government without completing the process of land acquisition. In India, sometimes projects are awarded when only 30% of the land has been physically acquired leading to subsequent delays in the projects. Although Land Acquisition Bill of 2013 has streamlined the process of acquisition, it does not address the question of premature tendering and inordinate delay in approvals from various sectors such as the External Finance Committee, Public Investment Board, by the Cabinet Committee for Economic Affairs, Ministry of Environment and Forest etc. There are as many as fifty approvals that are required at pre-tendering stage and lack of defined timelines for such approvals may indefinitely delay the project.
Therefore, it
should become mandatory for the government to acquire at least 90 percent of
land before tendering PPP and EP& C projects. To ease the process of
acquisition, approvals must be given in a time bound manner and individuals
must be held personally accountable for any such delay. Secondly, the
government must appoint high power committee known as Performance Review
Committee as proposed by planning commission, to regulate and unlock
inter-ministerial deadlocks. It must monitor project portfolio, nodal agency
performance and ensure transparency in performance. Such committee should have the power to
summon representatives of various sectors to seek update on the status of
pending approvals or clearances and act as an interface between private
companies and the government.[8]
Besides this,
another factor that has led to stalling of infrastructure projects is lack of
quality risk assessment skills. For example: in the national highways
sub-sector, factors such as failure to identify that a particular project has
been planned beyond scope or that the concerned project is based on dated cost
estimate which has resulted in insufficient viability funding and failure to
challenge self-defeating contractual terms such as termination of concession when
traffic crosses a threshold level has been significantly responsible for cost
overruns. Therefore, developers will need to improve their risk assessment and
management capabilities. This would include setting up an independent group to
assess and manage risks at multiple stages and developing sophisticated tools
and systems to do so. The current crisis in the infrastructure sector can also
be attributed to lack of a value engineering mindset as well as poor
capabilities. Therefore, technical consultants should be appointed on quality-cum-cost
based approach and their selection must be based on their experience and
expertise.
The private
sector is finding it difficult to raise funds for infrastructure owing to lack
of availability of funds from the banking sector. This is because of the risk profile of
infrastructure projects has increased significantly due to issues related to
land acquisition, increased traffic risks, changes in the scope of projects,
cost overruns etc. As a result the Government of India in 2013 has set up India’s
first Infrastructure Debt Funds (IDF) worth one billion dollars to facilitate
the flow of long-term debt into infrastructure projects. In fact, former Finance
Minister P. Chidambaram had suggested that IDF
must mobilize resources from insurance and
pension sectors as these funds are available for long-term horizon[9].Further,
in the 2011-12 budget, the rate of withholding
tax on interest payments on the borrowings of IDF was reduced from 20 per cent
to five per cent with an aim to enhance resource availability for
infrastructure development[10].
It is to be seen what impact these measures have on the economy but failure to
curtail red tape may render them completely ineffective.
4.TAX
REFORMS: REPLACE MULTIPLE INDIRECT TAXES WITH UNIFORM TAX SYSTEM
Goods and Service Tax has been implemented in over 140
countries. Its popularity stems from the fact that it follows the method of a
Value added Tax which means that at every leg of a transaction where there is
value addition, the Goods and Service Tax (GST) becomes applicable. This is a
complete departure from the way taxes today are levied in India. GST is
classically defined as destination based consumption tax. There are two aspects
of GST: one that it is ultimately paid where the consumer is and second, it is
a transaction tax which means that at every leg of a transaction wherever there
is value addition, GST becomes applicable.
Today most assesses are subjected to multiple indirect
taxes which has rendered the entire taxation system extremely complicated often
resulting in poor realization of taxes by both the State and central
government. Indirect taxation system in its present form means that at a
central level there is excise duty on manufacture, service tax on rendering of
services, central sales tax on transaction of sale of movable goods from one
state to another whereas at State level there are State level Value added tax,
entry tax or octroi, entertainment tax, luxury tax etc. Under the proposed taxation
system, all these state and central level taxes would be replaced by a
comprehensive Dual GST to be levied concurrently by the Center (CGST) and the
States (SGST). This is to say that on every transaction there will be a central
and a State levy. Such a simplified uniform tax structure will completely
eliminate the scope of multiple interpretations of what are “goods” and what
are “services” by the tax authorities. It is to be noted that interpretative
disputes over what constitute as “goods” and “services” has opened floodgate of
litigation by tax authorities and tax payers. For example, in the existing
regime, there is no clarity as to whether software customized or otherwise,
should be taxed under VAT or Service Tax.
It is also to be noted that under GST, the entire
supply chain mechanism would be overhauled. In India goods are manufactured at
a few factories and from there the goods are stock transferred to various
states. A typically large company would have a depot per state. This
requirement of having a depot per state stems from the fact that under the
present taxation system while the manufacturer in State A can avail credit for
Central State Tax (CST) imposed on sale
of goods to State B, the dealer in State B cannot avail credit for the same when
he further sells the goods to State C. This is because credit for CST can be
availed only in State A where the goods originated. Therefore, most companies
stock transfer goods to their respective depots located in various states in
order to necessitate a local sale of goods for which dealers would get VAT
credit.
Thus, the entire supply
chain mechanism in India is designed around the tax structure instead of
important factors such as product flows, faster reach to market which would
reduce inventory and make the supply chain cost effective. Under GST, CST would
be replaced by Integrated Goods and Service Tax (IGST) which would be levied
concurrently by both State and Center and since it would be a consumption based
destination tax imposed on every interstate transaction, manufacturers would be
able to avail credit from both State and Center on every transaction
irrespective of the place of origin of goods. This will allow the manufacturing
companies to establish their warehouses for distribution at select strategic
locations without looking at the same as tax planning options resulting in
reduction in cost of operations and inventory holding costs. Thus, under GST, logistics
service providers would set up and run nodal warehouses resulting in cost and
time efficiency.
However, States are opposed to
implementation of GST on account of fear of loss of revenue accruing from
imposition of several State level taxes. Many States don’t want GST to cover
petroleum products and alcohol. According to a leading national daily ‘The Hindu’,
“the former contributed Rs 1,10,875 crore
in sales tax revenues in 2012-13, while excise from liquor yielded another Rs
80,000 crore or so. Bringing these under
GST would mean forgoing their ‘right’ to tax these products at rates they
decide upon”[11].
However, in order to persuade States to adopt GST, the Center has finally agreed
to pay compensation to States for any estimated loss of revenue. Similarly,
States are not agreeing to an Integrated GST
(IGST) model
because it is being proposed that it would be the Center that would collect the
tax and pass it on to the destination states through a central clearance
mechanism. Thus, owing to lack of trust and consensus building between the Center
and State governments, this major tax reformation has still not seen the light
of day. Unless and until tax structure is simplified, businesses in India will
continue to suffer because of multiplicity of taxes rendering products
uncompetitive.
CONCLUSION
In my opinion, lack
of uniform economic conditions, lengthy processes of approvals, delay in
introduction of major reforms and other unnecessary bureaucratic hurdles have
adversely affected the business climate of our country. It is very important
that the central government takes all stakeholders including various state
governments into confidence before implementing policy measures that are
pertinent for the improvement of the business environment in the country.
BIBLIOGRAPHY
1.Ease of Doing Business Report, 2014,
World Bank and International Finance Corporation. http://www.doingbusiness.org/rankings
2.BhibhuRanjan Mishra, 2013, eBiz,
India’s first government-to-business
portal launched, Business Standard, 16th April. Viewed 16th
April,2014.<
http://www.business-standard.com/article/companies/ebiz-india-s-first-government-to-business-portal-launched-113012800205_1.html>
3.BS reporter,
2014, Govt Launches portal to better Biz climate, 21st January,
viewed: 16th April 2014 http://www.business-standard.com/article/economy-policy/govt-launches-portal-to-better-biz-climate-114012000751_1.html
4. Doing Business 2014: Understanding
Regulations for Small and Medium Sized Enterprises pp.-110-112
5.Mihir Mishra, 2013, 24 ‘pemium’
highway projects hit roadblock, seek bailout, The Indian Express, 11th
July. Viewed:16th April, 2014.
<http://archive.indianexpress.com/news/24-premium-highway-projects-hit-roadblock-seek-bailout/1140375/>
6. Prashanta Gupta,
RajatGupta,ThomasNetzer, 2009, Building India: Accelerating Infrastructure
projects. Mckinsey& Company. Pp-11-16
7.The Hindu Bureau,2014 Chidambram:
IDFs should raise funds from insurance, pension sectors , The Hindu,8th
February, viewed: 16th February, 2014 <http://www.thehindubusinessline.com/economy/chidambaram-idfs-should-raise-funds-from-insurance-pension-sectors/article5667520.ece>
8. PTI,
2013, FIIs to pay only 5% withholding tax on interest income, 21st
May, viewed : 16th February,2014
9. The Hindu Bureau, 2013, Floundering
on GST, The Hindu Businessline, 21st November, viewed: 16th
February, 2014. <
http://www.thehindubusinessline.com/opinion/editorial/floundering-on-gst/article5376269.ece>
[1]
Ease of doing business report, 2014, World Bank and International Finance
Corporation. http://www.doingbusiness.org/rankings
[2] Director
Identification Number (DIN) is a unique identification number for an existing
director or a person intending to become the director of a company.
[3]BhibhuRanjan
Mishra, 2013, eBiz, India’s first
government-to-business portal launched, Business Standard, 16th
April. Viewed 16th April ,2014.
<http://www.business-standard.com/article/companies/ebiz-india-s-first-government-to-business-portal-launched-113012800205_1.html>
[4] BS
reporter, 2014, Govt Launches portal to better Biz climate, 21st
January, viewed: 16th April 2014 <http://www.business-standard.com/article/economy-policy/govt-launches-portal-to-better-biz-climate-114012000751_1.html>
[5]
Ease of doing business report, 2014, World Bank and International Finance
Corporation. http://www.doingbusiness.org/rankings
[6]Doing
Business 2014: Understanding Regulations for Small and Medium Sized Enterprises
pp.-110-112
[7]Mihir
Mishra, 2013, 24 ‘pemium’ highway projects hit roadblock, seek bailout, The
Indian Express, 11th July. Viewed:16th April, 2014.
<http://archive.indianexpress.com/news/24-premium-highway-projects-hit-roadblock-seek-bailout/1140375/>
[8]Prashanta
Gupta, Rajat Gupta,Thomas Netzer, 2009, Building India: Accelerating
Infrastructure projects. Mckinsey& Company. Pp-11-16
[9] The
Hindu Bureau,2014Chidambram: IDFs should raise funds from insurance, pension
sectors , The Hindu,8th February, viewed: 16th February,
2014 <http://www.thehindubusinessline.com/economy/chidambaram-idfs-should-raise-funds-from-insurance-pension-sectors/article5667520.ece>
[10]
PTI, 2013, FIIs to pay only 5% withholding tax on interest income, 21st
May, viewed : 16th February, 2014 <
http://articles.economictimes.indiatimes.com/2013-05-21/news/39419023_1_qualified-foreign-investors-debt-market-infrastructure-debt-funds>
[11]
The Hindu Bureau, 2013, Floundering on GST, The Hindu Businessline, 21st
November, viewed : 16th February, 2014. <
http://www.thehindubusinessline.com/opinion/editorial/floundering-on-gst/article5376269.ece>
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