Macro Matters

Why India’s climb up Doing Business rankings will be slow

Among bigger hurdles, India Inc may face transition problems in the initial phase of the much-awaited GST.

 |  Macro Matters  |  5-minute read |   03-11-2015
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Prime Minister Narendra Modi wants India to be among the top 50 nations in the ease-of-doing-business rankings. That’s quite a long haul from its current position of 130 among 189 nations. While it is debatable whether India will get to the desired spot on World Bank’s Doing Business rankings by 2019, it is clear that the many small steps the government is taking may fetch the country a better ranking in the next year. However, it’s unlikely to be a leap, unless the government pulls out a magic wand to push through a lot of reforms.

Big changes in India’s ranking are best expected in the report to be published in 2017.

Nevertheless, at the World Economic Forum’s one-day Strategic Dialogue in New Delhi on November 4, finance minister Arun Jaitley is expected to talk about the difference his government has made to the business environment. India’s ranking has climbed four places among 189 nations in the new methodology for calculating the ease of doing business. He is likely to promise a lot more, and one hopes the Opposition parties would extend him a helping hand.

There are two major significant legislative changes where the Union government can play a lead role to make a big difference - not just in the rankings, but more importantly, in the business environment. These are the implementation of the goods and services tax (GST) regime and putting in place a robust law to deal with insolvencies. Migration to GST is high on the government’s agenda, but it faces a few impediments. Its impact will not be seen immediately either. In contrast, putting in place laws to deal with insolvencies would be much easier, and the cooperation of Opposition parties may be more forthcoming on this front. Also, the new insolvencies laws are likely to yield results more rapidly. Here’s why.

The Companies Act, 2013, the law that governs how companies are established, operated and closed, has provisions to deal with insolvency - allowing speedier rescues and winding up. However, these provisions have not been made effective as yet, because this part of the law has to be administered through the National Company Law Tribunal (NCLT) and its appellate tribunal. The constitutional validity of the NCLT was challenged in the courts. The National Company Law Tribunal (NCLT) and its appellate tribunal is supposed to have some of the powers of a high court and would deal with most matters to do with companies such as winding up, liquidation, mergers and acquisition, as well as the protection of stakeholders' interest.

The Supreme Court has upheld the constitutional validity of the NCLT and its appellate tribunal, but raised certain objections with respect to how the tribunal is to be set up, its members appointed as well as the qualification of certain members. The apex court, in its order, has made certain recommendations on amending the Companies Act to rectify problems. Unless these amendments are incorporated, the Supreme Court is unlikely to allow the tribunals to be set up - because the Chief Justice of India chairs the selection panel for appointment of members.

Since the government is intent on a modern insolvency code, amendments to the Companies Act are likely in the next session. Meanwhile, it has already kicked off the process of setting up the NCLT by seeking to appoint its secretary and registrar. If the amendments are cleared and appointments of members completed in the first few months of the next year, the tribunals may become operational in the second half of the next calendar. Once it does, restructuring or closing down a sick company would hopefully become less cumbersome and take less than the four to ten years it does now.

But the most watched tax reform - the goods and services tax or GST - has a few legislative hurdles to cross to begin with. The amendment of the Constitution to empower both the Centre and states to tax all sale of goods and services is yet to be cleared by the Rajya Sabha. That amendment of the Constitution also needs to be ratified by half the states in the country. In addition to that, there are three GST laws - Central GST, State GST and Integrated GST - that needs to go through Parliament and state legislatures. There is the GST network that needs be implemented in every state to enable businesses to pay taxes and the states to transfer some of the taxes to other states.

In addition, each business needs to make changes in their enterprise resource planning software solutions to track the movement and sale of goods and supply of services to pay tax. Even though there is a lot of progress on each of the fronts, it is ambitious to expect a GST rollout before October 2016. That would mean this reform will not contribute to improve rankings in the next year. And, in any case, businesses may face transition problems in the initial phase of implementation of GST.

These are just two of the big changes required to make India an easier place to do business. Greater use of information technology to reduce human interface for payment of taxes and obtaining clearances, increased use of self-declaration and speedier commercial dispute settlement through courts, all of these will go a long way to make India an easier place to do business. Many of these will not face political hurdles. Only, the government needs to focus on implementing its mantra of minimum government, maximum governance.

Writer

Tina Edwin Tina Edwin @tinaedwin

The writer is a Delhi-based journalist.

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