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Last Updated : Oct 29, 2019 10:45 AM IST | Source: Moneycontrol.com

The gain and the pain of ease of doing business in India

The National Ease of Doing Business Policy that measures the time and cost of compliance will mark the paradigm shift we need to break into the top 25

Representative Image
Representative Image

Sumita Kale

India has made a stupendous achievement rising to the 63rd rank on the World Bank Ease of Doing Business Index this year. The continuous upward trajectory over the past few years is a result of committed reforms by the government, from the days when we were stuck in the 130-140 rank range.

The target has now been set to break into the top 25 in the next five years. While this may seem like a tough challenge indeed, the idea that India would be in the top 60 in 2020 would have been unbelievable, five years ago. For the leap ahead, though, we need to change the way the government looks at regulation.

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While India’s rise in the global ranking is definitely a significant achievement for the government, some have pointed out (MoneyControl, October 24, 2019) that the news has limited value for businesses. Indian firms have discounted the gains from the reforms that have taken place and stay focused on today’s pain, burdened as they are by the high regulatory cholesterol of over 58,000 compliances and over 3,000 returns a year.

The complexity in regulation in India is much more than the 41 measures tracked by the World Bank. Small companies, in particular, are strapped for bandwidth as they struggle to keep up with the 2500+ legal updates in a year.

In conversations with MSMEs, we find that small firms bear a disproportionate burden of compliance -- Some report that a third of their time goes in ensuring they are meeting all the rules and laws, filing returns on time, correctly. For example, a chemical firm with just one factory has 72 applicable Acts, more than 1,000 compliances, averaging 10 filings monthly. Within its first year, a startup has to obtain registrations under at least seven regulators and file anywhere between 18 and 69 returns, depending on its specific business. The effort to stay compliant saps productivity, making it difficult for entrepreneurs to scale.

When it comes to Ease of Doing Business, India should benchmark its measures to the best in the world. Looking at just one indicator -- the World Bank report showed that an Indian business spends 252 hours paying taxes, last year this was 275. Definitely an improvement, but Chinese firms spend 138 hours paying taxes while a business in the best performing country Singapore spends 49 hours. This explains why the euphoria over the corporate tax rate cut announced recently has died down so fast.

On just finance and taxation, Indian businesses struggle with more than 9,000 compliances and 600+ filings. To make matters worse, there have been more than 600 updates over the past year. A very simplistic exercise using the World Bank scorecard shows that, all else remaining constant, if the businesses in India spent half the number of hours paying taxes, India’s rank in this category would jump from 115 to 96. But imagine the relief to businesses in time and cost spent in ensuring compliance!

It is exactly this aspect of time and cost of compliance that is reportedly on the radar of the government now. In its update on the first 100 days of the new government, the DPIIT announced that the National Ease of Doing Business Policy has been finalised. While specific details are not yet out in the public domain, this policy reportedly puts the onus on  government departments to measure the time and cost spent by companies on licences, registrations, renewals and the like and work towards rationalising the burden, simplifying and digitising the compliance process.

The policy should, however, go beyond licences and registrations and also keep in mind that companies of different sizes face different challenges, and in some cases, a threshold may significantly ease compliance for small companies. To take just one example, a new compliance instituted earlier this year to tackle the issue of delayed payments to MSMES is the MSME Form1, a half yearly return to declare outstanding dues to micro and small businesses. It is bad enough that small companies are not paid on time by large companies, filing a half-yearly return has just added to their compliance burden. This return should ideally be made applicable only for companies with turnover exceeding, say, Rs 250 crore.

Done well, the National Ease of Doing Business Policy can mark a paradigm shift in the way the government views regulation. Easing the compliance burden is the game-changing move that our businesses need to unleash their productivity, the move that we desperately need to realise our goal of a 5 trillion dollar economy, the move that will take India into the top 25 ranks in the world.

(Sumita Kale is Economist, Avantis Regtech, A TeamLease company. Views are personal.)

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First Published on Oct 29, 2019 10:44 am
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