SUBMITTED BYKAUSHAL AGARWALLA

KONARK PAULP.PRUDHVI RAM

KUNAL CHOUDHARYGROUP NO 16

IMPACT OF THE FINANCIALBUDGET ON EASE OF DOING

BUSINESS IN INDIA

1. INTRODUCTION TO THE ECONOMIC ISSUE

Ease of Doing Business is a measure of the entry friendlinessof a country’s business climate. It demonstrates theconvenience of the framework a country has set up tofelicitate the setting up of business inside it. The higherthe rank, the easier it is to set up a business in thatcountry. This ranking directly and indirectly impacts thecountry’s economy as it signals the country’s readiness fornew businesses to the global players. As India’s position is avery dismal low in the world rankings, we have tried toanalyse whether the new budget has any incentives for thedevelopment of business in India.

2. TITLE OF THE TERM PROJECT

‘IMPACT OF THE FINANCIAL BUDGET ON EASE OF DOING BUSINESS ININDIA’

2.1 INTRODUCTION

2.1.1 Basic ConceptsIndia ranks a dismay 142 rank out of 189 countries in theworld in the ease of doing business. The Doing Business projectby World Bank group provides objective measures of businessregulations and their enforcement across 189 economies andselected cities at the subnational and regional level. Thegoal is to provide an objective basis for understanding andimproving the regulatory environment for business around theworld.Doing Business encourageseconomies to compete towardsmore efficient regulation,offers measurable benchmarks forreform and serves as a resourcefor academics, journalists,private sector researchers andothers interested in thebusiness climate of eacheconomy. Doing business project

studies the entire lifecycle of business and also theenvironment in which organizations are operating. So, even theindicators also touch all the portions and faces of doingbusiness in specific environment.

Starting a Business Dealing with Construction Permits Getting Electricity Registering Property Getting Credit Protecting Minority Investors Paying Taxes Trading Across Borders Enforcing Contracts Resolving Insolvency

2.2 OBJECTIVEThe main objective is to study the relationship between theIndian financial budget and the ease of doing business inIndia. Another objective is to study the chances of thedevelopment of business in India and if the steps taken by ourfinance minister is enough or not.2.3 SCOPE

The scope of this paper covers steps announced in the Budgetof 2015 and the 2014-15 Ease of Doing Business ranking ofIndia in areas of Taxation, Land Acquisition, Legal Support,and Cross border trade.

2.4 LIMITATION

We have actually limited our scope only to the impact offinancial budget of 2015 only on the ease of doing business.The other limit is that we have only discussed those facets ofthe finance budget which are concerning to the ease of doingbusiness only.

3. ANALYSIS AND INTERPRETATION

3.1 Ease of doing business in INDIA:

To maintain its growth trajectory, India needs to be arelatively attractive investment destination across each ofthe above said indicators. The Government would need toundertake reforms to help place the country on an equalfooting amongst countries having favourable, flexible,liberalised and a transparent business environment. To improvethe rank of the country, Government needs to understand thenuances of the business in the view of industry people and itneeds to support the industry in its business needs. This isthe ideal time for India to press the accelerator and to curethe business situation existed in India.

3.2 Correlation between Ease of doing business &Indian Budget:Budget is not an elixir for all the diseases of the businesssituation in India but it is definitely an indicator whichleads India into new world of business. Let’s evaluate basedon the indicators and discuss the steps taken in the IndianBudget 2015-16.

Starting a business: Ease of ‘starting a business’ describesthe ease/difficulty with which an entrepreneur is able toestablish a new business, given a list of various procedures.A less cumbersome and less expensive process could result inprompt responses to starting a business. On the contrary,cumbersome regulations on startup of businesses can act as acurb on entrepreneurship that may lead to increasedinformality and a smaller tax base. However, it is known thatstarting a business in India involves getting a host ofclearances and permits.

GOI needs to address the issue like removingrequirement of minimum paid up capital,single-window clearances, onlineregistrations, tracking of applications,doing away with therequirements of company sealetc.

Dealing with Construction permits:

Urban development ministry needs to consolidate thebuilding laws at state and central level

States to notify required changes so that therewon’t be any need of inspection for low riskbuildings.

No requirement of NOC from AAI for buildings outsidenotified area.

GOI is trying to bring the consolidated effort byincluding states also as partners in this. Duringthe budget FM even announced 70,000 crore fund forthe infrastructure and referred the exclusion ofthe NOC from AAI.

Getting Electricity:

Taking the process to online and fixing time forinspection and estimations, Time bound inspection forinstallation and connection, Allowing third partycertification for installation, removing the need of pollutioncontrol certificates etc. are some of the process improvementsGOI can make to improve this indicator. Budget has givenindication of doing away of the pollution control

certificates.

Registering a property

States are the important players andthey need allow online registrationsand online payments.

Introduction of e-stamp facilitiesacross registrar offices.

Development of model sale deed and making them availableonline.

Finance Minister told during his budget speech about thedevolution of taxes and equipping them with resources to gofor reforms and GOI will always bethere as a mentor in the newlyformed institution NITI Aayog( TEAM INDIA).

Getting Credit & Protectingminority investors:

In these 2 indicators India has always shown its better rank.So, these are not at the center of the GOI strategy.

Paying Taxes: Creating predictable and stabletax regime is more important than any otherindicator and India faced seriousproblems on this front due toretrospective taxation in therecent past.

Trading across borders:

India is aiming at becoming manufacturing hub ofthe world and in this aspect cross border tradeis important. To improve the situation somemeasures need to be taken.

Electronic processing of customsdeclaration. (Ex: Shenzen model can be the benchmarking.)

Introduction of risk based inspections there by reducingthe no of inspections.

Reduction of total no. of documents and automatedselection of inspection based on pre-determined criteria.

GOI announced projects like Sagaramala and relaxing of customsrules during the budget session.

Enforcing contracts:

This indicator highlights the performance ofjudiciary and GOI needs to provide enoughresources to judiciary to see the improvement.

Creation of specialized commercial courtsand tribunals.

Fixing accountability fordelays in settlement.

Appointing more no. ofjudges.

Finance minister announced increased fundingto the law ministry to equip judiciary withbetter resources and speed.

Resolving Insolvency:

Introduction of bankruptcy law. Expediting setting up of National company laws tribunal. Setting up panel of professionals- liquidators, valuers. Providing alternatives to liquidation

3.3 IMPACT OF FINANCIAL BUDGET ON THE EASE OFDOING BUSINESS3.3.1 Impact of the Direct Taxes

Direct tax is the tax directly paid by an individual or anorganization to an imposing authority. Several changes havebeen introduced in this year’s financial budget which willactually help the corporate world to a large extent. Theirimpact can be further analysed under the following sub-sections.

Impact of Changes in Corporate Tax

The corporate tax has been lowered to 25 per cent from 30 percent, over the next four years. But the interesting thing hereis that the various exemptions provided to companies will beremoved and the corporation tax rate cut will take effect from2016-17. The effective tax rate on Indian companies will bemarginally higher, at 34.61 per cent, compared with 33.99 percent at present, because of an increase in surcharge proposedin the Budget. Arun Jaitleyclarified corporation tax would be brought down in phases, sothat Indian companies could gear up to compete with companiesbased in the ASEAN region, where the rate is 21.9 per cent. Hesaid the various exemptions for companies would be phased out,so that tax litigation could be bought down. This is a bigpositive for those like Reliance Industries, Tata Steel andthe Birlas, UltraTech, which are building new capacities inIndia

3.3.2 Impact of deferral of GAAR

The General Anti Avoidance Rules (GAAR) is a set of rulesproposed to be enacted by the Indian government on therecommendations of the P. Shome committee report. Its majorobjective is to empower the tax authorities against entities

who conduct certain transactions only to achieve tax benefitsor route investments through tax havens to avoid taxes. Therehas been a lot of criticism regarding GAAR and they are givenas below-

GAAR will weaken the investors’ faith in stability ofIndian tax regime.

Cost benefit analysis favours delay in implementationunless properly detailed and acceptable norms are formed.

One big case like Vodafone may have ripple effect oninvestor's confidence

It becomes a tool in the hands of the Income TaxDepartment to harass investors

Lack of training for officials to implement GAAR enhancesthe scope for faulty implementation

Retrospective Taxation can be termed as a disincentive forentities wishing to do business in India Arun Jaitley in thisyear’s financial budget has deferred the implementation ofGAAR for two years. This will have a positive impact on theease of doing business. This will actually instil a sense ofconfidence in the investors about investing in India.

3.3.3 Impact of the indirect taxes

It is the tax collected by an intermediary from a person whobears the ultimate economic burden of the tax.

The increase in the services taxes from 12.36 to 14 % willactually increase the cost of the services. But it hasactually made the road to GST possible. According to theexpected rules and regulations in the new GST structure, theservices taxes would be very high. It will be around a valueof 18-20 %. But since the increasing the service tax in asingle to such a large value will send a shock to the peopleand the corporate world in India, hence the increment ofservices tax is actually paving the road of implementing theGST next year. The finance minister this year said in hisbudget that the GST will be implemented by next year April.The advantages of the implementation of GST can be actuallydiscussed as below-

Common single tax- It will be a common platform forseveral central and states taxes which will actuallyreduce the complexity in the tax structure. This willactually help the manufacturer and the traders.

Common market- Good quality products being manufacturedin one part of the country will be available in otherparts of the country due to no entry tax and CST.

Invoices will be simpler- Relatively the invoices willbecome simpler and it will be easy both for the consumersand the producers.

3.3.4 Formulation of a bankruptcy code

The government has recognized that a comprehensive overhaul ofthe corporate insolvency laws is required to improve the easeof doing business and also to reduce the risks associated withdoing business in India.

The government has proposed a new bankruptcy code to beintroduced in 2015-16. The code is expected to align withinsolvency laws in developed countries. It is hoped that thecode will bring legal certainty and transparency forcreditors, particularly the banks, who have significantamounts of non-performing assets on their books. The proposedbankruptcy law fulfills a long-standing demand of the bankers.Uniform bankruptcy code for easy exit also charts the courseto be adopted by lenders. The loopholes on the account ofmultiple laws like the Sick Industrial Companies Act (SICA)and the Board for Industrial and Finance Reconstruction (BIFR)that allow defaulters to exploit and delay recovery will standaltered. This code would replace the SICA as well as the BIFR

3.3.5 Formulation of a MUDRA Bank

While the big corporate sector gives jobs only for a smallsection of the people, the small and medium enterprisesconsist of the maximum jobs across the country. Theestablishment of the MUDRA Bank will actually help to fund theunfunded. MUDRA stands for Micro Unit Development andRefinance Agency. A corpus fund of 20,000 crore has beencreated for the same purpose. Growth in small businesses isthe key for Indian economy because the sector is estimated toaccount for 20 percent of economic output and 40 percent of

India’s exports. It will provide credit of upto Rs. 10 lakh tosmall entrepreneurs benefitting small manufacturing units,shopkeepers, small entrepreneurs, artisans in rural and urbanareas and other such small vendors etc. The Mudra Bank willlaunch three products initially - Shishu would cover loans upto Rs 50,000 while Kishor above Rs 50,000 and up to Rs 5 lakh.Tarun category will cover loans of above Rs 5 lakh and up toRs 10 lakh.

3.3.6 SETU program and AIM platform

SETU is Self-Employment and Talent Utilization program. SETUwill be established as Techno-financial, incubation andfacilitation programme to support all aspects of start-upbusiness in India. The 2015 Budget has set aside Rs.1000 crorein NITI for the implementation of SETU. 

AIM Platform or Atal Innovation Mission (AIM). AIM isestablished within National Institution for Transforming India(NITI) to provide Innovation Promotion Platform involvingacademicians, and drawing upon national and internationalexperiences to foster a culture of innovation, research anddevelopment. The 2015 budget has earmarked Rs.150 crore forthe AIM Platform.

3.3.7 E- Biz -Portal

In order to facilitate 'Ease of Doing Business', theGovernment has launched a single window government-to-business(G2B) portal for 11 central government services. The services,available on the portal, www.ebiz.gov.in, include those fromCorporate Affairs Ministry (MCA), Reserve Bank of India (RBI),Department of Industrial Policy and Promotion (DIPP), CentralBoard of Direct Taxes (CBDT), Directorate General of ForeignTrade (DGFT) and Employees’ Provident Fund Organisation(EPFO).

Services from MCA include name availability, DirectorIdentification Number (DIN), certificate of incorporation andcommencement of business. Similarly, process such as foreigncollaboration through general permission route from RBI, issueof explosive licences from DIPP, to know importer-exportercode (IEC) from DGFT, to get PAN and TAN from CBDT and to

complete employer’s registration can be completed through thenew portal.

This will greatly help in the ease of doing business in India.

Adding on this, the central excise and service taxregistration will be completed by two working days.

3.3.8 Royalty and fees for technical services

A lot of new start-ups, businesses in India are coming upbased on new technology. They normally take help oftechnologies from outside India. The reduction of the taxesfrom 25 % to 10 % will actually facilitate the flow oftechnologies across the businesses. This is one of the stepswhich can boom the Indian business scenario. He move eases theprocess of doing business for IT start-ups, helping breed anew stream of IT companies in emerging technologies such asSMAC, IoT, etc. It will also encourage foreign firms, whoprovide various technical services to these small firms andstart-ups, to invest in the country. India has emerged as theworld’s fourth largest hub for start-ups with over 3,100 ofthem, driven by “hyper growth” in technology and softwareproducts in the country.

3.3.9 Infrastructure Sector

Adequate and efficient infrastructure is crucial because ofits impact on efficiency and growth of other economicactivities, and in turn, on the welfare of the society.

The infrastructure affects output in the following two ways:-

The prosperity of a country depends directly upon thedevelopment of Agriculture and Industry:-

Agriculture production, however, requires power, credit,transport facilities and more

Industrial production requires not only machinery andequipment but also skilled manpower, management, energy,credit facilities, marketing facilities, transportationservices which include railways, roads, shipping andcommunication facilities.

If sufficient capital is available for investment inbasic industries the normal Multiplier effect willnaturally lead to further industrialization.

How Infrastructure contributes to Growth

Infrastructure development is thus one of the major factorscontributing to overall economic development(I) Direct investment in infrastructure creates production

facilities and stimulates economic activities; (II) Reduces transaction costs and trade costs thus improving

competitiveness;(III) Provides employment opportunities and physical and

social infrastructure to the poor.

Now that we know how the infrastructure sector plays such acritical role in the economic growth of a country we move onto study and analyse how Budget 2015 has shaped up for thesector:-

I. National Investment and Infrastructure Fund (NIIF), to beestablished with an annual flow of Rs20,000 crore to it.

It will lead to facilitation of debts to theindustry players as well as an increased investmentinterest from the external sources.

As a result it will boost the sector and result inincreased economic activity.

II. Ports in public sector will be encouraged, tocorporatize, and become companies under the Companies Actto attract investment and leverage the huge landresources.

Clearly this step by the government again showsintent to maximize the resource productivity in away increasing the productivity from factors ofproduction. (Land, Labour and Capital)

III. Electrification of the remaining 20,000 villagesincluding off-grid Solar Power- by 2020.

It will lead to an indirect economic growth byfacilitation of economic activity in the rural partsof the country.

Thus it is one of the ways in which the multipliereffect will come into play resulting in growth ofGDP.

IV. Introduction of tax- free infrastructure bonds forprojects in railways and roads.

It will attract investment into the projects forroad and railways. Although the public expenditurehas also been increased for roads and railways it isalways beneficial to source capital in the form ofinvestments.

V. Public contracts (Resolution of Disputes) Bill tostreamline the institutional arrangements for resolutionof disputes.

Today, the dispute arising in public contracts takea long time to resolve and the process is also verycostly. This makes the PPP model unattractive to thepotential players.

With this step the apprehensions of the privateplayers will come down and result in developmentoccurring through collaboration between thegovernment and the private players.

VI. Target of renewable energy capacity revised to 175000 MWtill 2022, comprising 100000 MW Solar, 60000 MW Wind,10000 MW Biomass and 5000 MW Small Hydro.

In 1990’s China and India were almost comparable interms of their economic indicators. The gap thenwidened as China embarked upon an intensivedevelopment process mainly by attracting foreigninvestments and strengthening of the infrastructure.

When we see India the dearth of infrastructure ishuge. The power sector is reeling under hightransmission losses and thefts.

Thus the step to enhance the existing capacity is inright direction and long due for India to makeprogress

VII. The government continues increasing allocation towardstransmission and distribution it’s up 26% in 2015.

As talked about in the previous point this will helpin upgrading the existing infrastructure which isalso equally important since we can’t go on makingeverything from scratch and have to adopt theprocess of revamping as well.

VIII. Welspun's Mittal said increasing coal cess to Rs 200 atonne from Rs 100 will be helpful for sustainingsubsidies to clean energy projects. Transparent CoalBlock auctions to augment resources of the States.

With continuous efforts to make a transition towardsrenewable energy this certainly supports theintention.

With the continuously rising Coal Import bills it isnecessary that the Power sector move towards

renewables. Already about 50% of our thermal powerplants are idle because of shortage of coal.

The matter of coal block auctions being finallyresolved is also a huge relief because it will againhelp to support the existing power plants while alsoreducing the import bills thus increasing the NetExports.

IX. 5 ultra-mega power projects through transparent auctionsystem of 4,000 MW.

It will again have a multiplier effect on theeconomy with increased construction activity andemployment opportunities along with fuelling therising demand of India power requirements.

X. Mr. Jaitley said that the investment in infrastructurewould go up by Rs 70,000 crore in 2015-16.

It will create an upswing in the economy due toincreased government expenditure.

XI. India's clean energy sector was likely to generatebusiness opportunities of $160 billion in the next fiveyears.

It will boost the Make in India campaign andincrease the manufacturing output as well as itscontribution to the GDP thus increasing overallgrowth.

XII. Growth in telecom sector is not balanced. However, toensure equity in access and to accelerate the balancedsocio-economic growth, the DoT has planned to connect all2, 50,000 Gram Panchayats in the country with minimumbandwidth of 100 Mbps under the National Optical FibreNetwork Project.

It will thus increase the economic growth throughthe indirect channel.

XIII. Despite pressure on fiscal consolidation, enough room hasbeen created for infrastructure spending through thegovernment’s own resources and by nudging PSUs to investmore.

It’s a positive development that government hasshown its intentions to fuel the growth throughpublic expenditure and not focusing too much on themacro indicators.

3.3.10 Miscellaneous Steps

The government has focused on improving the ease of doingbusiness in India by proposing to:

set up exclusive commercial divisions in the courts tohelp ensure the speedy resolution of commercial disputes;

introduce a Public Contracts (Resolution of Disputes)Bill to streamline the institutional arrangements for theresolution of such disputes;

appoint an expert committee to draft legislation toensure that regulatory approval can be grantedexpeditiously;

progressively expand the ‘visas on arrival’ scheme from43 countries to 150 countries; and

Remove distinctions between the different types offoreign investments (foreign portfolio investment (FPI)and foreign direct investment (FDI)).

5. CONTRIBUTION TO TERM PAPER As a team, we have gone through the reports published bythe World Bank group and understood the crux of themethodology about the “Doing business project”. To get thegrip on the countries business environment, team has observedthe macroeconomic condition of India and then studied widelyavailable literature on the GOI websites and official sources.Team has gone through the Union Budget, Rail Budget andEconomic Survey of the country and analysed the same with

keeping the best performing countries in mind. Topics coveredin the course such as Budget, Taxation, Macro Economics, Traderelations etc. helped us in analysing and understanding thecore of the topic. Then after team has analysed and presentedtheir viewpoints, issues that can arise in future, remediesfor the present problems and steps to be taken to reach theIndia’s goal of ‘Below 50’ ranking.

6. CONCLUSION

Current business climate is gearing up for theintroduction of GST, the streamlined business permissionsportal – eBiz portal, and the world is eyeing Indiacarefully. With the entry barriers of business in Indiaseem to be reducing, albeit slowly, the market can besure to see some changes pretty soon.

Porter’s Five Forces Model talks of ‘Threat of newentrants’ as well as ‘Customer’s bargaining power’ whiledetermining how the industry will be moving. In thecurrent Indian context, reforms will increase the ‘Threatof new entrants’ in the market, as new players eye Asia’ssecond largest economy. As it becomes easier to offerproducts/services to consumers, the customer will have abigger variety to choose from and it will increase thecustomer’s bargaining power, forcing existing businessesto innovate to retain and increase its customer base. Onthe other hand, newer entrants in Supply upstream anddownstream will also decrease supplier’s bargainingpower, somewhat giving relief to businesses in lieu ofthe two forces discussed above.

Thus we can see that there has been a large impact of thefinancial budget on the ease of doing business in India.Some important steps have taken by the Indian governmentto cater to these problems and we hope that we will beable to see the bright results of these steps in the nearfuture.

7. RECOMMENDATION AND SUGGESTIONS

Despite the Budget of 2015 bringing in new steps to improve the Ease of doing business, there are still issues that hamperthe inflow of new businesses into India.

Ease of exit: It may seem strange to talk of the ease ofgetting out of a business while speaking of the ease of doingbusiness, but it is an integral part of setting up a business.Indian law does not allow a business to stop, especially inthe production industry, easily.

Extensive Customs Red Tape: When compared to its northerncounterpart China, Indian ports and airports have an extensivebureaucratic setup which hampers ease of doing business.

Taxes: While the Tax issues are underway to improvement, withGST supposed to be rolled out in the near future and educationcess having been removed. Still, the issue of MAT in SEZsstill remains. MAT is Minimal alternative tax that a companyhas to pay in the Special economic zones. These MATs usuallyend up negating most of the benefit a company expects fromoperating in a SEZ. There was a lot of hope from the newgovernment to do away with MAT in budget 2015 but it was notdone.

Enforcement of Contracts: A KPMG report has determined that84% of businesses believe that a review of laws andregulations need to be undertaken urgently. The evolution of asale of goods dispute, tracking the time, cost and number ofprocedures involved from the moment the plaintiff files thelawsuit until actual payment is averaged to be 1420 days.

A central contract repository should be made so that non-repudiation can be maintained. Laws should be updated keepingin mind the new ways of doing business – IPR protection,diversified organizational structure etc.

Land Acquisition: Indian legislatures and lawmakers need toset up specialized areas with pre-approved clearance toincentivize business to approach India as a hub forbusinesses. A single window registration process will go along way to bring in businesses wanting to set up in India.The land use conversion systems needs streamlining andupdating.

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