Terming retrospective taxation a “significant disincentive” for entities wishing to do business in India, a government-appointed panel has suggested a string of legal, administrative and regulatory reforms to make the country a better and easier place for doing business.
The panel has also suggested simpler drafting of rules to avoid leaving room for interpretations, while recommending greater autonomy to regulators, transparency in selection of heads for regulatory bodies, incentives for states undertaking key reforms and faster resolution of disputes through arbitration mechanism and consent settlements.
In its 77-page report for reforming the regulatory environment for doing business in India, former SEBI Chairman M. Damodaran-headed expert panel said that “death and taxes are equally undesirable aspects of human life”, but even death is “never retrospective”.
“Retrospective taxation has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India.
“While the legal powers of a Government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity.
“This is a major area where improvements should be attempted sooner rather than later since business cannot take corrective action retrospectively,” said the report, which has been submitted to the Ministry of Corporate Affairs.
The issue of retrospective taxation created a major controversy after UK-based global telecom giant Vodafone was asked to pay out a significant amount as taxes through a retrospective amendment to taxation laws pursuant to a Supreme Court order rejecting the government’s tax demand from the company.
The government later offered a conciliation with Vodafone on the matter.
The Damodaran panel, which was set up in August last year after India was ranked very low at 132nd position in World Bank’s ease of doing business list among total 183 countries, has made as many as 20 recommendations. These are classified in five broad categories -- legal reforms, regulatory architecture, boosting efficacy of regulatory process, enabling MSMEs, and addressing state level issues.
“If all you have is a hammer, everything looks like a nail! Such are the concerns relating to raising economic growth that everything in the business environment seems to be a candidate for reforms,” MR. Damodaran said in the report.
He observed that “the plethora of laws and regulation” in India has failed to keep pace with time.
“The Committee also observed that a large part of problem emanates from the way the appointments in the regulatory agencies, and also the organisational structure, are made and held,” he said, while suggesting infusion of professionalism through right selection and capacity building.
Damodaran said: “The Committee also felt that the use of information technology (IT) can be one possible solution wherever information asymmetry adversely impacts the regulatory environment. More effective use of IT can address multiple problems such as access to correct information, exchange of best practices and so on.”
Stressing the need for an easier set of regulations for micro, small and medium enterprises, the panel said the large enterprises may have the wherewithal to deal with the complex business environment, but a greater coordination amongst ministries and policymakers is required for MSMEs.
It has also asked the central and state governments to review all the regulations affecting ease of doing business to reflect the modern day trade and commerce.
The panel laid emphasis on the need to encourage arbitration to resolve contractual disputes.
“It is important that the judicial authorities are appreciative of the need for quick resolution of disputes that are brought up before them. Therefore, it is recommended that there should be a mechanism to dis-incentivise use of civil courts for resolving contractual disputes, so as to encourage arbitration as a preferred manner of resolution,” it said.
Giving example of the Satyam scam, the panel said the government should not always rush into making new laws as the case proved that even an existing set of regulations can be sufficient to handle even a major crisis.
“Setting up a new regulatory organisation should not be a kneejerk response to a specific situation or context,” it said.
On appointments and supervision of regulatory authorities, the panel said these matters should be decided in a “far more transparent manner”.
While advocating financial autonomy to regulators for a “genuine functional autonomy”, the panel also said that the accountability can be ensured by making the heads and board level persons of regulatory bodies appear before an appropriate Parliamentary Committee once in six months to report on past developments and a broad plan of action.
It also recommended a self-evaluation by every regulator once in three years and putting out the same in public domain.
The panel has also suggested a two-stage consultative for all new regulations, wherein a revised draft can be put up for comments after the first round of stakeholder consultation.
“To boost the effectiveness of regulatory apparatus, it is recommended that enforcement bandwidth of a regulatory body need to be optimally used to deal with cases of systemic importance on a priority basis,” it added.
Suggesting a system similar to the one in place at capital markets regulator Sebi, the panel has recommended putting in place a consent mechanism in place across all business areas for settlement of matters of relatively lower significance.
Expressing its disapproval of any “clumsy drafting” of regulations, the panel said: “It is necessary to ensure that simplicity and clarity should inform the content of regulation, leaving no part of it open to different interpretations by different persons“.
The panel said that “it has often been said, not without reason, that doing business in India is like taking part in an obstacle race, with one material difference. In an obstacle race, the number of obstacles, the nature of obstacles and the location of the obstacles are known in advance.”
The panel also expressed concern over different authorities writing “different, often conflicting, rules and regulations governing identical activities, thus creating avoidable confusion in the regulated space“.
“Therefore, it is recommended that every organisation tasked with the writing of regulations should have a provision for an advance authority for rulings,” it said, while also suggesting setting up a regulatory review authority and a sunset clause for all new regulations and regulatory agencies.
For MSMEs, the panel said it is necessary to have single window channels of compliance to help small business entities and also a hassle free tax payment regime.
“As regards the new entrants to the business environment, there should be facilitation centres to help deal with the complexities of filling cumbersome forms and dealing with other procedural issues,” it said.
The panel also recommended that the grant of permissions or the decision not to grant permissions should be taken within a prescribed time period, failing which there should be a provision for deemed permission.
To address state-level issues, the panel said that each state government can appoint a nodal person and a nodal office, which can be the single point contact for persons intending to obtain information on procedures and conditions for setting up a business.
“With an urgent need being felt to accelerate the process of simplification of regulations and consequently expediting the necessary approvals, the Committee recommends that State Governments that make significant progress in this matter should be appropriately incentivised,” it said.
“There should be built into the system an appellate process where a person aggrieved by an order of rejection may, as a matter of right, approach a superior authority for reconsideration of the matter on merits,” the panel added.
The panel noted that the committee was set up after India was ranked very low by the World Bank in terms of ease of doing business.
While challenging some of the factors based on which the ranking was made, the panel said that the World Bank itself later appointed a panel to review the report, which recommended discontinuing the cumulative ranking of countries and retaining publication of the individual parameters.
“Be that as it may, what is beyond debate is that the issues relating to India’s business environment are real and need to be resolved,” it said.