Confederation of Indian Industry
Ease of doing business in India May 2014
kpmg.com/in cii.in
Foreword Concerned with India’s dismal rankings in World Bank’s ‘Doing Business’ report (where India has been placed lower than its BRIC counterparts and even amongst other South Asian countries); a survey-based report on the prevailing business regulatory environment in the country was undertaken by CII with the support of KPMG in India. The study focussed on a few key parameters of ‘Doing Business’ such as starting a business, land acquisition, taxation and contract enforcement. The objective was to underscore the areas of business regulation that need attention; highlight a few effective and efficient processes already prevalent in some states that could be emulated by others; and advocate for adoption of more efficient and effective practices. The report has highlighted that even after two decades of economic reforms,India continues to falter on various sub-indices such as starting a business,dealing with construction permits, getting electricity, registering property, paying taxes, trading across the border, enforcing contracts or resolving insolvency. The report identifies key areas for reform and also highlights areas of business regulation where some states have converged towards efficient systems. We take pleasure in presenting the joint KPMG in India-CII survey report on ‘Doing Business in India’ to you. We do hope that the findings of this report would help bring the issues to the fore and also serve as a reference point for the imminent need to pursue reforms in business practices and processes.
Chandrajit Banerjee Director General CII
Richard Rekhy Chief Executive Officer KPMG in India
Contents Executive summary
1
Business climate in India
5
Methodology
7
Key Findings
11
• Land acquisition
11
• Starting a business
17
• Taxation
29
• Contract enforcement
37
Costs/Losses incurred due to delays
43
Conclusion
47
Annexure
49
Industry clusters in India
53
1 | CII-KPMG – Ease of doing business in India
Executive summary
CII-KPMG – Ease of doing business in India | 2
India is one of the fastest growing economies in the world. However, India’s position in the ‘Doing Business’ annual reports published by the World Bank continues to be less than favourable. The latest rankings place India 134th among 185 countries; lower than its BRICS (Brazil, Russia, India, China, South Africa) counterparts. There is an urgency to focus on improving the business environment and arrest the decline in relative performance against various determinants of investment attractiveness. Doing business
Starting a business India vs BRIC Rank 2014
Brazil 123
Russia 88 India
Change in rank
Rank 2013
Rank 2014
Overall rank
131
134
-3
Starting a business
177
179
-2
Dealing with construction permits
183
182
1
Getting electricity
110
111
-1
Registering a property
91
92
-1
Getting credit
24
28
-4
Protecting investor
32
34
-2
Paying taxes
159
158
1
Trading across borders
129
132
-3
Enforcing contracts
186
186
0
Resolving insolvency
119
121
-2
179
China 158 India Vs South Asia South Asia
India
Number of procedures
7
12
Time taken (in days)
16.2
27
Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.
Business needs When arriving at the ‘Doing Business’ rankings, the World Bank ranks 11 parameters that impact businesses across various stages of their lifecycle – at start-up, getting a location, getting financing, daily operations and even when things go wrong. To maintain its growth trajectory, India needs to be a relatively attractive investment destination across each of these parameters. The Government would need to undertake reforms to help place the country on an equal footing amongst countries having favourable, flexible, liberalised and a transparent business environment. With this in view, the survey aims to identify the improvement areas in various aspects of doing business in India viz. starting a business, land acquisition, labour, and taxes. Specific recommendations have been identified for each of these areas. Additionally, successful initiatives that were identified during the survey have been noted and many of these could perhaps be leveraged at a national level.
3 | CII-KPMG – Ease of doing business in India
Ease of doing business: Issues
CII-KPMG – Ease of doing business in India | 4
Ease of doing business: Recommendations
5 | CII-KPMG – Ease of doing business in India
Business climate in India
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CII-KPMG – Ease of doing business in India | 6
Ease of Doing Business
India is one of the fastest growing economies in the world, yet ranks among the lowest in the World Bank’s rankings on the ease of doing business, 2014. Ranking of select countries on the overall ease of business, 2014
Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.
The India Paradox India is one of the fastest growing economies in the world. The high potential of the Indian market driven by an emerging middle class, cost competitiveness and a huge pool of talent makes it one of the most
attractive investment destinations. Yet, according to the World Bank’s ‘Doing Business 2014’ report, India is ranked 134 out of 189 countries in the overall ease of doing business. This places India lower than the other BRICS (Brazil,
Russia, India, China and South Africa) members and highlights its relatively dismal performance among other South Asian countries.
Rankings on sub-indices on the ease of doing business
Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.
In the World Bank survey, India ranks lowly on most of the determinants of investment attractiveness — especially starting a business, enforcing contracts, dealing with construction permits and paying taxes. Problems in securing
land, inadequate infrastructure, power shortages, stringent labour laws, tax regulation, lack of governance and transparency and approval processes are critical issues in the country that need to be addressed.
7 | CII-KPMG – Ease of doing business in India
Methodology
CII-KPMG – Ease of doing business in India | 8
Methodology and scope of the study This report: • assesses investor feedback on four critical areas driving investment, attractiveness and decisions • describes specific initiatives taken up by states and industry bodies • provides specific recommendations across the following four areas: land acquisition, starting a business, taxation and contract enforcement.
Further, the respondents were also requested to identify noteworthy practices both within and outside their country. KPMG in India has summarised these but has not conducted an independent evaluation to validate their effectiveness. The list of these practices is only indicative and not exhaustive.
A extensive questionnaire pertaining to the selected aspects of ‘Doing business in India’ was administered on professionals from a variety of sectors across geographies. The sample was selected such that responses would be unbiased to enable comparative analysis.
Survey to assess investor perception on ease of doing business in India
Source: CII-KPMG in India survey, 2014
9 | CII-KPMG – Ease of doing business in India
Respondent profile Respondents included a mix of personnel across industries and states who have first-hand experience in different aspects of doing business in India. Segmentation by industry
Others* 17% Power1% Healthcare & Pharma 2% Financial Services 2% Energy & Natural Resources 2% Chemicals 3%
Industrial Markets 42%
Real Estate & Construction 4% Technology 7% Auto & auto components 7%
Consumer Markets 13%
Segmentation by state
Segmentation by company size**
Source: CII-KPMG in India survey, 2014 Note: * Others include consultancy services, diversified services, tourism, plastics etc. ** large, medium, small and micro units have be defined as follows: Manufacturing sector (based on investment in plant & machinery) Large: more than INR10 crore; Medium: INR5-10 crore; Small: INR25 lakhs to INR5 crore; Micro: less than INR25 lakhs Services sector (based on investment in equipment) Large: more than INR 5 crore; Medium: INR2-5 crore; Small: INR10 lakhs to INR2 crore; Micro: less than INR10 lakhs
CII-KPMG – Ease of doing business in India | 10
11 | CII-KPMG – Ease of doing business in India
Key findings
Land acquisition
CII-KPMG – Ease of doing business in India | 12
Land acquisition
The lack of an effective process has made land acquisition a complex and timeconsuming procedure Investors and manufacturers need timely acquisition of contiguous land to contain project cost escalation and project timelines. However, landowners are often wary of selling — given the potential future price appreciation and
non-transparent price benchmarks. As a consequence, land for industrial development is not as easily available as it used to be earlier.
Absence of a uniform land acquisition policy and inconsistent enforcement (percentage of respondents)
‘Lack of government support and local objections.’ - Respondent, infra company
‘Government cannot find new industrial development plots/ estates.’ - Respondent, chemical company
‘It has to be totally transparent with no hidden costs.’ - Respondent, electronics company Source: CII-KPMG in India survey, 2014
Ease of land allocation process (percentage of respondents)
Source: CII-KPMG in India survey, 2014
The time taken for land acquisition is one of the major obstacles. As per the survey, average time taken to acquire land is 14 months although it is much more in several cases. In addition, the number of departments to be visited
as well as the number of visits to each department make the land acquisition process complex. High costs and transaction fees add to the overall costs of the land acquisition process.
13 | CII-KPMG – Ease of doing business in India
Land acquisition
Some major problems in the land acquisition process Major reasons why access to land is an obstacle to the operations or growth of business (percentage of respondents)
Source:CII-KPMG in India survey, 2014
Land mutation process: considered complex and time-consuming (percentage of respondents)
Source:CII-KPMG in India survey, 2014
Ease of land conversion process (percentage of respondents)
‘Number of departments should be decreased. ’ - Respondent, pharma company
Source:CII-KPMG in India survey, 2014
Majority of the respondents feel that the need of the hour is to reduce uncertainty, streamline the process, and reduce bureaucracy, decrease acquisition costs and create a win-win model for land acquisition.
CII-KPMG – Ease of doing business in India | 14
Land acquisition - select initiatives to address issues
Select initiatives in India that have been identified by respondents Computer-Aided Registration of Deeds (CARD), AP • CARD is a simple and decentralised digital property registration system across 200 sub-registrars’ offices (SRO) of Andhra Pradesh • This system simplifies and expedites the registration process, provides certificates for non-encumbrance and assists in market valuation of properties. e-Dhara Bhulekh, Gujarat • Computerised land records, registration and title mutation process • Biometrics-enabled process to expedite registration and reduce fraud • E-stamping facilities for stamp duty payment • Use of technology and GIS to computerise and update land records. SIR ordinance (Special Investment Region), Gujarat • Gujarat promulgated SIR ordinance in order to expedite the process of land acquisition and planned development, mainly in the Delhi-Mumbai Industrial Corridor • The Ordinance facilitates the establishment, development, operation and regulation of SIR in Gujarat. It will comprise an apex and regional development authority Gujarat Industrial Development Corporation (GIDC), Gujarat • GIDC acquires land for industrial estates and allots to industry from within the existing industrial areas • A market-based pricing system, where price is determined by an independent body — Center for Environmental Planning and Technology (CEPT) • A database of land and an investor support system have been established to identify suitable land from the available options.
Key Benefit
Critical Enablers
• Time taken to register property was reduced from 17 days to one day with the CARD system. Technology
Key Benefit • Time to register property reduced from three days to three hours • Time to issue various land certificates reduced from two days to one hour.
Key Benefit • The ordinance provides for a single-window clearance system • The ordinance is expected to facilitate the establishment of superior hubs of economic activity. Key Benefit
Critical Enablers
Technology
Critical Enablers
Regulatory/Policy
Critical Enablers
• GIDC has acquired and developed 80,000 hectare of land.
Enabling Body
Industrial Cluster, Ahmedabad Pharma cluster, Gujarat
Key Benefit
• The cluster located in the Ahmedabad-Vadodara region comprises ~450 pharma and medical device companies • Creation of a healthcare ecosystem through significant promotion of allied industries • Financing support through links with financial institutions such as SIDBI, ICICI • Fiscal incentives to sustain the fiscal advantages.
• Ecosystem of similar companies fosters environment for the region to become a pharma hub with greater market share • Easier land acq. with availability of required support facilities directly • Employment in the area of > 50,000
Critical Enablers
Regulatory/Policy
Source: CII-KPMG in India survey, 2014; Department of Industrial Policy & Promotion (DIPP); Department of Administrative Reforms & Public Grievances
15 | CII-KPMG – Ease of doing business in India
Land acquisition - select initiatives to address issues
Select initiatives in India that have been identified by respondents Rehabilitation & Resettlement of Land Owners, Haryana • The State government assist all joint venture projects in the acquisition of land for the development of SEZs to the extent of 10 per cent NCR and 25 per cent non-NCR areas of Haryana. The State government also assists in acquiring left out pockets to help ensure contiguity of SEZs • Developers are liable to pay INR42,000/- per acre per annum with an annual increase of INR1,500/- per acre for a period of 33 years for the land acquired for setting up of an SEZ, technology city and park.
Key Benefit • Several players have expressed interest in developing industrial model townships, industrial parks and technology cities through private initiatives as well as PPPs.
Online and 'Anywhere registration' (KAVERI), Karnataka • Computerised land transactions and online registration expedite the generation of encumbrance certificates • Biometrics to complete verification and expedite registration; reduce fraud
Key Benefit
Critical Enablers
Technology
Karnataka Industrial Areas Development Board (KIADB), Karnataka
Key Benefit
Critical Enablers
• KIADB has so far developed 141 industrial areas in 28 districts of the state.
• Price determination through a committee involving all stakeholders, including landowners.
Enabling Body
Formation of an industrial cluster — Chennai automotive cluster, Tamil Nadu • The Chennai automotive cluster leads India in terms of production capacity, with an installed capacity of INR12.8 lakh passenger cars and 3.5 lakh commercials vehicles.
Regulatory/Policy
• About one day to complete all registration processes.
• E-stamping across the state to facilitate quick and paperless payment of duties.
• KIADB promotes rapid development of industries in the state by acquiring land and forming industrial areas. It provides basic infrastructure like establishing roads, power and technical training centres.
Critical Enablers
Key Benefit
Critical Enablers
• Emergence as one of the top 10 global automobile manufacturing hubs • Employment of ~500,000 people by 2015.
Source: CII-KPMG in India survey, 2014; DIPP; Department of Administrative Reforms & Public Grievances
Regulatory/Policy
CII-KPMG – Ease of doing business in India | 16
Land acquisition - Recommendations
There is a need for simplification and transparency in the land acquisition process; the government should encourage the establishment of industrial clusters Simplified and effective land acquisition process Need for simplification and transparency • Simplicity, transparency and speed should be introduced in the land acquisition process. The delays caused by bureaucracy need to be reduced • Simplify administrative procedures by facilitating single-window clearances, standardised documentation and
timely approvals. Failure to do so would be automatically escalated to the industry minister within a week of the lapse of the due date • E-procedures can help improve land acquisition as it aims to curb unethical practices and complete work within agreed timelines
• Lengthy land mutation and conversion processes need to be simplified • Government machinery needs to be proactive in handling land acquisition disputes.
Promote industrial clusters • Encourage the establishment of industrial clusters of related industries, including large and small units • Location viability in terms of infrastructure of the industrial land should be studied before its acquisition • Promote industry clusters through a well-defined and targeted cluster development policy, owned and driven by state and local governments: –– Identify suitable sectors for promoting clusters based on the study of existing industries in the state
–– Industry centric infrastructure master plan should be put in place. Ring roads with dry ports and rail heads must be created to link to the industrial corridors –– Simplify regulatory requirements, including elimination of several compliances and introduction of self-certifications –– State government can assume leadership role in creating clusters and building capacity for sustained development –– Draft sector-specific policies with input from experts and industry leaders, to help create a sound ecosystem
Land value • With respect to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, a major concern with the landowners is the possible undervaluation of their land that might be below market rate. There is a need to bring assurance in this regard.
Source: CII-KPMG in India survey, 2014
• Introduce a market price-based pricing mechanism: –– Make landowners partners and share with them the resources generated by projects from the allocations • Encourage partial or complete leasing of land (from landowners) as opposed to an outright sale to supplement acquisition efforts.
• Develop short-term fiscal incentives and ease tax requirements to encourage rapid cluster development • Benchmark clusters and survey industry members to understand critical infrastructure and facilities required • Facilitate access to funds by promoting linkages between industry and lending institutions • Aim to ensure access to quality and skilled manpower through improved curriculum and university collaborations • Create a government task force/ department for overseeing cluster development.
17 | CII-KPMG – Ease of doing business in India
Key findings
Starting a business
CII-KPMG – Ease of doing business in India | 18
Starting a business - Business approvals
Obtaining approvals like environment clearance, land procurement, construction-related permits and NOCs is a major obstacle in starting a business Starting a business The World Bank’s ‘Doing Business 2014’ report states that India ranks 179 among 189 countries on the ease of starting a business; with a less than desirable performance in the batch of BRICS and other developing Asian countries.
Ease of ‘starting a business’ describes the ease/difficulty with which an entrepreneur is able to establish a new business, given a list of various procedures. A less cumbersome and less expensive process could result in prompt responses to starting a business. On the contrary, cumbersome regulations on start up of businesses can act as a curb on entrepreneurship that may lead to increased informality and a smaller tax base. However, it is known that starting a business in India involves getting a host of clearances and permits.
Approvals required in starting a business in India (percentage of respondents)
38%
37% 43% 11%
16% 5%
Tax Approvals
Registration
0%
Environmental Clearances
39%
No Obstacles
23% 11%
33%
19% 7%
Minor Obstacles
7% Water Connection
20%
32%
Land Procurement
40%
40%
Construction Permits & NOCs
30%
21%
23%
17%
24%
12% 16%
32% 48%
26% 5%
37%
Moderate Obstacles
36% 47%
33%
31%
7%
10%
37% 15%
26% Quality Certificates
21%
33%
Labor Related approvals
48%
37%
60%
36%
Industrial Safety Permits
9%
Power Connection
7% 17%
80%
Permission of Chief Electrical Inspection
100%
Major Obstacles
Source: CII-KPMG in India survey, 2014
Approvals related to environment clearances, land procurement, construction permits, industrial safety permits and power connection are top five obstacles in starting a business in India. As per the survey results, about 50 per cent of the respondents have highlighted major challenges in obtaining environmental clearances. More than one-third of the respondents rated land approvals as the major obstacle in starting a business.
19 | CII-KPMG – Ease of doing business in India
Starting a business - Business approvals
Obtaining approvals and clearances is a time-consuming process involving multiple procedures; costs incurred in the whole process is significantly high Obtaining clearances — the first leg in the process (percentage of respondents)
‘There is a need to effectively implement a single-window system.’ - Respondent, chemical company
~80 per cent of the respondents feel that the time taken and number of departments to be visited to obtain clearances is not reasonable. Source: CII-KPMG in India survey, 2014
A comparison with select countries highlights the need for an ease in procedures when starting a business
Rank
Procedures (number)
Time (days)
Cost (percentage of income per capita)
New Zealand
1
1
1
0.3
Canada
2
1
5
0.4
Singapore
3
3
3
0.6
Australia
4
3
3
0.7
Russia
88
7
15
1.3
Brazil
123
13
108
4.6
China
158
13
33
2
India
179
12
27
47.3
Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.
A closer look at the ease of starting a business in India in comparison to other countries suggests that the number of procedures, time taken plus cost incurred is significantly higher than other countries.
CII-KPMG – Ease of doing business in India | 20
Starting a business - Business approvals: select initiatives to address issues
Effective implementation of single-window clearance systems and the registration process can facilitate obtaining approvals and clearances Select initiatives in India that have been identified by respondents The Single-Window Clearance Act, AP • The Single-Window Clearance Act was enacted in 2002, whereby all the clearances required to start and operate an industry are processed through a single point within a set time period • There is a provision of deemed approvals in certain cases, if the competent authority fails to communicate the decision within the set time period. Online building-plan approval system, Karnataka Bengaluru • Simplified approval procedure through online submission and approval of building plans • 'Pre-DCR' — a tool to submit building plans online
Key Benefit • Time-bound faster clearances • Common application form • Deemed clearances.
Key Benefit
• Delhi government introduced E-stamping in 2008 • E-stamping is the computer-based stamping of registration documents where a record-keeping agency maintains the database electronically instead of physical stamping of documents, which can be forged or duplicated. It is a computerbased application and a secured electronic way of stamping documents.
One-Stop Centre, Punjab • Punjab Bureau of Investment Promotion, a One-Stop Centre, has been established in 2013 for investors, with the intent of providing clearances, incentives and information on investment opportunities in a time-bound manner • Receive, process and approve all investment proposals
Policy
Critical Enablers
• Time taken to obtain building plan approval reduced to 10 days from 30 days.
• Automatic plan scrutiny system called Auto-DCR — checks the plans and simultaneously produces scrutiny reports. Registering a business, New Delhi
Critical Enablers
Technology
Key Benefit
Critical Enablers
• Curb revenue and time loss by preventing the circulation of fake stamp papers • Saving on the cost of printing and handling of stamp papers.
Key Benefit
Technology
Critical Enablers
• Time-bound faster clearances • Dedicated relationship managers.
• Examine applications for all necessary approvals • Encourage new investment and its actualisation. Source: CII-KPMG In India survey, 2014; DIPP; Department of Administrative Reforms & Public Grievances
Enabling Body
21 | CII-KPMG – Ease of doing business in India
Single-window clearance mechanism, Orissa
Key Benefit
• Orissa Industries Facilitation Act (OIFA) 2004 was introduced to facilitate single-window industrial clearance
• Time-bound faster clearances
• OIFA envisages a three-tier approval mechanism to expedite clearances to industrial projects based on the level of investment
• 18 out of 20 major approvals are provided through a single nodal point by using a combined application form.
• The provision exists for deemed approval by department in case the approval is not granted within the specified timeframe.
Single-Window Clearance Act, Rajasthan • Single Window Act, 2011, was passed to establish a singlewindow clearance mechanism in order to fast track all permissions, concessions, exemptions and relaxations for establishing operations of an enterprise in the state • Rajasthan established a single nodal agency, the Bureau of Investment promotion (BIP) to handle all applications / permissions of an entrepreneur and forward them to the concerned departments.
Key Benefit
Critical Enablers
Policy
Critical Enablers
• Time-bound faster clearances • Common application form • Online monitoring of the application’s status.
Policy
Select initiatives abroad that have been identified by respondents Single-window clearance system — Bizfile, Singapore • Bizfile, an internet-based online registration, filing, and information retrieval system was introduced that enables individuals to register businesses on their own • For cases requiring approval from other government agencies, Bizfile sends an email notifying the agencies of a pending application. The agency then logs on to Bizfile to retrieve the online application and provide its comments, thus saving time and effort • To simplify the process, Bizfile pre-populates forms with information already available in the database. The customer doesn’t need to re-enter the information but can make changes if needed • To help ensure accuracy and integrity, Bizfile validates and verifies the data entered.
Key Benefit
Critical Enablers
• Information is updated within 30 minutes of a successful filing instead of 14-21 days • Time to register was reduced from 24 hours to just 15 minutes • Time to incorporate a company decreased from five days to 15 minutes and cost fell to a flat rate of just SGD300 from SGD1200- 35000.
Source: CII-KPMG in India survey, 2014; DIPP; Department of Administrative Reforms & Public Grievances
Technology
CII-KPMG – Ease of doing business in India | 22
Starting a business - Enabling infrastructure
Besides obtaining approvals, inadequate infrastructure and the time taken in obtaining a new connection for water sewerage and power also act as hurdles in starting a business Ease of starting a business in terms of infrastructure enablement (percentage of respondents)
Source: CII-KPMG in India survey, 2014 *For Water, Sewerage and Power connection
Infrastructure is a key driver enabling investments, growth and improving quality of life. Inadequate infrastructure creates obstacles in starting a business.
Multiple visits to various departments and time taken for getting approvals for new connections (water, sewerage and power) also pose major obstacles.
Select initiatives in India that have been identified by respondents Water & sewerage connection, Greater Noida • Layout for Greater Noida sectors, along with detailing of water and sewerage connection to individual plots, are pre-planned • Since 1998-99, provision of water & sewerage connection with all the civil works is conducted before giving possession • Pre-possession of connections avoids repetitive road cutting at later stages.
Key Benefit • Obtaining water and sewerage connections in Greater Noida is faster as compared to other areas • Greater Noida:seven days; India (average):16 days.
Policy
Key Benefit
Critical Enablers
Critical infrastructure project (CIP) scheme, Gujarat • The government has launched the CIP Scheme to facilitate the upgrading of infrastructure in existing estates • Assistance is given for upgrading infrastructure facilities of the industrial estate including construction of approach road, by-pass road, over bridge on road and rail and facilities specific to the industrial area.
Critical Enablers
• The state government has sanctioned INR1,433.54 crore under the CIP schemes for 187 projects in 184 estates.
Source: CII-KPMG in India survey, 2014; DIPP; Department of Administrative Reforms & Public Grievances
Enabling Body
23 | CII-KPMG – Ease of doing business in India
Starting a business - Operation and growth
Unethical practices, macroeconomic instability, high financing cost, taxes and the availability of skilled labour pose major obstacles in the operation and growth of business in India Key problems in the operation and growth of business in India (percentage of respondents)
Source: CII-KPMG in India survey, 2014
As part of the survey, corruption emerged as the major obstacle in doing business in India followed by cost of financing, tax administration and high taxes. Economic and regulatory policy uncertainty and macroeconomic instability can create challenges in the
operations and growth of business in India. Skill and education of workers, labour regulations, customs and trade regulations and access to land are some other major areas of concern in doing business in India.
CII-KPMG – Ease of doing business in India | 24
Starting a business - labour
Forty-seven per cent respondents face moderate to major difficulty in complying with overall labour laws Labour laws Productive labour and harmonious labour relations are considered central to realising the demographic dividend that India is offered. There is a need to contain the inconsistencies that seemingly exist between different labour laws and other laws that concern labour indirectly.
The National Manufacturing Policy aims to increase the manufacturing sector's share of the economy from 15 per cent of the gross domestic product to 25 per cent by 2022. Of the ways in which it is expected to bring this about include the creation of national investment and manufacturing zones or NIMZs
— greenfield industrial townships with flexible labour laws and simpler business regulations.
Difficulties in complying with the labour laws (percentage of respondents)
Skill gap in the Indian workforce, recruiting the right work force and labour laws pose major constraints in hiring labour. Source: CII-KPMG in India survey, 2014; National Manufacturing Policy, 2011
Labour situation and compliance – tackling labour disputes (percentage of respondents)
“We negotiate, surrender, ignore the misbehaviour” - Respondent, auto component company
Source: CII-KPMG in India survey, 2014
Labour policies and regulations take a long time to change, as compared to other factors, given their sensitive nature.
“The environment here [in Gujarat] is very worker friendly. More importantly, there is business.” - Respondent, auto company
25 | CII-KPMG – Ease of doing business in India
Starting a business - labour: select initiatives to address issues
Initiatives focussed on tackling issues in skill gap and labour compliance would help ease labour situations in India Select initiatives in India that have been identified by respondents Labour compliance, SEZ Act, Gujarat • The Gujarat SEZ Act, 2004, has made key provisions with respect to the appointment and termination of labour for units established in SEZs • The concept of ‘fixed term employment’ introduced by the SEZ Act has helped in accounting for the least manpower days lost due to labour strife, among comparable industrial states.
Key Benefit • Gujarat’s manpower days lost accounts for 0.6 per cent of the total loss across India, less than comparable industrial states
Skill development, Gujarat • With a goal of providing employment to the youth, the Directorate of Employment & Training started imparting skill development training to youth through village cluster training centres in villages, under the Swarnim Gujarat Gramya Kaushalya Vardhan Kendra (KVK) Yojana • The Gujarat Skill Development Mission (GSDM) was developed for monitoring, coordinating and providing policy direction for skill development activities. Online portal was also launched.
Key Benefit
• E-portal to provide users with efficient and time-bound services (online registrations, returns filings, license, exemptions, tracking of applications) • Direct reconciliation of returns with bank statements to reduce physical inspections.
Policy
Critical Enablers
• Vocational skill development • 940 training institutes and one lakh candidates have been registered in the GSDM.
Labour Management System (Mahashramm), Maharashtra • The project was launched in 2010 by the Government of Maharashtra
Critical Enablers
Key Benefit
Policy Critical Enablers
• Information related to labour compliances can be viewed on a single portal • Time-bound services to businesses.
Source: CII-KPMG in India survey, 2014; DIPP; Department of Administrative Reforms & Public Grievances
Technology
CII-KPMG – Ease of doing business in India | 26
Starting a business - select initiatives to address manpower issues
Effective implementation of skill development plan can ease manpower challenges faced by industry Select initiatives in India that have potential to prepare a large scale skills pipeline for industry
Formation of Sector Skill Councils (SSCs), NSDC • The National Skills Development Council has setup SSCs to work with industry to create skill development frameworks • SSCs promote Occupational standards and industry standard assessments • Building on other schemes helps to promote industry standard certifications amongst youth – E.g. STAR scheme, MES Schemes.
Key Benefit • Transparency and increased currency of certifications • Increased participation in skill development process by employers and individuals
Promote private participation in skill development (various) • Adoption of government ITIs by private sector (PPP model) • Leveraging CSR agenda of corporates through Companies Act 2013, alignment with skill development and livelihood in the region and creation of shared value • Incentivize setup of skill development centres in industrial clusters in sectors such as Auto, Pharma, Capital Goods, Textiles, Leather.
Key Benefit
• Apart from skills training, NAC also executes consultancy work by conducting third party quality control checks of constructed buildings. This improves the industry linkages for the training/ trainer development activities.
• More efficient training resources allocation
Key Benefit • Availability of high quality skilled resources across a broad range of generic to specialized skills/ trades
Multi Skill Development Centres, REEMAP, AP • REEMAP is set up in AP to provide employment to 1.5 million unemployed youth in the private sector through skill development • REEMAP proposes to establish 100 Multi Skill Development Centers (MSDCs) to provide quality training to youth in various trades with potential for employment. These MSDCs will be closely aligned to the needs of local industry.
Policy
Critical Enablers and Success Models
• Increased ownership of private sector in overcoming skill development challenge
National Academy of Construction (NAC), AP • NAC has gained deep specialization in a single sector, i.e. construction with 138 centers, 21 trades and a target of training 1,00,000 technicians per annum
Critical Enablers and Success Models
Key Benefit
Policy
Critical Enablers and Success Models
Centre of Excellence
Critical Enablers and Success Models
• Alignment of training and skill development efforts to local industry needs • Multi skilling for enhanced candidate employability
Source: CII-KPMG in India survey, 2014; DIPP; Department of Administrative Reforms & Public Grievances
Policy
27 | CII-KPMG – Ease of doing business in India
Starting a business - recommendations
To encourage business startups, process of obtaining approvals and clearances should be expedited by effectively implementing the single-window clearance mechanism Faster and simplified clearances and approvals Improve the effectiveness of single window clearance • Effective implementation of the single-window clearance system for approvals related to starting a business • Single window agency should aim to co-ordinate all legal approvals necessary for the setting up of a business • Decrease the time taken to grant approval. Escalation could be done by a single-window clearance agency to the concerned authorities in case of delays • Enforce time-bound approvals by introducing 'deemed approvals' in case of delays beyond prescribed limit; investor may proceed with the implementation of the project • Eliminate multiple processes and remove the need to maintain several documents • Make processes and approvals online. Introduce the provision of online monitoring of application forms to help applicants monitor their status at various departments.
Source: CII-KPMG in India survey, 2014; DIPP
Emulate noteworthy initiatives from across states
Relax environment-related clearances
• Simplify applications by introducing a combined application form (CAF) instead of several different forms for various departments. Orissa has one common form which is accepted by all the departments
• A single-window clearance from the Ministry of Environment and Forests (MoEF) covering environment, CRZ, forest and wildlife to replace the current system of separate clearances
• Common register; Orissa has replaced the need for maintaining multiple registers (29 registers under various acts) by three combined registers
• Strengthen coordination between Central Pollution Control Board (CPCB)and the State Pollution Control Board (SPCB)
• Synchronised inspections to avoid multiple inspections by the Department of Labour, Inspectorate of Factories and Boilers and State Pollution Board.
• Environment norms should be clearly defined and implemented in a timebound manner • Introduce e-governance and technology-based initiatives to simplify processes for industries • Establish an Environment Compliance Assistance Center (ECAC) in states to facilitate information exchange between regulators and industry and provide technical assistance to industries for fulfilling compliance requirements • Periodic revision of environmental norms to keep pace with technology and changing environmental conditions.
CII-KPMG – Ease of doing business in India | 28
Starting a business - recommendations
Labour reforms are required to make the labour policy flexible; the issue of limited availability of skilled manpower could be tackled by establishing skill development centres Ease labour laws and related compliances Need for a flexible labour policy • Consider proposals for amendments in labour legislations such as the Industrial Disputes Act, Contract Labour (Regulation & Abolition) Act, Trade Unions Act and Factories Act • Provide greater flexibility in the hiringterminating policy • Firms should decide on the hiring of casual labourers. As per the existing law, a casual labourer can become permanent after one year, which forces many firms to manage with less labour and provide less than one year of employment
• Implement a compliance mechanism with appropriate checks to help minimise personal inspections • Establish labour arbitration court to settle labour dispute quickly
• Prepare a design and implementation plan for e-enablement of labour systems facilitating online registrations, returns filings, license applications, exemptions and tracking of applications.
• Code of conduct should be set for labour unions • Systematic capacity building of first line managers should be in place to deal with the unions
• Eliminate the requirement of thirdparty approval for terminating a worker’s employment
Address the issue of limited availability of skilled manpower Collaboration and Partnership
Skill Development • Revise curriculum and course content for industrial training. Integrate the education system with industry requirements so that fresh graduates can meet industry’s expectations in terms of the required skills • Establish skill development centres (SDC) across states for short-term bridge courses under the PPP model • Establish centres to upgrade skills at industrial estates/industrial clusters/ industrial parks/SEZs
• Introduce a flexible model of MoU with private companies to develop need-based skill development courses in ITIs • Adopt ITIs under the PPP scheme of the Government of India • Provide incentives to industries under the industrial policy to commence skill development courses as per their requirements • Channelise NAREGA funds for skill building and enhancing employability.
Source: CII-KPMG in India Survey, 2014; DIPP; State Government portals
• Collaboration of ITI with industry. For example: auto industry players etc. • ACTUniv is one of the partner organisations of Gujarat Knowledge Society in terms of training locations, skill sets required, training infrastructure, trainers and third-party assessment of their courses.
29 | CII-KPMG – Ease of doing business in India
Key findings
Taxation
CII-KPMG – Ease of doing business in India | 30
Taxation
Companies believe that the Indian direct tax regime is not conducive to fostering growth; reduction in corporate taxes could provide an impetus to the growth of business Ease of paying taxes in select countries India fares poorly on the ‘Doing Business 2014’ paying taxes indicators; total tax rate, the time to comply and the number of payments. Of the 189 countries studied, India ranks 158 in terms of overall ease in tax payment.
Rank
Payments (number per year)
Time (hours per year)
Profit tax (%)
Labour tax and contributions (%)
Other taxes (%)
Total tax rate (% profit)
UAE
1
4
12
0
14.1
0.8
14.9
Qatar
2
4
41
0
11.3
0
11.3
Saudi Arabia
3
3
72
2.1
12.4
0
14.5
Hong Kong
4
3
78
17.5
5.3
0.1
22.9
Singapore
5
5
82
4.9
17.6
4.7
27.1
Russia
56
7
177
8
36.7
6.1
50.7
China
120
7
318
6.2
49.6
7.9
63.7
India
158
33
243
24.4
20.7
17.8
62.8
Brazil
159
9
2,600
24.9
39.6
3.8
68.3
Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.
High tax rates emerged as one of the major obstacles to operating and growing a business in India. Issues/challenges in the Indian direct tax regime (percentage of respondents)
Ninety per cent respondents believe that the tax authorities are not proactive in promoting investments. Sixty per cent respondents feel that the neutralisation of the tax decision by the Supreme Court through a retrospective amendment is likely to have damaging effect on investment sentiments. Source: CII-KPMG in India survey, 2014
Ninety-two per cent respondents feel that there are challenges in transfer pricing audit/assessment relating to distribution/agency and 85 per cent
respondents find challenges relating to rendering of services including management and other cross charges. Sixty-five per cent respondents agreed
that companies are now willing to enter an advance pricing agreement.
31 | CII-KPMG – Ease of doing business in India
Taxation
Companies face issues while dealing with tax authorities, settling tax disputes, availing tax incentives and obtaining timely service tax refund Issues/challenges in the Indian indirect tax regime (percentage of respondents)
Around two-third of respondents find time taken for clearence and tax disputes resolution to be significant. Source: CII-KPMG in India survey, 2014
Time taken in obtaining service tax incentives (percentage of respondents)
More than half the respondents face delays in obtaining service tax refund. Source: CII-KPMG in India survey, 2014
Complexities in tax incentives (percentage of respondents)
There is a need to simplify complex tax processes and reduce the time taken for availing incentives. Source: CII-KPMG in India survey, 2014
CII-KPMG – Ease of doing business in India | 32
Taxation
Implementation of Direct Taxes Code (DTC) and Goods and Services Tax (GST), simplification of procedures and an independent redressal grievance cell, among others, have found favour with respondents Indicated improvements to the direct tax regime (percentage of respondents)
Source: CII-KPMG in India survey, 2014
Indicated improvements to the indirect tax regime (percentage of respondents)
Source: CII-KPMG in India survey, 2014
• Economies around the world have made paying taxes faster and easier for businesses by consolidating filings, reducing the frequency of payments or offering electronic filing and payment options. • Several countries have also reduced tax rates and these changes have brought about concrete results. Some economies that have simplified tax payments and reduced rates have witnessed a rise in tax revenues.
Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and MediumSize Enterprises. Washington, DC: World Bank Group.
33 | CII-KPMG – Ease of doing business in India
Taxation
Companies across sectors face issues and challenges with respect to the direct tax regime and transfer pricing regulations Sector-specific taxation issues/challenges (percentage of respondents)
Source: CII-KPMG in India survey, 2014
IT/ITeS Forty-seven per cent respondents feel that the IT sector requires a profit-linked tax holiday to continue with its growth trajectory. Telecommunication More than 80 per cent respondents face challenges with respect to the taxability of payments made to multinationals for supply of network equipment and access data servers situated outside India. Companies also face challenges with respect to withholding tax obligations on inter-service transactions like the use of passive infrastructure, network management services, etc. Media and Entertainment More than 70 per cent respondents face challenges with respect to the taxability of advertisement and subscription revenues earned by foreign telecasting companies. Eighty per cent respondents face challenges with respect to expenditure on film production and acquisition of distribution rights.
Consumer Markets/Industrial Markets Seventy-five per cent respondents face challenges with respect to claim of any deduction/weighted deduction for scientific research conducted inhouse/outsourced. About 80 per cent respondents perceive challenges with respect to withholding tax on payments made for contract manufacturing and toll manufacturing activities. Financial Services More than 80 per cent respondents face challenges in taxation of mark-tomarket profits/losses with respect to securities held. Infrastructure, Government and Healthcare Eighty-five per cent respondents feel that an investment-linked tax incentive is a better regime as compared to a profit-linked tax incentive for the infrastructure sector.
CII-KPMG – Ease of doing business in India | 34
Taxation - select initiatives to address issues
Various states have taken initiatives to ease paying of taxes and reduce the cost of tax collection Select initiatives in India that have been identified by respondents Registration, filling and payment of state VAT, AP
Key Benefit
• Registration certificates are issued through VATIS, an online software application
• Registration certificate is issued within 24 hours in case of nonrisk dealers
• Dealers can file the return through internet and e-seva centres. Dealers can view the details of returns and the payments filed by them using the ‘dealer ledger’ application.
• No fee and security deposit at the time of registration.
• An e-registration application software has been developed to help dealers to apply for Value-added Tax (VAT) registration online
AASTHI, GIS-based property tax system, Karnataka • A geographical information system (GIS) is being employed to bring all properties under the tax net. This facilitates the assessment of property and the creation of property records • Real time data on the collection of property tax by the ULB • Easy search and analysis of property details and tax data and tracking of defaulters on the property tax payment • Online property tax calculator application helps citizens to calculate property tax. VAT simplification and improvement, Rajasthan • Simplified categorisation of rates • All payments and returns have been made online compulsorily • Fast-track mode of return filing whereby 50 per cent of the claimed return is paid at the time of filing returns and the remaining 50 per cent paid after assessment of claims.
Key Benefit
Critical Enablers
Technology
Critical Enablers
• Defaulters can be easily tracked and notices served for nonpayment of tax • Ease of payment has improved due to the online payment facility.
Key Benefit
Technology
Critical Enablers
• Increased compliance due to simplified processes • Computerisation for accountability, efficiency and transparency.
Technology
Source: CII-KPMG in India survey, 2014; DIPP; Department of Administrative Reforms & Public Grievances
Tax approval: No. of days • Some of the key approvals and their timelines under direct and indirect taxes are as follows: • Obtaining Permanent Account Number (PAN) - 15 days • Obtaining Tax Deduction Account Number (TAN) – 15 days • Obtaining recognition from Department of Scientific and Industrial Research (DSIR) with respect to in-house R&D unit - 3 to 6 months • Obtaining approval from DSIR for claiming weighted deduction [under section 35(2AB)] for in-house R&D unit – 6 to 9 months • Value Added Tax registration – 10 to 16 days (applicable on sale goods) • Service Tax registration – 7 days (applicable for service provider) • Excise registration – 7 days (applicable for manufacturer) • Entry Tax registration – 10 to 30 days (applicable if goods are procured/purchased into the local area for use, consumption or sale therein) • Central Sales Tax registration – 10 to 30 days (applicable if goods are sold from one State to another). Source: ttp://www.incometaxsaving.co.in/pan-permanent-account-number; www.incometaxindia.gov.in; VAT registration - State VAT law; Service Tax registration- Service Tax Rules, 1994; Excise registration- The Central Excise Act, 1944; Entry tax registration- State entry tax laws; Central Sales Tax registration- CST Act, 1956 read with State VAT laws
35 | CII-KPMG – Ease of doing business in India
Taxation - recommendations
Taxation in India needs structural, operational and administrative reforms; the burden of tax compliance should be reduced besides enabling e-filing of all taxes Reduce tax-related compliance Ease of paying taxes • Enable e-filing of all taxes with uninterrupted access to online services especially in rural areas • Time-bound subsidies and tax exemptions should be given to the units located in industrial areas, food parks and agro-export zones.
the existing indirect tax system like tax cascading complexity and poor technological infrastructure along with high cost of compliance
A
C
L
• Refund of Value Added Tax (VAT) should occur automatically and in a time-bound manner • Introduce a feedback mechanism to obtain input from taxpayers on the tax regime.
• The GST proposes to subsume all indirect taxes levied in the country but is yet to be implemented. It could help address the shortcomings in
S A
A
Taxation in India needs structural, operational and administrative reforms Structural reforms — Reduce the number of levies and simplify their nature • Structural reform calls for:
• Indirect Tax
L
–– Clarity and precision in policy by aligning it to macroeconomic objectives
S
L
–– Move away from the revenue generation aspects of customs, focus on anti-dumping and border security
–– Stability and predictability to avoid frequent amendments
–– Facilitate consolidation of multiple taxes at the state and local levels, eliminate ‘nuisance’ levies
–– Emphasis on restricting practice of retrospective amendments. Examples of areas that should be looked into:
–– Elimination of ‘dual levies’ e.g. software and Intellectual Property Rights (IPRs)
• Direct Tax C
L
L
Note:
–– Elimination of capital gains tax to boost domestic and foreign investment –– Clarify the non-availability of Minimum Alternate Tax (MAT) for foreign companies – need for certainty post-Authority of Advance Rulings (AARs) rulings.
L
–– GST needs to be implemented urgently to meet the goals of consolidation and simplification while generating more revenues
–– Clarity in policy and precision in drafting to help decrease the number of disputes
–– Moderation in individual and corporate tax rates to spur domestic demand and investment
C
C
L
Legislative changes
L
Central government
C
Administrative action
A
State government
S
CII-KPMG – Ease of doing business in India | 36
Operational Reforms - Focus on getting the tax base right and ushering in certainty and stability Direct Tax • Indirect Transfers
C
L
–– Implement the Shome Committee recommendations; clarifications and legislative amendments are necessary
• Cross-border Tax –– Reiterate the applicability of Central Board of Direct Taxes (CBDT) Circulars on the Mauritius treaty, need to eliminate uncertainty at the departmental level
–– Clarification on items such as threshold, group reorganisations, stock market taxation –– Need to eliminate retrospectivity
C
L
–– Need for grandfathering of investments made prior to 1 April 2015
–– Need for clarity on interplay between Specific Anti-
Indirect Tax
Others C
• Clarity on the non-applicability of Section 14A to strategic investment
• Revisit the Fiat India issue, restore the primacy of actual transaction prices
• Guidelines on refund processes and timelines • Greater consistency and accountability in tax administration.
C
L
• Clarity on the deductibility of CSR expenditure. Administrative Reforms
A
A
• There is a need for consistency in approach, uniform interpretation and application of the law and judicial pronouncements • There is a need to adopt a trustbased approach, avoid not welldefined and onerous information requests during assessments
• Issue guidelines regarding compensation to be recovered in case of creation of marketing intangibles – as a result of excess Advertising, marketing and promotion (AMP) expenditure
• Review the need for Controlled Finance Company (CFC) Provisions in the Indian context • Rethink ‘place of effective management’ standard for establishing tax residency • Address the need for robust dispute resolution mechanisms C
C
L
C
L
• The Wealth Tax Act, 1957, can be repealed
L
L
DTC
• Clarification of the nonapplicability of Transfer Pricing regulations on transactions not resulting in taxable incomes or tax deductible expenses in India e.g. equity infusions, transactions with regard to foreign companies
–– Detailed guidelines on GAAR applicability
C
• Non-availability of domestic Transfer pricing (TP) to payment of director remunerations and other non- tax arbitrage situations to avoid double taxation.
Transfer Pricing
–– Entry into force from 1 April 2015 need reassesment before introduction
• Equal incentives for the services sector, to bring them at par with manufacturing incentives
L
–– Avoid the use of corporatelevel taxation (Dividend Distribution Tax (DDT)), Buyback tax) to bypass treaty limitations on source country taxation
–– Need for a comprehensive GAAR
• Ease restriction on the availability of Cenvat credits
C
–– Downward revision in domestic withholding rates for royalty/Fees for Technical Services (FTS), significant impact on technology inflows
–– Non-applicability of penalty and interest if applied retrospectively. • General Anti-Avoidance Rules (GAAR)
• Clarifications regarding impermissibility of secondary adjustments
avoidance Rules (SAAR) and General Anti-avoidance Rules (GAAR), specific reference to Limitation of Benefits (LOB) Articles.
C
L
L
A
L
L
A
• Delinking policy-making and legislative drafting, consider redrafting by an expert committee based on the final policy decisions.
• Increase stability in reporting, avoid frequent changes in the return format/other forms • Development of a strong IT backbone • Provide certainty and clarity on clauses. For example, the tax holiday for the IT sector faces issues while implementation due to ambiguity • The function of tax administration should be distinct from that of an Strategic business unit (SBU), any ambiguity could lead to undue arbitrary taxation claims • The administration, for taxes, should adopt a concentrated, rather than fragmented, approach.
A
L
A
A
A
37 | CII-KPMG – Ease of doing business in India
Key findings
Contract enforcement
CII-KPMG – Ease of doing business in India | 38
Contract enforcement
The process of filing and servicing court proceedings is often complicated and time consuming; there is also a need to review antiquated laws and regulations Fair, speedy trials are essential for small enterprises embroiled in disputes. If courts take a long time in resolving such disputes, small firms may not be left with enough finances to continue doing business for a long time. In such cases justice delayed may translate into justice denied.
At present, it could take several years for a commercial litigation to get resolved. If a lawsuit aims at seeking damages, it may stretch for at least a decade-and-a-half to reach resolution. There is a need to address such a pressing issue.
Though arbitration was proposed as a good and effective alternative to litigation, it has ended up being more expensive and almost equally timeconsuming.
Obstacles faced in contract enforcement and compliance (percentage of respondents)
Source: CII-KPMG in India survey, 2014
The time taken from filing a case to the final judgement seems unreasonable to most respondents and poses major obstacles. Also, a majority of respondents indicated that the enforcement of judgements are not enforced as smoothly as the existing procedures assure.
Moreover, costs for engaging and retaining lawyers, miscellaneous costs, during the interim stage and enforcement costs also pose significant challenges.
39 | CII-KPMG – Ease of doing business in India
Other issues in contract enforcement • Legal processes around foreign judgements A judgement/decree passed by a court of a country which is not a ‘reciprocating territory’1, cannot be enforced in India per se. A fresh suit has to be filed in a high court that has jurisdiction over the Indian judgement-debtor. Even for reciprocating territories, a foreign judgment/decree will not be enforceable in India if the court in India determines that: –– it has not been pronounced by a court of competent jurisdiction; –– it has not been given on the merits of the case; –– it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable; –– the proceedings in which the judgment was obtained are opposed to natural justice; –– it has been obtained by fraud; –– it sustains a claim founded on a breach of any law in force in India.
• Reconstruction, mergers and amalgamations The process of reconstruction, mergers and amalgamations of companies has been cumbersome and time-consuming. Though the Companies Act, 2013, has sought to rationalise it, the process requires further streamlining to be more effective. In some cases where it was felt that justice could have been served in a better way, courts in India have intervened and provided relief to the Indian contracting party, even where the parties to the contract had agreed to have a provision for exclusive nonIndia jurisdiction. As far as possible, this should be avoided in order to retain the faith of foreign contracting parties in the Indian judicial system. • Intellectual property laws Intellectual property laws are yet to evolve to be able to keep up pace with international trends and standards. Rights and liabilities of licensors and licensees of IP in propriety technology, in particular, need to be defined and appropriately set to enable international commerce to thrive.
Source: KPMG in India Analysis
Review of laws and regulations Eighty-four per cent respondents indicated that a review of laws and regulations needs to be conducted urgently. Respondents have identified the following areas that require urgent review.
Source: CII-KPMG in India survey, 2014
1. A ‘reciprocating territory’ is a country/territory with which India has reciprocal arrangement for the enforcement of judgements
CII-KPMG – Ease of doing business in India | 40
Contract enforcement - select initiatives to address issues
Effective implementation of e-courts for improving court efficiency to ease the contract enforcement process Select initiatives abroad that have been identified by respondents Improving court efficiency, Korea • Korea was a pioneer in using electronic features to streamline court processes and launching electronic case management in the mid-1980s • The electronic case filing system, which enables electronic submission, registration, service notification and access to court documents, began operating in 2010, and by June 2013 almost half of civil cases were e-filed • Korea had to modernise its information technology infrastructure and amend laws and regulations adopt a paperless regime • E-court solutions in Korea mainly encompass features to help judges, facilitate the filing of cases for litigants and inform the public about case outcomes.
Key Benefit • Implementation of e-court systems results in substantial savings from a reduction in the use of paper, time spent in court, cheaper service of process, low transportation costs, easy archiving of documents and payment of fees.
Critical Enablers
Technology
Source: CII-KPMG in India survey, 2014; DIPP; Department of Administrative Reforms & Public Grievances
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
41 | CII-KPMG – Ease of doing business in India
Contract enforcement - Recommendations
Reforms at all levels may be required for the enforcement of contracts to be effective and efficacious Implement e-courts • Effectively implement an electronic case filing system • IT-intensive productivity improvement programmes can be implemented, in courts at all the levels, including district courts. Though the process of e-filing of proceedings has been initiated in some high courts, this could be the norm, instead of an exception. The process of e-court service of proceedings has been initiated by the Supreme Court, however it has yet to permeate to courts at all levels
• Savings from the implementation of e-court systems can be substantial and result from a reduction in the use of paper, time spent in court, need for storage space, as well as easy archiving of documents and a general streamlining of processes and services • Results of the World Bank survey indicate that globally, the pace of contract enforcement is high in economies that have e-filing facility.
Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.
Increase in the number of courts and tribunals • Increasing the number of courts alone may not expedite proceedings. There is also a need to establish special tribunals for resolving commercial cases under various acts for various levels of monetary limits • Moreover, the number of judges / presiding officers should be increased and they should be provided with adequate infrastructure and manpower to facilitate effective functioning.
Alternative Dispute Resolution • Instead of filing proceedings in court, alternative dispute resolution (ADR) processes should be considered. ADR processes may require further streamlining and they should adhere to the specified timelines as far as possible.
Enter international treaties • Subject to certain restrictions in law, a foreign judgment can be enforced by courts in India only if the said judgment is of a court in a ‘reciprocative territory’. The number of ‘reciprocative territories’ with which India presently has such treaties is minimal. India should sign treaties with many more countries with which it does business regularly • The process of enforcement of foreign judgments should be streamlined and definite time limits should be provided for achieving finality with regard to their enforcement of the same.
CII-KPMG – Ease of doing business in India | 42
Antiquated laws should be updated • Updating certain antiquated laws viz. the Indian Contract Act, 1872, Transfer of Property Act, 1882, Indian Evidence Act, 1872, Indian Trusts Act, 1882, Indian Penal Code, 1860, etc. may help them be relevant to the changing times we live in
• Laws pertaining to intellectual property should continuously evolve to be in line with international trends and standards. Rights and liabilities of licensors and licensees of IP in propriety technology, in technology, in particular, need to be defined and appropriately set to enable international commerce to thrive
• Laws should be drafted in simple language so that they can be understood without difficulty and there is no need to issue clarifications regarding their interpretation. Laws should be consistent with economic reforms and there should be no conflict of the laws on the same issue.
43 | CII-KPMG – Ease of doing business in India
Costs incurred due to delays and inefficiencies
CII-KPMG – Ease of doing business in India | 44
Hypothetical Case Study - Loss due to unfavourable business conditions
Delays and high taxes may cause a 5-10 per cent loss in business in India Contribution of factors to total loss of business due to unfavourable business conditions in India
Source: KPMG in India analysis *Refer to methodology annexure for details
Let us assume a company investing INR 5bn in an infrastructure project that gets delayed by 3 months. Loss due to delay in land acquisition: Delays will increase the capital cost due to cost inflation and associated additional interest costs. This could contribute a loss of 3 per cent 4 per cent on investment cost. Loss due to high taxes: Indian face a higher tax burden as compared to Asian countries (estimated by the World Bank at 62.8 per cent as compared to 40.6 per cent in South Asia) which may lead to an additional cost of 1-3 per cent on investment cost.
Loss due to delay in contract enforcement: In a scenario where this business has claims enforceable by law amounting to 5 per cent of project cost due to the delay. The total cost of the process could lead to an additional expenditure of 1-3 per cent of the investment cost (based on an assumption of 40 per cent of the claim amount going towards legal costs).
45 | CII-KPMG – Ease of doing business in India
Hypothetical Case Study - Loss due to unfavorable business conditions
For a 2X660MW thermal power plant, a delay of six months in the project can reduce IRR by 1 per cent, and a delay of 12 months by 2 per cent can add burden of penalty and increase the payback period Performance difference between power project of 2X660MW
Key Metrics
Project without delay
Project with six month delay
Project with 12 month delay
Project IRR
14.90%
14.08%
13.11%
Equity IRR
18.83%
17.45%
15.54%
Project payback period
5.14 yrs
5.66 yrs
6.31yrs
Equity payback period
4.38 yrs
5.04yrs
6.09 yrs
No penalty
INR1,782 million
INR3,564 million
Penalty due to loss in PPA
Losses due to delays in projects • A 2X600 MW power project with an initial investment of INR 60 mn per MW can get delayed by six to12 months due to several factors including delay in land acquisition, clearances and issues associated with construction. As per regulations, if a power producer has a PPA signed with the state electricity board, the power producer has to pay a penalty of INR112.5 mn per month of delay for every 250MW of power. • Thus, a six month delay for a project whose 50 per cent production is under PPA and the other 50 per cent under merchant tariff, escalated at 2 per cent per annum and has to pay a penalty of INR1,782mn. A further six month delay can increase the penalty to INR3,564 mn • Considering a debt equity ratio of 70:30, the project IRR decreases from 15 per cent to 14 per cent with a six month delay and further to 13 per cent with another six month delay • Payback period for the same project increases by more than six months for a six month delay and by more than 14 months for a one year delay.
As on June 2013, of the 569 central sector projects, delays in implementation were reported for about half (227) of the projects, resulting in cost overruns of about 18.8 per cent. Time overruns have been high in road transport (90 projects), power (51 projects) and railways (35 projects) Source: RBI Annual Report 2012-13
CII-KPMG – Ease of doing business in India | 46
47 | CII-KPMG – Ease of doing business in India
Conclusion
CII-KPMG – Ease of doing business in India | 48
Conclusion
The survey conducted across respondents in various business segments has highlighted a number of areas to improve the business climate in India – particularly around land acquisition, starting a business, taxation and contract enforcement. Many respondents have noted new initiatives started in some states that have led to positive change - many of these could perhaps be leveraged at the national level. The recommendations presented in this report highlight the need for: • Reform in Policy & Regulation –– Enhanced transparency in rules and processes around land acquisition, business approvals and taxation –– Simplification and clarification of rules and processes pertaining to taxation and business approvals –– Structural reform in the taxation system to reduce the number of levies, while simplifying them –– More flexible labour policy –– Creation of independent grievance redressal mechanisms –– Establishment of skill development centres in partnership with industry to develop relevant curriculum and courses to enhance employability –– Promotion of industrial clusters for ease in land acquisition and business start-up.
• Reform in Administration and Execution of policy –– Increased online processes for registrations and clearances –– Introduction of single window clearance systems with time bound decision making for business approvals –– Introduction of coordinated clearance systems e.g. for environmental clearances, to facilitate information exchange between various ministry departments, regulators and industry –– Increasing number of courts & tribunals as well as alternative dispute resolution to enhance the ease of contract enforcement.
49 | CII-KPMG – Ease of doing business in India
Annexure
CII-KPMG – Ease of doing business in India | 50
Methodology - 1 Loss due to delay in land acquisition and other clearances
Assumptions: 1. Project cost of INR 5bn has been considered 2. Cost of fund taken as 12.5 per cent to annual rate paid to financer
3. Inflation rate of 8 per cent 4. Typical EBITDA for generated for road and power projects of INR 5bn project cost.
Loss due to high tax rate
Assumptions: 1. Typical PBT for infra and power projects have been taken assuming a 25 yr project period 2. Tax rate as a per cent of profit taken as 62.8 per cent for India and 40.6 per cent as South Asia Average (World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group). Tax holiday assumed for the first ten years
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Methodology - 2 Loss due to high cost of contract enforcement
Assumptions: 1. Claim amount taken as 5 per cent of the project cost 2. Cost of enforcement is 39.6 per cent of the claim amount (World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.)
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Industry cluster in India
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Pharmaceuticals sector
While the sector is fairly established in the south and west, the north is witnessing increasing activity recently • Himachal Pradesh and Uttarakhand are considered among the fastest growing regions in the pharma industry in India -- Haridwar, Roorkee, Dehradun and Rudrapur are reportedly the main hubs of pharmaceutical firms in Uttarakhand with ~200 pharma manufacturing units -- Baddi and some other pockets in Himachal have over 300 units • The investment in the region is reported to be worth an estimated INR30 billion in recent years • The growth in these areas can be attributed to the incentives announced by their respective governments in its Industrial Policy, 2004 • The HP government has come up with some new initiatives to focus on developing new technologies in the areas of biotechnology for agriculture, animal husbandry and healthcare • The development has also resulted in employment for thousands across the region.
Key pharmaceutical ventures across India
Clusters have been highlighted in the map above based on the number and size of pharma units located across the country Sources: KPMG in India analysis; “Backbone of the industry”, Pharmabiz, 31 March 2011; IBEF August 2013; http://www.msmedihimachal.nic.in/AnnualReport2011-12_ A1b.pdf
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Textiles & Clothing Sector
Each region in India caters to a specific sector of the Textiles and clothing sector Textiles and clothing output of each state (in INR million)
• Tamil Nadu accounts for the largest Textiles and clothing production of INR7 618,200 million, which also employs the largest number of workers (2.63 million) in textile factories. This state is followed by Gujarat, which has an annual textile production valued at INR 491,650 million. • There are more than 70 textiles and clothing clusters in India accounting for about 80 per cent of the total production. There are 39 power loom clusters and 13 readymade garment clusters in India. • Bhiwandi and Malegaon are the two largest power loom clusters. Major readymade garments clusters are located in Delhi, Mumbai, Gurgaon, Nagpur, Madurai and Salem, with annual turnover of more than INR 10,000 million since 2003. The state of Maharashtra has 10 textile clusters. Other major states in terms of the number of clusters are Tamil Nadu, Andhra Pradesh, Karnataka, Kerala and Uttar Pradesh (seven clusters each). Source: “Annual Survey of Industries 2010-11”, Ministry of Statistics and Planning, Government of India accessed on 6 February 2014, KPMG in India Analysis as of 10 March 2014
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Leather & leather goods sector : Major Production Clusters
Major leather hubs in India in terms of export earnings and employment
Source: KPMG in India Survey
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Capital Goods
Major clusters for Engineering and Capital Goods Sub-sector
Location Cluster
Machine Tools
Rajkot, Pune, Mumbai, Chennai, Bangalore, Hyderabad, Ludhiana
Power and Electrical Equipment
Ahmedabad, Bangalore, Gurgaon, Delhi, Jaipur, Noida
Textile Machinery
Rajkot, Surat, Vapi, Ahmedabad, Mumbai, Tarapur, Nagpur, Coimbatore, Panipat, Amritsar, Ludhiana
Process Plant Machinery
Pune, Mumbai, Bangalore, Chennai, Coimbatore
Plastic, Paper and Rubber Machinery
Ahmedabad, Mumbai, Pune, Bangalore
Light Engineering Goods
Mumbai, Pune, Nagpur, Chennai, Delhi
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Auto and auto components sector
Tamil Nadu, Karnataka and Maharashtra are among the largest auto and auto component clusters There are four major clusters in the automotive industry in India. They are in and around: • New Delhi, Gurgaon and Manesar in North India, • Pune, Nasik, Halol and Aurangabad in West India, • Chennai, Bengaluru and Hosur in South India • Jamshedpur and Kolkata in East India
Source: Society for Indian Automobile Manufacturers (SIAM) - Automotive Mission Plan 2006-2016
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About KPMG
KPMG in India, a professional services firm, is the Indian member firm of KPMG International and was established in September 1993. Our professionals leverage the global network of firms, providing detailed knowledge of local laws, regulations, markets and competition. KPMG in India provide services to over 4,500 international and national clients, in India. KPMG has offices across India in Delhi, Chandigarh, Ahmedabad, Mumbai, Pune, Chennai, Bangalore, Kochi, Hyderabad and Kolkata. The Indian firm has access to more than 7,000 Indian and expatriate professionals, many of whom are internationally trained. We strive to provide rapid, performance-based, industry-focused and technologyenabled services, which reflect a shared knowledge of global and local industries and our experience of the Indian business environment.
KPMG International KPMG International is a global network of professional firms providing Audit, Tax and Advisory services. KPMG member firms operate in 155 countries and have 155,000 people working in member firms around the world. The KPMG Audit practice endeavors to provide robust and risk based audit services that address member firms’ clients’ strategic priorities and business processes. KPMG’s Tax services are designed to reflect the unique needs and objectives of each client, whether firms are dealing with the tax aspects of a cross-border acquisition or developing and helping to implement a global transfer pricing strategy. In practical terms that means, KPMG firms’ work with their clients to assist them in achieving effective tax compliance and managing tax risks, while helping to control costs. KPMG Advisory professionals provide advice and assistance to help enable companies, intermediaries and public sector bodies to mitigate risk, improve performance, and create value. KPMG firms provide a wide range of Risk Consulting, Management Consulting and Transactions & Restructuring services that can help their clients respond to immediate needs as well as put in place the strategies for the longer term.
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About CII
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes. CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India’s development process. Founded in 1895, India’s premier business association has over 7200 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 100,000 enterprises from around 242 national and regional sectoral industry bodies. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensusbuilding and networking on key issues.
Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few. The CII theme of ‘Accelerating Growth, Creating Employment’ for 2014-15 aims to strengthen a growth process that meets the aspirations of today’s India. During the year, CII will specially focus on economic growth, education, skill development, manufacturing, investments, ease of doing business, export competitiveness, legal and regulatory architecture, labour law reforms and entrepreneurship as growth enablers. With 64 offices, including 9 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, U.K., and USA, as well as institutional partnerships with 312 counterpart organizations in 106 countries, CII serves as a reference point for Indian industry and the international business community.
KPMG in India contacts:
CII contacts:
Richard Rekhy
Abha Seth
Chief Executive Officer KPMG in India T: +91 124 307 4303 E: rrekhy@kpmg.com
Director - Regulatory Affairs Confederation of Indian Industry T: +91 11 4150 6492 E: abha.seth@cii.in
Amit Mookim
Rohan Sirkar
Partner Management Consulting T: +91 22 3090 2141 E: amookim@kpmg.com
Executive Officer - Financial Services Confederation of Indian Industry T: +91 22 2494 8569 E: rohan.sirkar@cii.in
Jaijit Bhattacharya
Partner Infrastructure and Government Services T: +91 124 307 4032 E: jaijitb@kpmg.com
Preeti Sitaram
Associate Director Advisory T: +91 80 3065 4415 E: psitaram@kpmg.com
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