TIOL-DDT 2957
26 10 2016
Wednesday

Ease of Doing Business

THE opportunity to find a job or develop one's business idea is crucial for most people's personal satisfaction. It creates a sense of belonging and purpose and can provide an income that delivers financial stability. It can raise people out of poverty or prevent them from falling into it.

But what does one need to find a job or to start a business, especially if that job or business is in the private sector?

Many things are needed, but well-functioning markets-that are properly regulated so that distortions are minimized-are crucial. Governments play a pivotal role in establishing these well-functioning markets through regulation. If the land registry is not required to provide reliable information on who owns what, for example, the efficacy of the property market is undermined making it difficult for entrepreneurs to acquire property, put their ideas to practice and create new jobs. Without well-regulated credit information sharing systems it is difficult for credit markets to thrive and be more inclusive. A properly functioning tax system is also key. Where the burden of tax administration is heavy-making it difficult to comply with tax obligations-firms will have an incentive to avoid paying all taxes due or may opt for informality, thereby eroding the tax base.

To start a business, entrepreneurs need a business registration system that is efficient and accessible to all. Failure is part of taking risks and innovating. For people to be willing to start a new business there needs to be a well-developed system in place for closing businesses that do not succeed.

In its Doing Business 2017 Report released yesterday, the World Bank seems to be appreciative of India's efforts, but India remains at the bottom rank of 130 out of 190 economies in the ease of doing business.

New Zealand, Singapore, Denmark, Hong Kong, Korea, Norway, UK, USA, Sweden and Macedonia are the top 10 countries for ease of doing business. If you are looking for ease of doing business, you will not go to Somalia which is ranked 190 at the very bottom of the list.

India has embarked on an ambitious reform path - World Bank Report

THE current government of India was elected in 2014 on a platform of increasing job creation, mostly through encouraging investment in the manufacturing sector. Soon after the elections, policy makers realized that for this to occur substantial improvements would need to be made to the country's overall business regulatory environment. The Doing Business indicators have been employed as one of the main measures to monitor improvements in India's business climate. As a result of the election platform-driven reform agenda, over the past two years the Doing Business report has served as an effective tool to design and implement business regulatory reforms.

The data presented by the Doing Business indicators have led to a clear realization that India is in need of transformative reforms. The country has embarked on a fast-paced reform path, and the Doing Business 2017 report acknowledges a number of substantial improvements. For example, India has achieved significant reductions in the time and cost to provide electricity connections to businesses. In 2015/16 the utility in Delhi streamlined the connection process for new commercial electricity connections by allowing consumers to obtain connections for up to 200 kilowatt capacity to low-tension networks. This reform led to the simplification of the commercial electricity connection process in two ways. First, it eliminated the need to purchase and install a distribution transformer and related connection materials, as the connection is now done directly to the distribution network, leading to a reduction in cost. Second, the time required to conduct external connection works by the utility has been greatly reduced due to the low-tension connection and there is no longer a need to install a distribution transformer. As a result, the time needed to connect to electricity was reduced from 138 days in 2013/14 to 45 days in 2015/16. And in the same period, the cost was reduced from 846% of income per capita to 187%.

Pat for Customs:

In the area of trade, as of April 2016 the Customs Electronic Commerce Interchange Gateway portal allowed for the electronic filing (e-filing) of integrated Customs declarations, bills of entry and shipping bills, reducing the time and cost for export and import documentary compliance. The portal also facilitates data and communication exchanges between applicants and Customs, reducing the time for export and import border compliance. Additionally, an Integrated Risk Management System has become fully operational and ensured that all the consignments are selected based on the principles of risk management.

Compliments to Companies Act:

The government of India adopted the Companies (Amendment) Act (No. 21) in May 2015. The amendments were published in the official gazette and immediately entered into force upon notification by the Ministry of Corporate Affairs. As a result, the minimum capital requirement for company incorporation was abolished and the requirement to obtain a certificate to commence business operations was eliminated.

Commercial Courts:

To improve court efficiency, the passage of the Commercial Courts, Commercial Divisions and Commercial Appellate Divisions Act of 2015 established effective mechanisms for addressing commercial cases. And in May 2016 the government of India enacted the Insolvency and Bankruptcy Code (IBC), which-when it comes into effect-will overhaul the 60-year-old framework for company liquidation and introduce new insolvency practices. The experience of implementing reforms based on Doing Business data has demonstrated to the government the significance of establishing clear stakeholder feedback mechanisms to close the gaps between policy formulation and implementation. Finally, the government has also acknowledged the need to implement reforms across the country-not just in Mumbai and Delhi, which are the cities covered by Doing Business. Lawmakers have recommended the implementation of a large number of reforms across all States, going beyond the scope of Doing Business.

India the first economy in the world with a quantified and legislated Corporate Social Responsibility (CSR) requirement

RATHER than a popular initiative focused on managerial compensation-albeit a central issue with multiple ramifications-the government of India took on the task of completely overhauling its Companies Act, its primary set of rules governing how businesses are incorporated, owned, managed, rehabilitated or closed when insolvent, and challenged in court. The previous version dated from 1956. Ambitious and comprehensive legislation takes time. India's law-making process started in 2004 and was followed by years of drafting, redrafting and consultations on the bill. It was finally submitted to parliament in 2012 and passed by the upper house on August 8, 2013. It received the assent of the president shortly after, on August 29. The date of entry into force is less straightforward. India follows an unusual system whereby provisions are not applicable until the Ministry of Corporate Affairs notifies each section; notification typically happens in waves. The first took place in September 2013 with the notification of 98 sections followed by another series of notifications in April 2014. As of June 2016, 282 of the 470 total sections were notified and eight provisions of the 1956 Act remain applicable. Despite this piecemeal introduction, it has paid off both in economic terms and in India's performance in Doing Business: India's score increased in three of the six indices of the protecting minority investors indicator set.

Four objectives guided the drafting of the reformed Companies Act. First, administrative requirements weighing on companies had to be simplified. Second, more transparency had to be instilled in their operations and decision-making structures. Third, the competitiveness of Indian firms had to be increased by bringing them in line with global standards, particularly regarding accountability and corporate governance practices. Lastly, it had to advance all of the above while ensuring that businesses contribute more to shared prosperity in an economy where demographics and income inequality pose stark challenges.

To simplify administrative requirements, the minimum paid-in capital was abolished. To instill greater transparency, the Act increased disclosure requirements, particularly regarding related-party transactions. To bring Indian firms in line with global standards the Act added requirements to disclose managerial compensation and to have one-third independent directors and at least one woman on the board. The fourth objective, however-contributing to greater shared prosperity-garnered the most attention by aspiring that all companies allocate 2% of their net profits to socially responsible projects. In effect, India became the first economy in the world with a quantified and legislated Corporate Social Responsibility (CSR) requirement. However, it is enforceable on a "comply or explain" basis and goes beyond the scope of areas measured by Doing Business. In practice, this means that companies who fail to meet the target must simply state so in their annual report and provide a justification. The Act provides a statutory definition of CSR as activities relating to hunger and poverty eradication, education, women empowerment, and health and environmental sustainability, among others.

Company regulation is an ongoing process. Since the enactment of the Companies Act, 2013, the Ministry of Corporate Affairs has issued clarifications, notifications and circulars on a regular basis to address ambiguities in the law. Most notably, two sets of amendments were released in August 2014 and in May 2015, highlighting the Indian government's ongoing commitment to reform. On June 4, 2015, it set up a committee tasked with identifying and recommending further amendments to the Act and with centralizing recommendations and concerns from private sector stakeholders and regulatory agencies. The case of India serves as a reminder of the time it takes and the challenges inherent to a holistic legislative overhaul. Piecemeal fixes can be a time-and cost-effective approach, but only a full-fledged legislative reform gives policy makers the opportunity to innovate and sends a strong signal to the business community.

Ease of Doing Business - Documentary compliance

DOCUMENTARY compliance captures the time and cost associated with compliance with the documentary requirements of all government agencies of the origin economy, the destination economy and any transit economies. The aim is to measure the total burden of preparing the bundle of documents that will enable completion of the international trade for the product and partner pair assumed in the case study. As a shipment moves from Mumbai to New York City, for example, the freight forwarder must prepare and submit documents to the customs agency in India, to the port authorities in Mumbai and to the customs agency in New York City.

The time and cost for documentary compliance include the time and cost for obtaining documents (such as time spent to get the document issued and stamped); preparing documents (such as time spent gathering information to complete the customs declaration or certificate of origin); processing documents (such as time spent waiting for the relevant authority to issue a certificate); presenting documents (such as time spent showing a port terminal receipt to port authorities); and submitting documents (such as time spent submitting a customs declaration to the customs agency in person or electronically).

All electronic or paper submissions of information requested by any government agency in connection with the shipment are considered to be documents obtained, prepared and submitted during the export or import process. All documents prepared by the freight forwarder or customs broker for the product and partner pair assumed in the case study are included regardless of whether they are required by law or in practice. Any documents prepared and submitted so as to get access to preferential treatment-for example, a certificate of origin-are included in the calculation of the time and cost for documentary compliance. Any documents prepared and submitted because of a perception that they ease the passage of the shipment are also included (for example, freight forwarders may prepare a packing list because in their experience this reduces the probability of physical or other intrusive inspections).

In addition, any documents that are mandatory for exporting or importing are included in the calculation of time and cost. Documents that need to be obtained only once are not counted, however. And Doing Business does not include documents needed to produce and sell in the domestic market-such as certificates of third-party safety standards testing that may be required to sell toys domestically-unless a government agency needs to see these documents during the export process.

India Committed to Improving its Doing Business

THE Report also says:

The Indian government, has committed to improving its Doing Business ranking by steadily implementing reforms across all indicators

After changes were made to the Hindu Succession Act improving inheritance rights for women in India, there was an increase in education for girls.

In India the establishment of debt recovery tribunals reduced non-performing loans by 28% and lowered interest rates on larger loans, suggesting that faster processing of debt recovery cases cut the cost of credit.

Our rank, however is 130 out of 190. There are at least 129 countries where it is easier to do business than in India - and that includes our poor neighbours Nepal and Sri Lanka. Where will GST rank us?

Income Tax - Taxability of compensation received by land owners for land acquired under Right to Fair Compensation - CBDT clarifies

UNDER the existing provisions of the Income-tax Act, an agricultural land which is not situated in specified urban area, is not regarded as a capital asset. Hence, capital gains arising from the transfer (including compulsory acquisition) of such agricultural land is not taxable. Finance (No. 2) Act, 2004 inserted section 10(37) in the Act from 01.04.2005 to provide specific exemption to the capital gains arising to an Individual or a HUF from compulsory acquisition of an agricultural land situated in specified urban limit, subject to fulfilment of certain conditions. Therefore, compensation received from compulsory acquisition of an agricultural land is not taxable under the Act (subject to fulfilment of certain conditions for specified urban land).

CBDT clarifies that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the provisions of Income-tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income-tax Act, 1961.

CBDT Circular No. 36/2016., Dated: October 25, 2016

Until Tomorrow with more DDT

Have a nice day.

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