Entrepreneurial woes: Ease of doing business not that easy

In most cases it takes a tragedy to bring the world’s focus to a plight prevailing for long, the same happened with V.G. Siddhartha’s death, as it brought to light the dark side of the Indian entrepreneurial environment.

Although the NDA government has put much emphasis on easing regulations for doing business, harassment by tax authorities, high taxes and liquidity crunch among other issues has proved that the government has largely not been able to walk the talk.

According to official data, around 6.8 lakh companies registered with the Ministry of Corporate Affairs (MCA) have shut. This accounts for 36 per cent of the total firms registered with the MCA.

A total of 6,83,317 companies, of the 18,94,146 registered firms, are closed. At 1,42,425, Maharashtra recorded the highest number of closed companies, followed by Delhi (1,25,937).

Harassment by tax authorities, famously known as "tax terrorism", has been a known phenomenon in India and in recent times, it has only risen.

Apart from claiming pressure from a private equity firm and some lenders, the late founder and Chairman of Coffee Day Enterprises said in his last letter to the board: "There was lot of harassment from the previous DG Income Tax in the form of attaching our shares on two separate occasions to block our Mindtree deal."

This led to the rise of other voices of concern as industry veterans, Mohandas Pai and Kiran Mazumdar Shaw too came out against the harassment caused by tax officials against businessmen.

Interestingly, as avenues of businesses increased with time, avenues for taxes too rose in tandem.

A glaring example of this is the angel tax, the phrase used for the income tax payable on the capital raised by unlisted companies through the issue of shares through off-market transactions. Start-ups are the most affected due to angel tax.

"Ever since its introduction in 2012, angel tax has been stifling the entrepreneurial activity in the country," said Digvijay Singh, the Chief Operating Officer of Indian Angel Network.

Although the government has made some changes for DIPP-registered start-ups to be exempted from angel tax altogether if they fulfill certain conditions, these very set of conditions have been troubling for both start-ups and angel investors, Singh told IANS.

One of the latest strikes on businesses has been the 20 per cent taxation on share buyback by companies, which industry representatives say, would be a major hurdle for businesses.

Not just taxation and clampdown by tax authorities, a slowing economy led by a severe liquidity crisis and low consumption too have posed serious threat towards the growth of businesses and entrepreneurship in India.

Even as the Reserve Bank of India (RBI) has in its last four monetary policy meets reduced lending rates, the transmission of the same to the retail borrowers has not been swift and proportionate.

"We note that since June, RBI has ensured that the banking system liquidity remains extremely comfortable. This in conjunction with 110bps rate cuts has improved the transmission but the transmission has been shallow," said Madhavi Arora, Economist with Edelweiss Securities.

She noted that overall financial condition is still tight, implying that businesses still lack funds at a good cost and thus the growth cycle is getting impacted.

"One of the key factors have been the savings rate and investment rate in the economy. The savings rate and investment rate of the economy have not been too good," she told IANS.

Sunil Sinha, Principal Economist at India Ratings and Research said: "Depressed demand along with inadequate credit flow situation has hampered the entrepreneurship spirit as well as growth in the economy."

According to Sinha, the government must accept that there are serious issues plaguing the economy and there is a need to find specific solutions to spur growth.

B.K. Chaturvedi, former member of the erstwhile Planning Commission was of the view that falling savings and eventual investments in the past couple of years, is among the major reasons for the slow decline of entrepreneurial spirit.

"The overall environment is such that there is no demand, so many of the entrepreneurs have also not grown... and it depends a lot on the state governments, so many of the states have not really provided the sort of incentives which are required for industry to grow," he told IANS.

So, although the government claims of making efforts to clean the economy and the corporate environment by going after norm violating and tax-evading companies, these very steps if not taken carefully and legitimately, may ultimately harm the industry and the economy.

The government according to industrialists and experts should have a more transparent tax regulatory and investigation system and also should provide the needed incentives and economic environment so that India can have more "unicorns" and become a global start-up hub.