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Tangled In Red Tape

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Santram ‘Santu' Vishkarma, PAN card holder and proud employer of 70 people, decided to get his wood-carving and furnishing units in Mumbai registered as one company for better financing and tax benefits. For this, he spent two laborious months securing the necessary environmental clearances and bank approvals, and negotiating tax slabs, concessions and employee benefits. It was a harrowing experience. "I think I was better off as an individual employing a few people, who were paid at the end of the day," he says now.

Vishkarma's woes are not unusual. Despite more than two decades of economic liberalisation, India still does not have a ‘single window' clearance for businesses like the kind China has in place. Currently, no less than 11-13 approvals, eight from the Centre alone, are required for an entrepreneur to start a business in India.

"On the face of it, Indian regulations appear reasonable in many aspects," says Jai Mavani, head of infrastructure and real estate at KPMG. "However, the challenge lies in the process. Because of the multiplicity of approving authorities and absence of single-point ownership, often one has to traverse a labyrinth of documents and government corridors to get approvals."

Right To Speedy ClearanceOne consequence is that India now has sectoral variances: although there are far more opportunities in production, manufacturing and construction, investors find agriculture and the services sector easier to work with. Moreover, "funding by banks is still a mirage for a start-up," says Vishambhar Saran, president of the Indian Chamber of Commerce in Kolkata.

Despite special loans and interest incentives, banks refuse to risk their bottom lines with fledgling businesses, particularly during economic crises. This has added a further 15-20 per cent procedural work to starting a business.

Centre Vs States
"A key issue is that while policies are formulated at the Centre from a national perspective, states set their own priorities because of local and political considerations," says Suryavir Singh, head, strategic planning, Sahara Prime City. "They (bureaucracy) find refuge in the fact that rules and regulations are not uniform across all states."

As sources of energy fall under the state list, Andhra Pradesh wants preference in gas allocation in the Krishna-Godavari Basin, Rajasthan is trying to squeeze the last penny out of Cairn Energy, which has started production from Barmer, and Orissa has been demanding more investments in lieu of its mineral resources.

"Though a dissonance between the Centre and states is quite common in a federal set-up with certain subjects on the concurrent list, it is the lack of a national perspective that is causing the rift to widen," says Amit Ladsaria, director of Turtle, a clothing company. An example is the Press Note relating to foreign direct investment (FDI), which has created uncertainty among foreign investors who made investments based on certain assumptions, only to face legal and technical issues in some states.

The Tax Hurdles
Archaic local taxes such as octroi, which bring the Brihanmumbai Municipal Corporation the bulk of its revenues, have pushed manufacturing out of Mumbai. There are at least 11 such taxes in different states. Inter-state reforms suggested by the Sarkaria Commission can untangle these issues if they are implemented in the right spirit.

The Economic Survey of 2008-09 wants a neutral corporate tax regime to replace the Income Tax Act of 1961, which has been modified over 5,000 times by various finance ministers resorting to the Finance Act (Budget) route. Experts believe that a single, higher tax rate for both personal and corporate tax will ensure better tax compliance and revenue generation.

At The Receiving End
"Real estate is the most unnecessarily and overly regulated sector," says Santosh Rungta, president, Confederation of Real Estate Developers' Association of India. "It is difficult to create affordable housing when various taxes, levies, fees and charges account for 25-30 per cent of cost." At every level, from land identification up to delivery and maintenance, clearances are required, and the lack of a single window for approvals complicates matters further.

Sectors such as print media, broadcasting, and retailing of single-brand products, require multiple licences for doing business. Also, "Legally speaking, an investor in India suffers from the lack of practical advice," says Rabindra Jhunjhunwala, partner, Khaitan and Co. As investors come without understanding the delays associated with starting a business, they end up with unrealistic timelines and cost escalations.

Is China A Role Model?
Though the World Bank's India ranking (121) for starting a business is better than that of China (151), it is still behind Russia (65) and neighbours Sri Lanka (29) and Pakistan (77). China attracts large foreign investment, thanks to faster clearances and economic experiments — one example is the way it linked its organised retail to domestic procurement to improve manufacturing and job creation.

"Bureaucracy (in India) has simply not kept pace with the changes in technology, business practices and globalisation," says Nirmal Jain, chairman and managing director of India Infoline. "Today, even the smallest clerk from any (government) department can cause harm."

Click here to view enlarged imageBut looking to China for answers is seen as defeatist. The growth of the Indian economy is largely attributed to Indian entrepreneurship against China's FDI-oriented growth. India's globally competitive IT sector, large consumption economy, sound managerial talent pool and transparent capital market and banking systems are seen as good examples. This compares rather well to, say, China's technically insolvent banking sector. "As bohemian as it may sound, an ideal combination would be Indian creativity and ideation with China's blinkers-on approach to implementation," says Mavani.

The World Bank's Doing Business Survey for 2009 says India has introduced seven major reforms in entering a business, registering a property, getting credit, paying taxes and trading across borders. Inter-state sale transactions will be phased out by March 2010, and value-added tax has been the single-most investment-friendly revenue reform of recent provenance. Electronic filing of most taxes, e-governance rules such as tender processing and court filing, new laws such as the Securitisation Act, and the strengthening of Debt Recovery Tribunals, are notable improvements. But while import and export activities have been simplified, enforcing a contract is still tangled in lengthy procedures.

Indeed, what we perceive as over-regulation may not always be for strategic reasons. The plethora of procedures sometimes are the result of historical accumulation. As our laws are largely based on the British common law, legislations first introduced during the Raj are still in vogue in some modified form or other. For instance, while the Charitable Trust Act of 1920 remains an as-yet-unrevised copy of Elizabethan laws, the amendments to the Indian Telegraph Act of 1885 and the Banking Regulation Act of 1949 have facilitated growth in both these sectors. A comprehensive overhaul of key laws could hold the answer to necessary, but not excessive, regulation.


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