Regulatory cholesterol is one of the reasons for start-ups to lose heart—the failure rate of start-ups is quite high, but closure can take more than two years
By Sumita Kale
& Rishi Agarwal
In her Budget speech, Nirmala Sitharaman put a greater spotlight on Ease of Doing Business through many measures—simplifying GST process, e-assessments for tax, interchangeable Aadhaar and PAN, etc. The government’s intent to further simplify procedures, reduce red-tape and make the best use of technology was clearly set out. However, there was no reference of a refreshing, revolutionary move that is already on the cards. A draft Cabinet note has reportedly been circulated last month on the National Ease of Doing Business Policy, where, for the first time, we see the government holding the bureaucrats accountable for the compliance requirements they place on businesses.
The details are not out yet in the public. According to media reports, ministries and departments must measure the time and cost of compliance requirements. The rationale behind licensing to be explained, as departments are being asked to replace licences where possible with simple registration processes or simplify process where the removal of licences is not possible. Departments also have to justify the frequency of renewals they demand.
Holding bureaucrats accountable for the pain they inflict through compliance marks a structural break in the way India regulates and controls businesses. There is a three-vector framework that is key to Ease of Doing Business—rationalisation (rationalising the 1,100+ Acts and 58,000+ compliances that govern businesses), simplification (reducing the 3,100+ filings and 2,500+changes every year), and digitisation (using the GST template of an API architecture that allows straight-through-processing of filings from external systems, instead of uploading documents to a government website with passwords). Viewing compliance within this framework will facilitate the re-engineering that the government is targeting.
Once you set in force a mindset change, and control the controllers, there will be significant productivity gains for firms. One of the biggest constraints to scale currently is the exponential increase in compliance as a firm grows. Actual client data from Avantis Regtech shows that a mid-sized manufacturing company spread across six different states is regulated by over 5,000 compliances, approximately 100 licences and registrations—making for an average of two filings a day. A small firm is faced by around 10 filings a month—not an easy task. The proposed policy has suggested that the compliance burden should be capped at an hour per month for start-ups. Our submission is that a similar benchmark should be placed for micro and small firms.
The government has recognised the vision and passion of start-ups to scale up, yet treats them on par with larger businesses when it comes to compliance. Typically, start-ups are run by young, first-time entrepreneurs, who have no idea what hits them when they are faced with the heavy compliance requirements—a start-up working from a home office/shared space, in its first year, needs to obtain registrations under at least seven regulators and file a minimum of 18 returns to a maximum of 69 returns. Not surprisingly, regulatory cholesterol is one of the reasons for start-ups to lose heart—the failure rate of start-ups is quite high, but closure can take more than two years!
The proposals regarding the vexatious angel tax issue are steps in the right direction. Yet, so much more can be done to make it easy for a start-up to begin operations, grow or exit if needed. Some compliance requirements can be removed, for example, mandate only one board meeting a year, instead of two, implement single window NOC clearances for closure, have a single annual return for MCA instead of 4-5 now and an annual TDS return instead of quarterly, etc. These are simple steps that will make a world of difference to the life of a young entrepreneur, who is out to take on the world.
Over the past five years, India’s ranking has risen dramatically in the World Bank Ease of Doing Business index from 130 to 77. But this achievement has not really meant much for businesses in India struggling under the weight of 58,000+ possible compliances and 3,100+ possible filings annually. The government has now finally come through, and taken on board the pain and stress of the compliance burden. The proposed National Ease of Doing Business Policy can be a game-changer, making a greater impact on growth and formal employment, than government programmes and subsidies. It is time to remember the spirit and intent of a regulatory framework—effective regulation need not be complicated, control need not be cumbersome. It is time to bury the license raj and inspector raj forever.
Authors are with Avantis Regtech Private Ltd
Views are personal