Easing up

Easing up

Two recent legislative exercises by government will improve business environment
Two recent legislative efforts by the government will be conducive to easing the business environment in India. Following a proposal in the budget by finance minister Nirmala Sitharaman, Lok Sabha this week cleared the Direct Tax Vivad Se Vishwas Act to provide a resolution pathway for outstanding direct tax disputes. Separately, the cabinet cleared a proposal to introduce 72 changes in the Companies Act, which cut down provisions pertaining to criminality and aim to unclutter courts. Both these are important as they reduce the cost of doing business in India. The government has done well to introduce them.

At the end of 2018-19, there were outstanding direct tax disputes at various level of the appellate chain, locking up Rs 8.02 lakh crore in disputes. The Vivad Se Vishwas legislation aims to free up a part of this logjam by providing a resolution mechanism to willing litigants. The government has tried to provide a measure of comfort by enshrining in the legislation a bar on reopening a case following resolution. This is essential if a resolution mechanism is to have traction. Also, unlocking potential resources at this moment will help the government as it grapples with a serious fiscal constraint.

Last year, a committee comprising government and private sector representatives made a set of suggestions to alter the framework which deals with the deterrence mechanism for companies which violate rules. Getting the balance between violations which are classified as criminal and civil is important as the former needs a far more stringent standard of proof. Acting on the committee’s suggestions, government has done well to fine tune the balance by changing 65 sections of the Companies Act to cut back on criminality provisions, and expand the settlement mechanism which allows companies to pay up instead of facing prosecution.

These changes will undoubtedly improve the ease of doing business and should be seen as a part of the regular tweaking needed to deal with problems piling up. However, they limit themselves to treating symptoms. The root cause for a high incidence of disputes in India is the lack of clarity in framing laws and poor quality of drafting. Unless steps are taken to improve state capacity we are unlikely to see a durable change in the situation. The political executive can improve the business environment by avoiding knee-jerk reactions and refraining from introducing stringent laws as a default solution to every niggling problem.