India’s Real Challenge Is the Unease of Doing Business

It is somewhat ironic that, a day before the government spoke about removing obstacles to doing business, the 62-year-old founder of software company Vakrangee suffered a heart attack during an Enforcement Directorate (ED) raid on his premises.

Vakrangee, which operates a network of one-stop digital convenience stores, has undergone several iterations over its lifetime.

It is likely that the company or its promoters were involved in activities that attracted the attention of the ED, which is mandated to investigate offences related to money laundering and violations of foreign exchange laws.

Be that as it may, it is telling that one of the key promises in the Union Budget, presented on Saturday, February 1, was the decriminalisation of a raft of outdated laws.

The finance minister announced that the government will introduce the Jan Vishwas Bill 2.0 to decriminalise over 100 more legal provisions in a bid to improve the ease of doing business in the country.

The announcement follows the Jan Vishwas (Amendment of Provisions) Act, 2023, which decriminalised over 180 legal provisions.

Decriminalisation Promised, But Compliance Burdens Remain

Three years ago, think tank Observer Research Foundation published a report titled Jailed for Doing Business: The 26,134 Imprisonment Clauses in India’s Business Laws.

The report highlighted that 1,536 laws govern business operations in India, with 678 implemented at the Union level.

Within these laws lies a web of 69,233 compliances, of which 25,537 are at the Union level. In the 12 months leading up to December 31, 2021, there were an average of 10 regulatory changes every single day, the report noted.

More importantly, of the 1,536 laws, more than half carry imprisonment clauses. Of the 69,233 compliances, 37.8% (or almost two out of every five) have provisions for imprisonment. More than half of these clauses mandate a sentence of at least one year.

Not all misdemeanours—intentional or unintentional—lead to jail time, but the fear is real and palpable, particularly for smaller enterprises. The threat of imprisonment also leads to corruption, especially at the local level.

Cumulatively, it results in an atmosphere where doing business is like walking on hot sand and constantly hoping you don’t burn your feet.

Volkswagen’s Tax Fight Reflects Investor Uncertainty

Meanwhile, news has emerged that carmaker Volkswagen has sued Indian authorities to quash what it calls an "impossibly enormous" tax demand of US $1.4 billion. The company argues that the demand contradicts India’s import taxation rules for car parts and will hamper its business plans, according to court papers seen by Reuters.

Volkswagen’s Indian unit, Skoda Auto Volkswagen India, also told the High Court in Mumbai that the tax dispute puts at risk its US $1.5 billion investments in India and could negatively impact the country’s foreign investment climate.

A government source earlier told Reuters that with penalties, Volkswagen India may have to pay about US $2.8 billion if it loses the case.

In 2023-24, Volkswagen India reported sales of US $2.19 billion and a net profit of US $11 million.

No wonder the company has taken the government to court.

Volkswagen argues that it is not liable to pay higher taxes since it did not import car parts together as a single "kit", but instead shipped them separately and combined them with some locally sourced components to manufacture the vehicle.

According to court filings reviewed by Reuters, the term "kit" has been explained using a practical analogy—it is similar to ordering a chair online from Amazon, which is delivered in one shipment with all the parts and fixtures needed to assemble it.

There is clearly an interpretational issue at play, but with massive financial consequences. There is also the problem of regulations most likely being wielded like a jackhammer.

A multinational car company told me a few years ago that India represented more than 90% of all cases the global automaker was fighting across the dozens of countries it was present in.

India’s Regulatory Burden Makes Business A Tough Bet

Indian laws are built on going after exceptions, the polar opposite of an honour system, where the assumption is that most people will follow the law.

Almost every amendment to a direct or indirect tax law is aimed at catching that one potential lawbreaker, increasing the burden on all businesses and individuals.

A simple example is the tax collected at source (TCS) imposed to track Indians spending liberally on their credit cards overseas.

Go above Rs 10 lakh in spending—raised from Rs 7 lakh earlier—and you will be charged a presumptive tax of 20%, to be collected by the bank. Implementing this cumbersome and regressive guideline took several months for banks to set up year before.

Perhaps a few individuals used their credit cards to buy multiple Rolex watches in duty free without paying customs duties, or committed some other infractions we can only speculate about. But like hundreds of such laws, the TCS rule makes life harder for everyone.

Despite repeated promises of reducing compliance burdens, there are in general more such acts, laws, and guidelines actually being introduced.

High inflation, steep indirect taxes, and limited wage growth have already strained most middle-class households in the last few years.

The government tacitly acknowledged this challenge by raising the income tax exemption limit to Rs 12 lakh per annum.

But fixing the jobs and employment problem requires far superior conditions for entrepreneurs to thrive and businesses to expand.

The current environment does not encourage either beyond a point, especially for larger businesses that have the potential to scale and drive growth.

Instead of focusing on the ease of doing business, we should address the unease of doing business in India.