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Ease of Doing Business

Author: Ashok Chowgule
Publication: Hindu Vivek Kendra
Date: May 11, 2020
URL:   http://hvk.org/2020/0520/19.html

Ease of doing business is a powerful concept to help the entrepreneur to set up a business, and, if the business is successful, to nurture it to grow to the satisfaction of the entrepreneur.  The basic criteria to determine if there is actually easy to do business would be that the entrepreneur should encourage others, especially his family, to follow (or join) him and set up similar business or to go into business themselves.  If every day an entrepreneur says “Why did I get in business, instead of being in employment with someone else?” then obviously doing business is not easy.  (I am assuming that the business model of the entrepreneur is successful.)

To ensure that the concept does not remain a mere slogan, I would like to suggest some elements that will take it to a reality.  These suggestions are initial ones on my side.  Additionally, others may have many more to give.  I am also suggesting action points which are in the realm of administrative actions, and not legislative.

I would also like to suggest that we follow the principle of 20:80 that is common in the business – it says that the first 20% of the effort will lead to 80% of the expected benefits.  The objective is to quickly implement them to show that improvements are possible.  Additionally, these improvements will improve the bottom line which will generate resources to make the investment for the next set of improvements.

My suggestions are:

a. On validity of licences.

I. Some of the licences like Shop & Establishment act licence is for the purpose of census enumeration and not a permission to conduct a business.  Such licences should have a life-long validity, or till such time the businesses closes or shifts from that particular premise.  Today, the licences are valid for a limited period, sometimes even one year.  The work of renewing is an exercise that involves a lot of effort, particularly for the small and medium enterprises, where the entrepreneur himself has to get himself involved, distracting him from his main tasks.

II. Other licences are sought to have periodic update of validity, to ensure some conditions (often relating to safety) are being followed.  Here too the validity can be on the same basis as above, with the proviso that on a periodic basis a third-party inspector confirms that the conditions are met.
b. In some cases, there are multiple licences that have to be sought.  For example, relating to electricity.  A high tension consumer has to have a low tension licence as well.  And a high tension consumer with a connected load beyond a threshold has to have an additional licence.  It should be a understood that a high tension user has also some equipment which has low tension connection.  Hence, what should be done is that there is one licence depending upon conditions relating to power demand by the unit.
c. Many of the acts have science behind them.  They have not been enacted with the express purpose of harassing people.  For example, in the factories act there are many provisions relating to the safety of the work place.  A task of the inspector is to ensure that these provisions are met.  In ordinary case, the owner of the factory would follow them because an accident is a big loss for him.  If he does not, hee will be seen as a bad employer and, in addition, he will have a loss of production.  There may be some owners who deliberately do not follow the laws.  And there some who inadvertently miss out on certain provisions for a period of time.  The job of the inspector is to ensure that these laws are followed.  It is suggested that this inspection can be outsourced to a third-party who would certify, after verification, that the provisions are met.

d. The above should be implemented in case of many other acts where inspections are required, like labour law, etc.  It is my experience that meticulously following the law actually increases the efficiency of the business.  A qualified third-party inspector can also be an advisor for better implementation of the laws, since he would have a specialised knowledge.  He will also bring in knowledge from across the industry, particularly from another sector, which will help the owner of the facility.
e. There is a necessity for reviewing some of the provisions of the existing laws.  While doing the review there should be an understanding the objective of the provision.  At the time the law was formulated, the method to achieve the objective was determined on the basis of the knowledge available then.  For example, there is a provision that walls in a factory have to be white-washed.  The objective here is not aesthetic but disinfection.  Today’s technology achieves the same purpose in a better way.  An across the table discussions, in an atmosphere to find a solution, will lead to many changes that are desirable.
f. When Angus Smith, considered to be the father of the system of inspectorate in the second half of the 19th century, said: “There are two modes of inspection. One is by a suspicious opponent, desirous of finding evil and ready to make the most of it. The other is a friendly adviser, who treats those whom he visits as gentlemen, desirous of doing right.”  I think we should train both the inspectors and those being inspected to work in the second mode.
g. On land laws.  The two reasons for the present law.  There is a perception that there is a diversion of vast tracts of agriculture land to other uses, and this will threaten food security.  Secondly, the land owners would be taken for a ride by the ‘unscrupulous capitalist’.
The first reason is a myth.  The cultivable land in India is more than 50% of the total land mass, and our country has the second most such area in the world, a little less than the USA.  Residential and industrial land together constitutes 15% of the land mass.  If 5% points of the agriculture land is diverted to these other uses, it would mean that the increase in availability will be more than 30%.  I do not think that this is the increase that is needed for this sector for quite some time to come.

Moreover, it needs to be understood that the agriculture productivity in India is some 40% of the world average, and much more less than the world’s best.  If the productivity is increased to 50%, then the agriculture production in the country will increase by 25%.  In any case, agriculture productivity needs to be increased to increase farm income, making agriculture viable.

Regarding the image of the ‘unscrupulous capitalists’, the cases that are available are actually those of cronyism.  This has happened because of the stringency in the laws, partly, and a system of discretion available to the powers that be.

h. Income Tax.  There is a lot of talk about simplification.  At the same time, there is a demand from the industry for exemptions or incentives.  The industry should understand that such demands cannot go along with simplification.  Moreover, exemptions reduce the tax base, which has an effect of increasing the tax rate.  And, it is often the case that exemptions are available only to a certain group of people or firms.  In particular the value of the exemptions is more in case of those in the higher tax brackets, which effectively reduces their tax rate.  So, I would like to suggest that the following slabs of rate be applied, and doing away with all the exemptions:
For incomes below Rs 5 lakhs – zero rate
For incomes between Rs 5 lakhs and Rs 20 lakhs – 10%
For incomes between Rs 20 lakhs and Rs 40 lakhs – 20%
For incomes above Rs 40 lakhs – 30%

The slabs given are for the purpose of reference, and the same can be tweeked a little.  As said above, the value of exemptions would not be significant for those with income below Rs 20 lakhs, and of medium value for those in the next slab.  However, the simplification will have a large value, in terms of less interaction with the tax authorities.

I will stop here, with a hope that my reader understands the basic trend in my thinking.  And also with a hope that we should try to quickly implement these suggestions, if merit is found in them, and THEN work out more proposals.  It is my experience that working out a comprehensive solutions would take much more time than implementing the basic solutions.  It is also against the 20:80 principle that I have explained above.

Most of the above proposals relate to what are called low hanging fruits, and can be tackled even as we work out proposals in other areas.  For example, these proposals have nothing to do with the implementation of GST, and hence we need not wait for a consensus on the issue.

(Ashok Chowgule belongs to a business family based in Goa.)

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