Somesh Arora: Liberalisation — A farce

Is India heading towards becoming the most regulated economy?

FOR the entrepreneurs of India, it has been a virtual saga of being out of the fire and into the frying pan. The globalisation and consequent liberalisation in 1990s brought in a temporary whiff of fresh air for them, when so termed ‘Inspector Raj’ was dismantled and atleast in some of the Central Government departments like Customs, Excise and Income Tax, the process of simplification was started in the right earnest. However, before the same could percolate to states and municipal levels, the imported regulations from all over the world have started affecting them in a big way. 

While some related to environment etc. are understandable, there seems to be a mushrooming growth of regulatory authorities, each armed with their legislations and as the recent spate of IRDA and SEBI has shown fighting for their own space.  Individual privacy and space have already been heavily intruded by Income Tax information returns, know your customer norms, which are required for banks, mutual funds, DEMAT and broking accounts and keep on changing with regular frequency. 

Average Indian is getting fed up of giving his photographs to so many agencies. Individuals of my age often think as to why they were not taking so many, when we were young and good-looking. Income Tax authorities will not let a person forget his PAN number, even if in old age the poor person is suffering from Amnesia or Alzheimer’s. It was often said that American economy is most liberal yet most regulated.  In India, while we are no where being close to the former, thanks to the imported laws and regulations we shall soon be offering competition to USA in the latter. The liberalization for us has  brought not only more of imported goods but also imported laws.  If a serious Fraud office is in UK, we must have it here. They have a competition commission, let us rechristen our MRTP and name it so.  Even our accounting norms and standards from 2011 shall be imported. If they have EET in their Provident Funds, we must have the same. Overhaul all tax laws, prescribe new returns even before the earlier law could settle in someone`s mind. If the previous Saral was saral, then let there be sequels of Sarals.  If someone forgets any of thousands of laws being churned out, then ignorance of law is no excuse. Hang the person with interest, penalties, prosecution and even interest on penalties (as in case of EPFO).

The  office of the President of India, when  invited  President Musharraf from Pakistan, for more than three days forgot that there is some obscure  instruction with F.R.R.O., requiring each Pak national to report.  If this can happen at that level, then thank your stars if as an ordinary mortal, you ignored some dormant but ticking like a time bomb law, but still got away with it. If you are a civil servant and some one brings Mithai for you, the conduct rules require that you open the box and check that Mithai is of not more than Rs.100/-. Therefore, only sweets made of vanaspati or mustard oil are permissible and visitor must be asked the value of gift brought by them.

During last elections, when Wealth Tax limit was Rs15 lakh, quite a few prospective electoral candidates declared their assets which contained lists of cars and jewellery in excess of Rs.15 lakh and thus indicated they should have been Wealth Tax Assessees, but whether they were or were aware is the question.

Even if you are an ascetic and have renounced the world, you still need to be aware of certain laws and regulations as you may be entering restricted forest or reserved area without valid permission or may be hauled up for polluting Himalayas. Therefore, justifiably, there should be entry level awareness course for prospective renounces of the world.

Next, let me dwell upon SSI industry which has now become Micro, Small and Medium enterprise in the post-liberalised era to show that growth trajectory is northward on the basis of combined statistical jugglery. A number of SSI units are facing closure and if one does an analysis, about 80 per cent closures are because of some or the other legal compliance issues, which did not engage attention at the right time and   swelled in time causing financial wreck.

A typical S.S.I unit has to deal with 36 legislations, and compliance burden on them, even when we go by utopian presumption of none of the government agencies being corrupt, is about 20 percent of cost of production or services in terms of time and other costs involved. One can easily double up this figure, if it is presumed that some of the Departments are corrupt and have extraneous reason to show the might of law. 

Even if one such department is not satisfied or appeased, it is capable of wrecking an SSI unit through entangling them in some violation of law, which might have been overlooked or ignored. The applicable list of laws can broadly be Income Tax, Customs, Excise, Service Tax, Property Tax, EPF, ESI, VAT,CST, Entry tax, Octroi, environment laws, banks, financial institutions, industrial development authorities, labour welfare and trade union laws, SEBI, insurance, shops and establishments, Factories Act, power or electricity department, water department,  Legislations relating to workmen’s security and safety and compensation and labour employment and exit laws, professional tax laws and Cess Acts, sewage department, Companies Act or Partnership Act, FEMA, EXIM regulations, RBI regulations, Telephone, Railways, Police and municipal building bye laws and regulations in general, a part from Industry specific. Then there are certain labour laws specially relating to EPFO  and ESI under which if an employer fails at any point of time to pay Provident Fund or ESI contribution, then at any point of time thereafter employer or any partner or director of the company shall be liable to pay the same with interest, penalty and again interest and penalty, and under law not only his business assets but even personal assets can be attached and such employer, partner or director can be arrested for any period till recovery is made.

There have been instances when EPFO started making recovery efforts for defaults in 1962, in 2004 only and the meager sums of defaults through the power of compounding become crores of recoverable dues. It is normally believed that an SSI unit starts having serious problems with legal compliance issues with one or more of the multifarious agencies it has to deal with, after 10 years of its existence and most of the units suffer their mortality any time after that period.  A company in India requires 10 to 12 years just to wind up its business and six months to 3 years to get established.  Greater the regulation, greater will be the infant mortality rate of such SSI units.

Coming to the bigger corporate entities, the problem is not that much from small time inspectors or visiting officers (as they hardly understand or are allowed access to the complex accounting system and the maze of inter corporate transactions that a Satyam-like corporate entity may have so as to be able to detect any serious contraventions). But the problem mainly arises from the complexities of the legal issues and its differential interpretation at various level of policy making. A major corporate entity just to build a good legal compliance system through SAP or any other IT enabled solution needs to spend Rs 60-70 crore for initial setting up and then needs to spend a fortune on engaging audit and legal personnel and firms to ensure periodic compliance with minimum of 70 to 100 laws they have to deal with. At times, the total legal compliance costs for them, in terms of manhour spent, system building cost, hidden cost, and system maintenance and litigation costs, turns out to be more than the total amount of taxes these companies pay out. Even if such corporate giants come out unscathed and remain protected from litigation, due to good legal compliance system, still the heavy cost of ensuring compliance makes their products uncompetitive in international markets, as administrative overheads incurred by them turn out to be of a much higher magnitude compare to less regulated economies like China etc.

Policymakers have to understand that every added regulation, return, statistics etc. demanded add to the cost of products and services and makes the conduct of such business that much more complex. Courts have to be liberal with omission of procedural compliances and have to really consider when the defaults were intentional or otherwise and have to give business an appropriate chance to survive. For any closure of business, not only effects that entrepreneur but also the employees who eke out their living serving such enterprise. The role of the Government in dealing with Satyam issue has been exemplary as it punished the wrongdoer but saved the enterprise and its employees.  Legislations like G.S.T are welcome as they subsume various other legislations and intervention of one or two departments only will be there and of others will be eliminated. But GST is only one good reform we are trying to follow. There is scope of doing much more. Reforms need to originate in our own country by evolving a `think process’ rather than an `ape process’. Let there be a GST like model for labour laws also minimizing compliance costs for entrepreneur and for various other laws.  Let the effected interests come out with new ideas and let technology assist in enabling them. Let every prospective Indian Civil Servant and judicial officer have a compulsory business attachment during probation to understand how difficult it is to do business in this country from cottage to SSI to corporate level.  Special Economic Zones, likewise, will have a meaningful existence only if they become the least regulated zones.

This aspect of these zones needs greater attention than even the tax aspect. Unless the process of regulation is reversed with seriousness, we, the people of India, will have to continue living with the thought of blissful ignorance being better than non-compliable wisdom.