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2 out of 5 Compliances Can Send an Entrepreneur to Jail

In Business
February 14, 2022

Doing business in India is challenging due to the presence of imprisonment clauses in its business laws enacted since Independence. What policy reforms are required to transform India’s business climate?

Jailed for Doing Business: the 26,134 imprisonment clauses in India’s business laws is a monograph by Observer Research Foundation that analyses newly isolated compliance data that entrepreneurs and corporations face. It offers recommendations that could help policymakers reimagine India’s compliance universe.

This monograph is a first-of-its-kind consolidation of business compliance data that had, till date, only existed in silos across ministries and departments. Collated over the past seven years by TeamLease RegTech, a regulatory technology solutions firm, the monograph has classified the data into seven broad domains — labour; finance and taxation; environment, health and safety; secretarial; commercial; industry-specific; and general.

These clauses have been enacted by Union and state governments. Five states have more than 1,000 imprisonment clauses in their business laws: Gujarat (1,469), Punjab (1,273), Maharashtra (1,210), Karnataka (1,175), and Tamil Nadu (1,043). Excessive compliances are especially burdensome on MSMEs; a typical MSME, having more than 150 employees, faces 500-900 compliances that cost Rs. 12-18 lakhs in a single year. This regulatory overreach impacts not just entrepreneurs running for-profits, but not-for-profit institutions as well. There is a widening gap between the goods and services the country needs and how the State views the entrepreneurs creating them.

“The excessive criminalization of India’s employer compliance universe breeds corruption, blunts formal employment and poisons justice,” says Manish Sabharwal, Vice Chairman of TeamLease. “This report is a wonderful contribution to ideas for actionable reforms; the government has made a good start in purging compliances but truly reducing regulatory cholesterol requires extending that project to purging the 26,134 jail provisions for employers at the centre and state.”

The disproportionate focus on imprisonment in the law-making process can be observed in several legislations. For example, acts of sedition can attract a sentence of one to three years — similar to not whitewashing latrines and urinals once every four months. The report offers ten recommendations on rationalising the excesses of business laws, rules and regulations. Using criminal penalties with restraint and constituting a regulatory impact assessment committee could lay the foundation of policy reformation. It also recommends rationalising imprisonment clauses. For instance, removing criminality from procedural lapses and inadvertent omissions while retaining imprisonment for wilful transgressions including but not limited to loss of life, destruction of environment and evasion of taxes. In addition, defining standards for legal drafting, introducing sunset clauses, and ushering all reforms under single overarching legislation could be key to infusing dignity to the entrepreneurs, businesspersons and wealth-creators.

“This publication lays the foundations for engaging with and delivering India’s third-generation economic reforms. The recommendations in Jailed for Doing Business, and its thorough analysis, must compel us to change how we assess our businesses and treat those who run them,” says Samir Saran, President of the Observer Research Foundation. “I see this report as a springboard for new research and efforts that are needed to do away with rules, laws and codes that hold back India’s entrepreneurial energy and its emergence as a global economic powerhouse.”

Despite the numerous difficulties in implementing large-scale policy reforms in India, there is a need for change. The monograph suggests that rather than waiting for the reforms to come, the larger policy fraternity, including politicians, bureaucrats, business executives, scholars and citizens rethink their own actions through this report, and reshape new narratives that will usher in a compliance climate that befits a 21 st century India.