The World Bank’s Ease of Doing Business 2019 report ranked India 77th among 190 countries, a 23-notch improvement from the previous year. Sure, India has a long way to go to be counted as one of the world’s most attractive investment destinations. It now ranks between Uzbekistan and Oman. To achieve its ambition of becoming a $5 trillion economy by 2024-25 and doubling that in the next eight years, India certainly needs to claw its way further up the rankings.
There could be structural reasons for India remaining out of the top 50 nations in the ease of doing business, but the biggest challenge is regulatory, experts say. It is exhausting for businesses and individuals to navigate the regulatory gauntlet because of overreach by enforcing agencies, and it is often manifested in the execution of direct and indirect tax laws. This is what has come to be known as “tax terrorism”.
India-based consultants who guide domestic and international businesses on their investment choices often cite some laws and their enforcement as big impediments to ease of doing business in India. Among them are the Income-Tax (I-T) Act, the Goods and Services Tax (GST) Act, the Prevention of Money Laundering Act (PMLA), the Prohibition of Benami Property Transactions Act and even the laws governing corporate social responsibility (CSR).
Barring matters related to CSR, all other laws are in the administrative domain of the revenue department in the finance ministry. CSR is part of the Companies Act under administrative control of the ministry of corporate affairs (MCA).
Mumbai-based lawyer Somasekhar Sundaresan, who specialises in financial sector regulatory matters, adds two more laws -- the Companies Act, 2013 and the Foreign Exchange Management Act (FEMA), 1999 -- to the list of laws that act as deterrents to the ease of doing business in India.
“The provisions [of the Companies Act] on grant of bail when fraud is alleged are on par with the provisions governing bail on the charge of drug running. The risk of being charged with fraud in the running of a company is on a par with the risk of being charged with drug running. This is grave,” he said.
Sundaresan hopes that the MCA, which is reviewing the Companies Act, will examine how to minimise criminalisation of violations. “This needs serious attention,” he said.
He said FEMA, which was meant to be a reform aimed at removing the element of criminality in “exchange controls” and to introduce a “seriously expensive civil penalty regime”, also needs to be reviewed.
“This reform has been undermined by introducing criminal law provisions in FEMA and that too through a Finance Act, passed as a Money Bill, without debate in both Houses of Parliament that brought in FEMA,” he said.
Ashok Shah, a partner at N.A. Shah Associates LLP, said: “There is lack of trust between tax administrators and taxpayers.” That’s mainly because tax laws are prone to the subjective interpretation of tax officers which causes undue hardships to taxpayers and leaves scope for corruption.
“Many transactions, undertaken for genuine commercial reasons, are subjected to adverse tax consequences,” he said, adding he hopes the task force on the Direct Tax Code (DTC) will address these issues. The task force submitted its report to finance and corporate affairs minister Nirmala Sitharaman on August 19 with recommendations to make taxation laws simpler and tax administration impersonal.
The report is not yet in the public domain because the government is still considering its recommendations.
SR Patnaik, partner & head of taxation at the legal firm Cyril Amarchand Mangaldas, says that even if the avowed aim of the government is to make the laws simpler, the provisions tend to get more complex with numerous amendments.
“To add to this, high-handed behaviour of the tax officers has created an impression that Indian tax laws do help develop a sense of defencelessness among taxpayers,” he said.Money laundering law
Experts say these laws are “absolutely necessary” and “efficacious,” but are often prone to “serious misuse” in implementation and so perceived to be draconian. One of the most important, but often abused laws, is PMLA.
Sundaresan says PMLA was originally conceived as a law that would essentially address global concerns over money laundering offences such as drug trafficking, human trafficking and terror. He advocates building a mechanism to chase the money trail in these rackets and choking their access to funds from legitimate fronts.
“PMLA is essentially a secondary or ‘predicate’ legislation,” he said. “The primary or ‘subject’ legislation gave the basis for the charges under PMLA - these offences were placed in a schedule and they came to be called ‘scheduled offences’. Now, the schedule kept growing over time. Even violations such as failing to make an open offer for a listed company’s shares when one takes over substantial ownership is now a scheduled offence under PMLA,” he said.
“Therefore, the legislation has lost its way -- from being a tool to counter serious offences, it has become a tool in the hands of the state to interfere with legitimate businesses and freeze accounts, impound properties, and hold things up pending investigation. Worse, prosecutors seriously argue that even if one is absolved of the subject offence, the predicate offence under PMLA would have to continue to be probed -- this is an abject mistake,” he said.
For example, assume that a stash of cash is suspected to be from drug running and the assets of the person from whom the cash is found are seized, Sundaresan said. Once the suspect is absolved of the drug running charges, the role of PMLA is effectively over.
“The explanation for the large sum of cash may be pursued by the tax authorities but it cannot continue to be a PMLA case. On this one issue alone, a plethora of litigation is pending and one awaits the Supreme Court to conclusively rule on it,” he said.
Experts say that the government is aware of the law’s misuse and taking steps to curb it. Shilpa Mankar Ahluwalia, partner, Shardul Amarchand Mangaldas, a legal firm, says, “The recent amendments to PMLA rules have codified the framework for face-to-face digital KYC [know your customer] – a very welcome move to the Fintech sector that is constantly striving to simplify customer on-boarding procedures. Digital KYC eliminates the need for any paperwork, and also allows for a ‘live’ photograph of the customer (with a time, date and location stamp) to be used as identity proof. The next step will be for the regulator to evolve a framework for non-face-to-face KYC, at least for low-value transactions – a problem that Fintech players have been struggling with.”
Amit Singhania, a partner at Shardul Amarchand Mangaldas, points to implementation issues: “While any law will involve a certain degree of interpretation, tax laws are not complicated per se. However, their compliance and implementation is every businessman’s apprehension. The need of the hour is to make efforts to reduce the human interface between tax officers and taxpayer while automating the tax machinery, coupled with uniform guidelines or norms to facilitate compliance. If this can be achieved, this will go a long way in mitigating so-called tax terrorism.”GST, anti-profiteering law
Experts say that GST, which came into force on July 1, 2017 and was touted as the biggest indirect tax reform since independence, is still a reform-in-the-making. GST was to subsume a raft of local and state taxes and usher in the concept of “one nation, one tax.”
Bela Sheth Mao, a partner at Deloitte India, says: “Compliance with the GST laws is raised as one of the biggest areas of concern by the trade. With over 100 clarificatory circulars issued, numerous rate and law changes and a less-than-efficient technology platform, [it] has impacted business efficiency.”
“The GST law was designed for sure as a facilitator for the business and anti-profiteering as a consumer protection provision. The intent of the law was to enable efficient business operations from a logistics and fiscal perspective and ensure that some of these benefits are passed on to the consumer. The gap that we are witnessing now is with the implementation, which has moved away from GST being an economic agenda to other aspects. The actions under the anti-profiteering provisions have yet to benefit the consumer,” she said.
According to Shah, the basic purpose of GST was to ensure “one nation, one tax”.
“However due to the federal structure of India, there is the concept of a dual GST,” he said.
He wants certain roadblocks to be cleared for its smooth functioning. For example, he said, “processing of refund for exporters, punishing the honest taxpayer for non-compliance of vendors, restrictions of Input Tax Credit and system related issues.”
He does not support the view that anti-profiteering laws are ineffective. “Experience has shown that in most of the cases, profit has been passed on [to the end consumers] and in very few cases have anti profiteering laws been invoked. Thus, anti-profiteering laws have not been a roadblock for the industry,” he said.
According to Patnaik, compliances in the matters of GST has “unfortunately been extremely cumbersome and plagued with systemic issues” due to structural problems such as the issues related to the functioning of the GST Network and the unavailability of alternative options for resolution of problems. “Most of the initial litigation under GST has emanated from an inability to fulfil the compliance requirements. While the simplified return format has been approved, it is still to [be] implemented,” he said.Benami transactions
The retrospective nature of the benami law, aimed at punishing the common practice under which a property is held by proxies for the real owners, is one of the major concerns, says Shah.
“In practice, these transactions were applied with retrospective effect. Many transactions done under prevailing customs also got caught under this. Further it is causing lots of difficulties to genuine people as administrators are indiscriminately applying these provisions. Assets get attached and redressal in Indian legal system takes an unduly long time. Though the intention of the law is good, Implementation of the law leads to harassment of genuine/honest citizens,” he said.
Sundaresan calls for a review of existing cases to see if the facts had indeed warranted a probe under the benami law. “Such a review may be done on a confidential basis so that the fate of ongoing proceedings is not undermined, and where it is found that the proceedings were initiated without a basis, such cases must be withdrawn,” he said.CSR laws
The law mandates that firms with a net worth of at least ~500 crore or revenue of ~1,000 crore or net profit of ~5 crore should spend at least 2% of their three-year annual average net profit on corporate social responsibility activities such as sanitation, education, healthcare, poverty alleviation and the environment, among others. Parliament in July passed amendments to the Companies Act under which unspent CSR allocations would have to be transferred to a fund specified by the government.
“These [CSR] regulations have ensured widespread action is taken by the business community at large for the welfare of the society. New regulations mandate that if the CSR expense is not incurred then the company will have to transfer the funds to a separate bank account. In the current times of slowdown, this will squeeze cash flow available with the company,” says Shah.
“Further, companies which are in losses will still have to make the contribution as criteria is based on average of past three years’ profits. Originally it was proposed that non-compliance with CSR laws will lead to penalties as well as imprisonment. However, government has taken heed to the concerns of corporates and announced that non-compliance with CSR will not lead to imprisonment,” he said.
“The intent of CSR is in the right direction -- to ensure companies actively undertake sustainable projects and programs for the overall growth of the local areas they operate in,” says Singhania.
However, the latest amendments (yet to be notified), which also seek to penalise non-compliance with imprisonment, are not encouraging, he said. “In my view, non-compliance being met with penalty in the form of monetary fines should suffice. However.., the recent statement that these amendment will be implemented by the finance ministry after making necessary corrections, is reassuring,” he added.
According to Sundaresan, “The criminalisation of CSR provisions has been rightly put on hold. Good sense has prevailed for now. One cannot legislate virtue with the threat of the sword of the law. Making corporates more responsible is an outcome to be achieved by gaming the behaviour of the corporate sector and not by coercion of the corporate sector”.Solutions
Singhania is confident that India has the potential to climb up the ease of doing business index.
“The pain point of every business owner is the compliance burden which often involved duplicity of efforts. For example, incorporating a company, obtaining regulatory licenses/permits, and obtaining sanction of various regulators to approve a scheme of arrangement is a tedious task nowadays and can be streamlined. However, the latest statement by the Hon’ble Prime Minister on taking measures to ensure honest taxpayers are not harassed is quite motivating,” he said.
Mao said the focus now should be to “stabilise the current [GST] law” and “strengthen the technology backbone” rather than make more changes. “Reconstitute the sectoral committees to look into the issues faced by businesses and find a workable solution. Enable various mechanisms existing within the law to check evasion,” Mao said.
Patnaik suggests a slew of measures for ease of doing business such as making tax laws more simple, lowering the backlog of tax litigation and encouraging alternative dispute resolution processes, he suggested.
“Tax collection targets should be discouraged. Instead of focusing on quality (quantity), good quality assessments should be encouraged. Discretionary powers given to the tax authorities should be taken away and substituted with process- and technology-driven solutions,” he said.
Sandeep Parekh, founder of Finsec Law Advisors, a Mumbai-based financial sector law firm, cited a recent decision by the government to roll back an enhanced surcharge on foreign portfolio investors (FPIs), who had become the unintended target of a levy meant for the so-called super rich.
“While, we don’t need to pamper foreign investors, we should certainly do no act to push them away. The removal of tax free havens is a good move, but it can work well only if India is a lower taxed country which treats both domestic and foreign investors at par and offers attractive rates of tax,” Parekh said.