In the latest World Bank report on ‘ease of doing business’, India has limped to 130th rank from previous ranking of 131. This report as expected, drew sharp reaction from government on inability of World Bank to factor in plethora of reforms initiated by it.

To be in all fairness, whatever the political leaning or commercial interest one has, there is no denying of the fact that the present government is one of the most responsive government ever seen by citizens of this country. Be it a minister or a bureaucrat, everyone is just a tweet away to get a response or a meeting. However, getting response one thing but the reality on ground suddenly seems to be getting complicated.

Try to incorporate a company and all ‘ease of doing business’ goes out of window with first step of selecting a name itself and then the real game starts. Want to raise funds, get a new capital account, valuation certificate and host of other paper work starts creeping in and engulf the entrepreneur. Of all numerous compliance papers, valuation certificate seems to be most logical till one really get into it.

In India after every private placement of shares in an unlisted entity, valuation certificate from an accountant is needed and tax is levied on deemed income if there is gap between accounting firm valuation and investors. In the world of startups or even listed entities, valuation of the company is most dynamic process and goes through various ups and downs.

However, the real devil is taxation on deemed income! “Deemed” i.e. an income that would have been there but not earned by anyone! For example if Uber would have been an Indian company in year 2014, its investors would have been taxed USD 3 billion on income of USD 10 billion as investors (Bill Gurley) valued Uber at USD 16 billion while Damodaran, a renowned valuation expert (here can be taken as government mandated independent valuation expert) valued it at USD 6 billion.

Later on, Damodaran changed Uber valuation to USD 54 billion and then finally settling at USD 23.4 billion a swing of more than 900 percent (from 6 billion to 54 to 23). So if an expert like Damodaran is wide off mark on valuation then how one can trust the valuation certificate by some random CA firm. And this point of disagreement can cause a tax of USD 3 billion at minimum.

Hence, an innocuous rule becomes the first step in red-tape / corruption and costs, as all accounting firm tweak data to match valuation given by investors and charge heft sums for doing that. Further as valuation of a startup keep moving up and down, how one shall account for it and provide for it?

One wonders as what objective a CA certificate achieves other than harassment at tax offices where assessment officer raises questions about giving a premium to a zero revenue company or a loss making company.

Valuation certificate is just one example there are dozens of documents / requirements serving little purpose but needed nonetheless by endless number of government departments and all adding to useless paper work, red-tapism and scope of bribery.

Somehow there is a naïve belief among the mandarins that by porting a paper document to web will improve ease of business and hence there is a massive effort going on move everything online and hoping it will do wonders. This thought process is as naïve as the one where some government expected bribes to disappear if citizens started making sting videos.

Somehow in India, the lawmakers and bureaucrats work with the fundamental belief that every private enterprise has been started with the core aim of committing fraud, launder capital, evade taxes, and commit financial crimes until and unless proven otherwise, and it may come as a great shock and surprise to our giant army of babus that private companies – big or small – do add to the wealth of the nation and contribute in their own way in building the nation.

The aim and objective of any government is to keep its citizens happy and to help them achieve this goal rather than doubting every motive and treating every enterprise as a den of crime. Hence, the government needs to behave in a more mature way and adopt a more adult approach when it comes to treatment of companies, instead of having a parental attitude towards everyone.

Unfortunately, despite all the big talk and announcements being made regarding so-called ease of business, responsive govt. and empathetic tax collectors, things remain as they are were. As despite all the big talk, no changes in laws have been made to eliminate unnecessary paper work (and eliminate harassment and corruption), neither any accountability has been created in system for the regulators and army of bureaucrats. Hence despite all well-meaning intentions, ease of business is going to remain a pipe dream only.

Source: MoneyControl

Image Courtesy: Business Standard