Compliance burden can be worrisome for businesses as non-compliance can mean jail time for entrepreneurs. There are around 26,134 imprisonment clauses in 843 economic legislations, rules, and regulations that oversee and influence doing business in the country, according to a new report. Of that, almost seven out of 10 imprisonment clauses (68.1 percent) come under the labour category.

The research report titled 'Jailed for Doing Business', prepared by Teamlease and Observer Research Foundation (ORF), stated: "Almost two out of every five (37.7 per cent) clauses pertaining to doing business in India carry imprisonment as penalties. More than half the laws (or 54.9 per cent) carry imprisonment clauses."

The report states despite the end of the licence-permit Raj, the criminal provisions in economic laws have increased.

'Labour segment needs most compliance reforms'

Speaking to CNBC-TV 18, Gautam Chikermane, vice-president at ORF, said: "The biggest compliance reforms needed in India are in the labour category — almost seven out of 10 imprisonment clauses (68.1 per cent) come under the labour category."

"Imprisonment clauses under labour laws add up to more than twice those contained in the other five categories combined — three times more than commercial laws; 4.5 times more than the environment, health and safety laws; seven times more than finance and taxation laws; and over 17 times more than secretarial laws," he said.

As India looks to increase automation in the coming years, "the pre-Independence, 1940s-style administrative controls meant to protect labour will prove counter-productive in 21st-century India," the report highlighted.

Within labour laws, the Factories Act, 1948, stands out, said Chikermane. "If urgency is the key, the Factories Act, 1948, is the target. If India wants to undertake compliance reforms, it needs to be done systematically and in one legislative stroke, rather than a lingering and unending stream of legislations across categories and acts."

Discouraging MSMEs from growing

India is home to approximately 6.3 crore Micro, Small & Medium Enterprises (MSMEs). It has been often stated that entrepreneurs prefer to stay under the MSME category, mainly due to the compliance burden attached to doing business as businesses grow. The total compliances for small-, medium-, and large-sized companies is 669, 3,109, and 5,796, respectively.

"More than 98 per cent of Indian employers stay small by choice," Chikermane said. "The moment an entrepreneur aspires for growth and his/her company raises its head to expand its scale and become part of the formal economy, it can lead to more than 400 compliances a year that become applicable as soon as the setup is formalised — overnight."

Yet another prevailing phenomenon in the country is that entrepreneurs prefer creating another company rather than expanding the existing one to support growth.

As per India Brand Equity Foundation (IBEF), under the top five state-wise Udyam registrations, Maharashtra recorded a maximum number of (MSME) registrations with 12.18 lakh units, followed by Tamil Nadu (6.23 lakh), Gujarat (4.86 lakh), Rajasthan (4.68 lakh), and Uttar Pradesh (4.45 lakh). Interestingly, some of these states have more than 1,000 imprisonment clauses in their business laws – Gujarat (1,469 imprisonment clauses), Maharashtra (1,210), and Tamil Nadu (1,043).

Systematic approach needed to improve ease of doing biz

The report suggests 10 major and 31 minor recommendations. The report recommends reforming the way policies are designed, using criminal penalties in business laws with extreme restraint, and constituting a regulatory impact assessment committee within the Law Commission of India.

It suggests that every imprisonment clause should go through legislative scrutiny at least once every five years.

"The rate of innovation is faster than this period, but since enacting new laws is an arduous activity, a five-year term, in tune with the terms of Lok Sabha or state assemblies, is apt," the report states.

The durations to turn laws into regulations by state-determined agencies — for instance, officials from the Competition Commission of India — the frequency should be shorter, perhaps two years. For the capital market or banking that fall under the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI), respectively, there could be an annual review.

(Edited by : Amrita Das)

First Published:Feb 14, 2022 3:52 PM IST