21 Days agoIndia improves in 6 out of 10 indicators on the World Bank’s Doing Business Report 2018. Read more.
India’s ranking in the World Bank’s – Ease of Doing Business Index 2018, has made a giant leap of 30 positions – from 130 th in 2016 to the 100 th spot in 2017.1 This jump can be attributed to major improvement in significant parameters such as starting a business, dealing with construction permits, resolving insolvency, getting electricity and getting credit, among other parameters.2
The World Bank’s ‘Doing Business 2018 — Reforming to Create Jobs’ report ranks 190 countries based on a combined score on 10 parameters.3 According to the report, India features among the top 10 countries that have shown a marked improvement this year in six out of 10 ‘Doing Business’ indicators.4 This comes as a positive news after 2016, when India moved up only by a single position from 131 to 130.5
Additionally, India’s combined or Distance-to- Frontier (DTF) score also witnessed a spike - from 56.05 in the previous year to 60.76 now, which reflects the country has improved in absolute terms as well.6
After the new ranking was announced, India’s Prime Minister Narendra Modi said this “historic jump is a testament to the multi-sectoral reform push of Team India”. He added, “India welcomes the world to explore economic opportunities our nation has to offer. Guided by the mantra of Reform, Perform and Transform, we are determined to further improve our rankings and scale greater economic growth.”7
Here’s a look at the key areas where India’s ranking has improved:
Paying taxes: In the year 2016, India introduced the Income Computation and Disclosure Standards (ICDS) to standardize the procedure of computing taxable income and other tax accounting standards. In a positive move, this has helped India move over 50 notches in this particular parameter.9
Earlier, tax accounting was done through a traditional method, so that one could recognize income as and when it arose. However, this method led to many companies having discrepancies and their books to show a lower income. To address this issue, the Central Board of Direct Taxes (CBDT) came out with its own accounting standard – ICDS, which came into effect from 1 April 2016. Under this method, profits have to be mandatorily recognized once 25% of the completion stage has been achieved in construction contracts.10
Also, as opposed to the earlier method where interest payment by companies was allowed full deduction from income tax, ICDS does not permit this. A certain part of the borrowing taken for acquisition, construction or production of an asset is considered as the capital amount, which is not applicable for deduction.11
Secondly, India has also relaxed rules on tax compliance for businesses through the introduction of an online platform for the electronic payment of the Employees’ Provident Fund.12
Getting credit: India has strengthened access to credit by amending the rules on priority of secured creditors outside reorganization proceedings and adoption of a new insolvency and bankruptcy code that introduced a reorganization procedure for corporate debtors.14 Secured creditors, such as banks and financial institutions, are given powers to enforce securities without the intervention of courts. This is a productive move to create wealth, generate employment as well as promote entrepreneurship.15
Protecting Minority Investors: The government’s thrust on pro-investor reforms including the enactment of Insolvency and Bankruptcy Code (IBC) has helped India reach the 4th position. This also comes in the wake of several steps taken by Securities Exchange Board of India (SEBI) to increase investor protection and market integrity.17
With regard to investor protection, SEBI has launched reforms especially in the area of governance and has also mandated companies to formulate and disclose a dividend distribution policy. The Securities market regulator has also extended the concept of Business Responsibility Reporting (BRR) to the top 500 listed companies, under which companies have to disclose their performance in areas such as social, environmental and economic responsibilities. Further to safeguard minority investors, SEBI has also imposed restrictions on fundraising by defaulters.18
India has moved up 33 places from the previous year with regard to resolving insolvency in this year’s Doing Business Index. This drastic jump can be credited to the enactment of the landmark Insolvency and Bankruptcy Code that was approved by Parliament in May 2016, with certain provisions imposed in August 201619 to bring India’s legal and institutional machinery in line with the global standards for dealing with the issue of debt default.
With the enactment of the IDC, there has been renewed interest in entrepreneurship and a positive shift in the access to credit. All the laws related to reorganisation and insolvency Resolution of various entities, such as, companies and limited liability entities, unlimited liability partnerships and individuals have been consolidated to ensure a clear, coherent and speedy process.20
Apart from the above mentioned parameters, India has also improved in the sphere of getting an electricity connection. The time to obtain a connection in Delhi has dropped from 138 days four years ago to 45 days now, which is much below the 78-day average in high-income economies. India ranks 29 th among 190 countries with regard to this parameter.21
In the sphere of starting a business, the scenario has drastically improved by merging the applications for the Permanent Account Number (PAN) and Tax Account Number (TAN) through an online system.22
Lastly, the government has reduced the number of procedures as well as the time required to obtain a construction permit through an online system.
Going forward, it is likely that the implementation of the biggest economic reform, Goods and Services Tax (GST) in India will further aid India to move up the ladder in the future. Apart from this, there have been consistent efforts by the government to simplify licensing and tax structures, thereby helping India to become the preferred destination for investors and also a global manufacturing hub envisioned by the ‘Make in India’ campaign. With these ongoing structural reforms, it is not long enough before the Modi’s vision for India to reach the top 50 in Ease of Doing Business is realised.23
7 http://indianexpress.com/article/india/pm-modi-ease-of-doing-business-ranking-world-bank-gst-demonetisation-india-economic-growth- 4916080/
16 http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Profiles/Country/IND.pdf pg77
22 http://www.business-standard.com/article/news- ani/economist-says-india-s-pace-of-improvement-better-than-other-economies-117110100099_1.html