Doing Business in India

Policy

Doing Business in India

Vatsal Khullar - November 1, 2017 Comments

‘Ease of doing business’ refers to the regulatory environment in a country to set up and operate a business. Every year, the World Bank compares the business environment in 190 countries in its Ease of Doing Business Report. In its report released yesterday, India’s rank improved to 100 out of 190 countries in 2017, from its rank of 130 in the previous year.[1]^,[2] In this context, we explain the parameters on which each country is ranked, what has led to India’s improvement in rankings, and some recommendations made by committees to further improve the business environment in the country.

What parameters is a country ranked on?

Table 1 (2) The ease of doing business rankings are based on a country’s performance on 10 parameters such as enforcing contracts and starting a business. In India, these rankings are based on the business environment in Mumbai and Delhi. A lower rank indicates better performance on that parameter, whereas a higher rank indicates worse performance on the indicator. India’s ranking improved in six out of the 10 parameters over the previous year, while it remained the same or fell in the remaining four (see Table 1).

Note that these parameters are regulated by different agencies across the three tiers of government (i.e. central, state and municipal). For example, for starting a business, registration and other clearances are granted by central ministries such as Finance and Corporate Affairs. Electricity and water connections for a business are granted by the state electricity and water boards. The municipal corporations grant building permits and various other no objection certificates to businesses.

What has led to an improvement in India’s ease of doing business rankings?

According to the 2017 report, India introduced changes in some of these parameters, which helped in improving its ranking.¹ Some of these changes include:

Starting a business: Starting a business involves obtaining clearances, and conforming to various regulations under laws such as Companies Act, 2013. The report noted that India merged the application procedure for getting a Permanent Account Number (PAN) and the Tax Account Number (TAN) for new businesses. It also improved the online application system for getting a PAN and a TAN.

Getting credit and resolving insolvency: The Insolvency and Bankruptcy Code passed in 2016 provides for a 180-day time-bound process to resolve insolvency.[3] It also provides for the continuation of a debtor’s business during these proceedings. The Code allows secured creditors to opt out of resolution proceedings, and specifies that a debtor will be immune against creditor claims during the 180-day insolvency resolution process. Prior to the passage of the Code, it took 4.3 years in India to liquidate a business (as of 2015).

Paying taxes: The report notes that India made paying taxes easier by requiring that payments to the Employees Provident Fund are made electronically.[4] Further, it introduced measures to ease compliance with corporate income tax.¹^,[5]

Trading across borders: Import border compliance at the Jawaharlal Nehru Port, Mumbai was reduced. Export and Import costs were also reduced through increasing use of electronic and mobile platforms, among others.

Enforcing contracts: The introduction of the National Judicial Data Grid has made it possible to generate case management reports on local courts.[6]

What are some of the other recommendations to improve the business environment in India?

Over the last few years various committees, such as an Expert Committee constituted by the Department of Industrial Policy and Promotion and the Standing Committee of Commerce, have studied the the regulatory requirements for starting a business in India and the made recommendations on the ease of doing business.[7]^,[8]^,[9] Some of the issues and recommendations made by these committees are discussed below.

Starting a business: The Standing Committee observed that regulations and procedures for starting a business are time-consuming.⁸ The Committee observed that as a consequence, a large number of start-ups are moving out of India and setting base in countries like Singapore where such procedures are easier. It emphasised on the need to streamline regulations to give businesses in India a boost. Note that the government announced the ‘Start-up India Action Plan in January 2016.[10] The 19-point plan identified steps to simplify the process for registering and operating start-ups. It also proposed to grant tax exemptions to these businesses.

The Committee had suggested that the procedures and time period for registration of companies should be reduced. In addition, a unique business ID should be created to integrate all information related to a debtor. This ID should be used as sole reference for the business.

Acquiring land, registering property: Under the current legal framework there are delays in acquiring land and getting necessary permissions to use it. These delays are on account of multiple reasons including the availability of suitable land and disputes related to land titles. It has been noted that land titles in India are unclear due to various reasons including legacy of the zamindari system, gaps in the legal framework and poor administration of land records.[11]

The Standing Committee observed that the process of updating and digitising land records has been going on for three decades. It recommended that this process should be completed at the earliest. The digitised records would assist in removing ambiguity in land titles and help in its smooth transfer. It also suggested that land ownership may be ascertained by integrating space technology and identification documents such as Aadhaar. Note that as of September 2017, land records had been linked with Aadhaar in 4% of the villages across the country.[11]

Several states have taken steps to improve regulations related to land and transfer of property.⁸ These steps include integration of land records and land registration by Andhra Pradesh and Gujarat, and the passage of a law to certify land titles in urban areas by Rajasthan. The Committee also recommended creating a single window for registration of property, to reduce delays.⁸

Construction permits: In India, obtaining construction permits involves multiple procedures and is time consuming. The Standing Committee had observed that it took 33 procedures (such as getting no objection certificates from individual departments) over 192 days to obtain a construction permit in India.⁸ On the other hand, obtaining a similar permit in Singapore involved 10 procedures and took 26 days.

Taxation: The Standing Committee had noted that the tax administration in India was complex, and arbitration proceedings were time-consuming. It observed that the controversies on the Minimum Alternate Tax on capital gains and the tax disputes with companies like Vodafone and Shell had harmed India’s image on taxation matters. Such policy uncertainty and tax disputes have made foreign companies hesitant to do business in India.⁸

The Committee observed that for ‘Make in India’ to succeed, there is a need for a fair, judicious and stable tax administration in the country. Further, it suggested that to reduce harassment of tax payers, an electronic tax administration system should be created.⁸ Such a system would reduce human interface during dispute resolution. Note that the Goods and Services Tax (GST) was introduced across the country from July 1, 2017. The GST framework allows for electronic filling of tax returns, among other measures.[12]

Enforcing contracts: Enforcing contracts requires the involvement of the judicial system. The time taken to enforce contracts in India is long. For instance, the Standing Committee noted that it took close to four years in India for enforcing contracts. On the other hand, it took less than six months for contract enforcement in Singapore. This may be due to various reasons including complex litigation procedures, confusion related to jurisdiction of courts and high existing pendency of cases.⁸

The Standing Committee recommended that an alternative dispute resolution mechanism and fast track courts should be set up to expedite disposal of contract enforcement cases. It suggested that efforts should be made to limit adjournments to exceptional circumstances only. It also recommended that certified practitioners should be created, to assist dispute resolution.⁸

[1] ‘Doing Business 2018’, World Bank, http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB2018-Full-Report.pdf.

[2] ‘Doing Business 2017’, World Bank, http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB17-Full-Report.pdf.

[3] Insolvency and Bankruptcy Code, 2016, http://www.prsindia.org/billtrack/the-insolvency-and-bankruptcy-bill-2015-4100/.

[4] G.S.R. 436 (E), G.S.R. 437 (E) and G.S.R. 438 (E), Gazette of India, Ministry of Labour and Employment, May 4, 2017, http://labour.gov.in/sites/default/files/Notifications%20for%20amendment%20under%20EPF%2C%20EPS%20and%20EDLI%20Schemes%20for%20e-Payment_0.pdf.

[5] Finance Bill, 2017, http://www.prsindia.org/billtrack/the-finance-bill-2017-4681/; Memorandum explaining the provisions of the Finance Bill, 2017, http://unionbudget.nic.in/ub2017-18/memo/memo.pdf.

[6] National Judicial Data Grid, http://njdg.ecourts.gov.in/njdg_public/index.php.

[7] Report of the Expert Committee on Prior Permissions and Regulatory Mechanism, Department of Industrial Policy Promotion, February 27, 2016.

[8] ‘Ease of Doing Business’, 122^nd Report of the Department Related Standing Committee on Commerce, December 21, 2015, http://164.100.47.5/newcommittee/reports/EnglishCommittees/Committee%20on%20Commerce/122.pdf.

[9] Ease of Doing Business: An Enterprise of Survey of Indian States, NITI Aayog, August 28, 2017, http://niti.gov.in/writereaddata/files/document_publication/EoDB_Single.pdf.

[10] Start Up India Action Plan, January 2016, http://www.startupindia.gov.in/pdffile.php?title=Startup%20India%20Action%20Plan&type=Action&q=Action%20Plan.pdf&content_type=Action&submenupoint=action.

[11] Land Records and Titles in India, September 2017, http://www.prsindia.org/parliamenttrack/analytical-reports/land-records-and-titles-in-india-4941/.

[12] The Central Goods and Services Tax Act, 2017, http://www.prsindia.org/billtrack/the-central-goods-and-services-tax-bill-2017-4697/.

Examining urban local governance in India through the case of Bengaluru

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Prachi Kaur and Shruti Gupta - December 24, 2020 Comments

Recently, the Karnataka legislature passed the Bruhat Bengaluru Mahanagara Palike (BBMP) Bill, 2020. BBMP is the municipal corporation of the Greater Bengaluru metropolitan area. The BBMP Act, 2020 seeks to improve decentralisation, ensure public participation, and address certain administrative and structural concerns in Bengaluru. In this blog, we discuss some common issues in urban local governance in India, in the context of Bengaluru’s municipal administration.

The Constitution (74th Amendment) Act, 1992 provided for the establishment of urban local bodies (ULBs) (including municipal corporations) as institutions of local self-government. It also empowered state governments to devolve certain functions, authority, and power to collect revenue to these bodies, and made periodic elections for them compulsory.

Urban governance is part of the state list under the Constitution. Thus, the administrative framework and regulation of ULBs varies across states. However, experts have highlighted that ULBs across India face similar challenges. For instance, ULBs across the country lack autonomy in city management and several city-level functions are managed by parastatals (managed by and accountable to the state). Several taxation powers have also not been devolved to these bodies, leading to stressed municipal finances. These challenges have led to poor service delivery in cities and also created administrative and governance challenges at the municipal level.

BBMP was established under the Karnataka Municipal Corporation Act, 1976 (KMC Act). The BBMP Act, 2020 replaces provisions of the KMC Act, 1976 in its application to Bengaluru. It adds a new level of zonal committees to the existing three-tier municipal structure in the city, and also gives the Corporation some more taxation powers. Certain common issues in urban local governance in India, with provisions related to them in the BBMP Act, 2020 are given below.

Functional overlap with parastatals for key functions

The Constitution (74^th Amendment) Act, 1992 empowered states to devolve the responsibility of 18 functions including urban planning, regulation of land use, water supply, and slum upgradation to ULBs. However, in most Indian cities including Bengaluru, a majority of these functions are carried out by parastatals. For example, in Bengaluru, the Bengaluru Development Authority is responsible for land regulation and the Karnataka Slum Clearance Board is responsible for slum rehabilitation.

The BBMP Act, 2020 provides the Corporation with the power and responsibility to prepare and implement schemes for the 18 functions provided for in the Constitution (74^th Amendment) Act, 1992. However, it does not provide clarity if new bodies at the municipal level will be created, or the existing parastatals will continue to perform these functions and if so, whether their accountability will shift from the state to the municipal corporation.

This could create a two-fold challenge in administration. First, if there are multiple agencies performing similar functions, it could lead to a functional overlap, ambiguity, and wastage of resources. Second, and more importantly, the presence of parastatals that are managed by and accountable to the state government leads to an erosion of the ULB’s autonomy. Several experts have highlighted that this lack of autonomy faced by municipal corporations in most Indian cities leads to a challenge in governance, effective service delivery, and development of urban areas.

An Expert Committee on Urban Infrastructure (2011) had recommended that activity mapping should be done for the 18 functions. Under this, functions in the exclusive domain of municipalities and those which need to be shared with the state and the central government must be specified. Experts have also recommended that the municipality should be responsible for providing civic amenities in its jurisdiction and if a parastatal exercises a civic function, it should be accountable to the municipality.

Stressed municipal finances

Indian ULBs are amongst the weakest in the world in terms of fiscal autonomy and have limited effective devolution of revenue. They also have limited capacity to raise resources through their own sources of revenue such as property tax. Municipal revenue in India accounts for only one percent of the GDP (2017-18). This leads to a dependence on transfers by the state and central government.

ULBs in states like Uttar Pradesh, Uttarakhand, Bihar, Jharkhand, Rajasthan, and Haryana are in poor financial condition. This has been attributed to limited powers to raise revenue and levy taxes, and problems in the management of existing resources. For instance, the finances of Bihar’s ULBs were assessed to be poor because of: (i) delays in release of grants, (ii) inadequate devolution of funds, and (iii) delays in revision of tax rates and assessments of landholdings.

In comparison, Karnataka ranks high among Indian states in key indicators for fiscal capacity like collection of property taxes, grants from Central Finance Commissions, and state government transfers. The BBMP Act, 2020 further increases the taxation powers of the Corporation, by allowing it to impose taxes on professions and entertainment.

Experts have recommended that the central government and the respective state government should provide additional funds and facilitate additional funding mechanisms for ULBs to strengthen their finances. The revenue of ULBs can be augmented through measures including assignment of greater powers of taxation to the ULBs by the state government, reforms in land and property-based taxes (such as the use of technology to cover more properties), and issuing of municipal bonds (debt instruments issued by ULBs to finance development projects).

Powers of elected municipal officials

The executive power with state-appointed municipal Commissioners and elected municipal officers differs across states. States like Tamil Nadu and Gujarat, and cities like Chennai and Hyderabad vest the executive power in the Commissioner. In contrast, the executive power of the Corporation is exercised by a Mayor-in council (consisting of the Mayor and up to 10 elected members of the Corporation) in Kolkata and Madhya Pradesh. This is unlike large metropolitan cities in other countries like New York and London, where elected Mayors are designated as executive heads. Experts have noted that charging Commissioners with executive power diluted the role of the Mayor and violated the spirit of self-governance.

Under the BBMP Act, 2020, both the elected Mayor and the state-appointed Chief Commissioner exercise several executive functions. The Mayor is responsible for approving contracts and preparing the budget estimate for the Corporation. He is also required to discharge all functions assigned to him by the Corporation. On the other hand, executive functions of the Chief Commissioner include: (i) selling or leasing properties owned by the Corporation, and (ii) regulating and issuing instructions regarding public streets.

The Expert Committee on Urban Infrastructure (2011) has recommended that the Commissioner should act as a city manager and should be recruited through a transparent search-cum-selection process led by the Mayor. A Model Municipal law, released by the Urban Development Ministry in 2003, provided that the executive power should be exercised by an Empowered Standing Committee consisting of the Mayor, Deputy Mayor, and seven elected councillors.

Management of staff and human resources

Experts have noted that municipal administration in India suffers from staffing issues which leads to a failure in delivering basic urban services. These include overstaffing of untrained manpower, shortage of qualified technical staff and managerial supervisors, and unwillingness to innovate in methods for service delivery.

The BBMP Act, 2020 provides that the Corporation may make bye-laws for the due performance of duties by its employees. However, it does not mention other aspects of human resource management such as recruitment and promotion. A CAG report (2020) looking at the implementation of the Constitution (74th Amendment) Act, 1992 in Karnataka has observed that the power to assess municipal staff requirements, recruiting such staff, and determining their pay, transfer and promotion vests with the state government. This is in contrast with the recommendations of several experts who have suggested that municipalities should appoint their personnel to ensure accountability, adequate recruitment, and proper management of staff.

Other states including Kerala, Maharashtra and Tamil Nadu also allow the state governments to regulate recruitment and staffing for ULBs. In cities like Mumbai, and Coimbatore, and some states like Gujarat and Madhya Pradesh, while the recruitment process is conducted by the respective municipal corporations, the final sanction for hiring staff lies with the state government.

Anti-Conversion Legislation: Comparison of the UP Ordinance with other state laws

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Anoop Ramakrishnan - December 17, 2020 Comments

On November 27, 2020, the Uttar Pradesh (UP) Prohibition of Unlawful Conversion of Religion Ordinance, 2020 was promulgated by the state government. The Ordinance seeks to regulate religious conversions and prohibits certain types of religious conversions (including through marriages). Few other states, including Haryana and Karnataka are also planning to introduce a similar law. This blog post looks at existing anti-conversion laws in the country and compares the latest UP Ordinance with these laws.

Anti-conversion laws in India

The Constitution guarantees the freedom to profess, propagate, and practise religion, and allows all religious sections to manage their own affairs in matters of religion; subject to public order, morality, and health. To date, there have been no central legislations restricting or regulating religious conversions. Further, in 2015, the Union Law Ministry stated that Parliament does not have the legislative competence to pass an anti-conversion legislation. However, it is to be noted that, since 1954, on multiple occasions, Private Member Bills have been introduced in (but never approved by) the Parliament, to regulate religious conversions.

Over the years, several states have enacted ‘Freedom of Religion’ legislation to restrict religious conversions carried out by force, fraud, or inducements. These are: (i) Odisha (1967), (ii) Madhya Pradesh (1968), (iii) Arunachal Pradesh (1978), (iv) Chhattisgarh (2000 and 2006), (v) Gujarat (2003), (vi) Himachal Pradesh (2006 and 2019), (vii) Jharkhand (2017), and (viii) Uttarakhand (2018). Additionally, the Himachal Pradesh (2019) and Uttarakhand legislations also declare a marriage to be void if it was done for the sole purpose of unlawful conversion, or vice-versa. Further, the states of Tamil Nadu (2002) and Rajasthan (2006 and 2008) had also passed similar legislation. However, the Tamil Nadu legislation was repealed in 2006 (after protests by Christian minorities), while in case of Rajasthan, the bills did not receive the Governor’s and President’s assent respectively. Please see Table 2 for a comparison of existing anti-conversion laws across the country.

In November 2019, citing rising incidents of forced/fraudulent religious conversions, the Uttar Pradesh Law Commission recommended enacting a new law to regulate religious conversions. This led the state government to promulgate the recent Ordinance. We discuss the key features of the ordinance below.

What does the UP Ordinance do?

The Ordinance defines conversion as renouncing one’s existing religion and adopting another religion. It prescribes a procedure for individuals seeking to undergo conversions (in the state of Uttar Pradesh) and declares all other forms of conversion (that violate the prescribed procedures) illegal.

Procedure for conversion: The Ordinance requires individuals (seeking to convert) and religious convertors (who perform such conversions) to submit an advance declaration of the proposed religious conversion to the District Magistrate (DM). The declarations have to be given with a notice of: (i) 60 days by the individual, and (ii) one month by the convertor. On receiving both the declarations, the DM is required to conduct a police enquiry into the intention, purpose, and cause of the proposed conversion.

Once the conversion has taken place, within 60 days from the date of conversion, the converted person must submit a declaration (with various personal details) to the DM. The DM will then publicly exhibit a copy of the declaration (till the conversion is confirmed) and record any objections to the conversion. The converted person must then appear before the DM to establish his/her identity, within 21 days of sending the declaration, and confirm the contents of the declaration. Violating any of these procedures will render the conversion illegal and void, and will attract punishment of: (i) imprisonment between six months and three years, and a fine of at least Rs 10,000 (for individuals seeking to convert), and (ii) imprisonment between one and five years, and a fine of at least Rs 25,000 (for convertors).

Prohibition on conversions: The Ordinance prohibits conversion of religion through means, such as: (i) force, misrepresentation, undue influence, and allurement, or (ii) fraud, or (iii) marriage. It also prohibits a person from abetting, convincing, and conspiring to such conversions. The Ordinance assigns the burden of proof of the lawfulness of religious conversion to the persons causing or facilitating such conversions. However, a person reconverting to his/her immediate previous religion is allowed.

Marriages involving religious conversion: Under the Ordinance, a marriage is liable to be declared void if it was done for the sole purpose of unlawful conversion, or vice-versa. However, a marriage involving religious conversion is permitted if the conversion is undergone as per the procedure laid down under the Ordinance.

Punishment for unlawful conversions: The Ordinance provides for punishment for causing or facilitating unlawful religious conversion, as specified in Table 1. Further, the accused will be liable to pay compensation of up to five lakh rupees to the victim of conversion. Additionally, repeat offences will attract double the punishment specified for the respective offence. All offences under the Ordinance are cognisable and non-bailable.

Table 1: Punishments prescribed under the Ordinance for offences by individuals for causing/facilitating the conversion

Type of offence	Term of imprisonment	Fine amount
Mass conversion (conversion of two or more persons)	3-10 years	Rs 50,000 or more
Conversion of a minor, woman, or person belonging to SC or ST	2-10 years	Rs 25,000 or more
Any other conversion	1-5 years	Rs 15,000 or more

If any of the above three offences are committed by an organisation, the registration of the organisation is liable to be cancelled and grants or financial aid from the state government is liable to be discontinued.

Note: For Odisha, Jharkhand, and Uttarakhand, some of the penalties have been specified in the Rules published under their respective Acts. For the rest of the states, the penalties have been specified in the respective Acts.

Doing Business in India

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