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Saturday, 9 November 2013

In India, invest and get arrested (Sunday Guardian)

MADHAV NALAPAT  Mumbai | 9th Nov 2013
usinesspersons in Mumbai are voting with their chequebooks to leave India for other shores. Over the past six years, there has been a growing tide of investment abroad, be it in Europe, North America or Africa. "Anywhere but India" has become the motto for the Indian private sector, although few have the courage to articulate this publicly. A cross-section of the business community gave reasons as to why India has become "the most dangerous country to do business in", according to a Bangalore-based investor.
He and others pointed out that during the past six years, laws and regulations involving business have been changed so as to make the option of arrest and detention available for a battery of offences. "Whether it is income-tax, service tax, excise or matters relating to company management, under the amended laws, any perceived non-compliance invites arrest," a top Mumbai-based company executive said. He pointed out that "in case a company fails to meet a tax demand for whatever reason, all the directors can now be sent to jail". The power of arrest has been given not only to Central bodies but to those at the state and even lower levels, each of whom have come up with new regulations for which jail is often the penalty for non-compliance
According to the director of four large companies, the new Companies Act "is draconian". He points out that "there are backdoor provisions in 65 chapters that make it very easy for an executive to get prosecuted on technical grounds. One of his colleagues warned that "the powers given to even the holder of a single share could result in unscrupulous shareholders holding senior management to ransom". In its eagerness to protect the small investor, "the rights of the majority stakeholder have been ignored" and this "will destroy the investment climate in the country". A company chief executive pointed out that "these days, there is a blizzard of notices from various agencies and time spent on dealing with these has gone up manifold". Not surprisingly, "prosecutions have multiplied". The effect, according to all those talked to, has been a huge rise during the past few years on the bribes being paid to officers, "especially at the middle level".
The laws that have been passed "have made India a paradise for the corrupt official", because he now has "several sticks to threaten industry with, which get brandished so as to get bribes". According to a senior executive, "a corrupt tax officer can make Rs 5 crore a year while a commissioner gets nothing less than Rs 20 crore". According to a CEO, since 2007 "the percentage of corrupt officers has risen from 45% to 70% because it is so easy to make money and there are so many new opportunities for doing so".
Another pointed out that the much-advertised scheme for voluntary disclosure of service tax arrears "contains a provision that the officer need not accept the return. He can reject the application for voluntary disclosure and levy penalties and prosecution." According to him, "Such a provision has been introduced only to ensure a bribe gets paid even after compliance, to stop the officer from rejecting the application". Others too claimed that the raft of new legislation passed by the "reformist" government of Manmohan Singh "has created a nirvana for corrupt officers". Earlier moves to liberalise, such as the shift from FERA to FEMA, have been neutralised.
"In place of FERA these days the Prevention of Money Laundering Act with its draconian provisions gets applied to so many cases. We have gone back to the days of FERA," a senior executive lamented, pointing out that "the discretion given to the officer often means that demands have no relation to business realities".
Now, a Customs officer can order not just a fine but the arrest of a passenger suspected of having smuggled undeclared goods, "even if these be of a modest value". Worse, "for many such procedures the option of bail has been removed from the rule book and from statutes". So intent has the government been on securing revenue that "service tax is now levied just on invoices, even before payments have actually been made and stamp duty is getting imposed even on some loans".
The overall impact has been chilling for business operations in the country, with even industrialised states such as Maharashtra going ahead with regressive legislation designed to "get revenue for a year or two, but kill the business paying the taxes over five years", according to the CEO of a Delhi-based company. Banks have become the victims of the zeal to raise funds anyhow, with "loans from banks and dues to employees now coming behind payouts to government agencies". In the matter of income-tax searches, where formerly seized property was returned after a panchnama was prepared, "these days the property is taken away and comes back only after a bribe gets paid", a senior executive of a Mumbai-based corporate house said.
Several executives pointed out that "some officials in the Banking Department interfere informally in bank operations, protecting their favourites and arming their rivals". The name of a senior official was mentioned as being "in the pay of a corporate house, so that he ensures that the flow of funds goes on while that to business rivals gets choked". Because of political patronage, such officers are more likely to be promoted than those (few) who are honest.
As for the share market, it was pointed out that the actual index, adjusted for the steep fall in the value of the rupee, should be 13,000 rather than 21,000. The delay in the GST and the increasing number of punitive steps being taken by state agencies at different levels have ensured that "any sane businessman stays far away from investing in India".
Clearly, there are more than "international" factors responsible for the halving of the rate of growth from its level in the boom years of the Manmohan era.

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