Unshackling Indian Industry

Report of the Special Subject Group

Members :

Shri Nusli N. Wadia ( Convenor )
Shri Ratan N. Tata

Principles of Unshackling ...

In order to free industry from various shackles, the Report proposes the following approach -

This Report seeks to highlight major shackles arising from outdated laws / procedures; and suggests measures to unshackle Indian industry. This would help in achieving broader objectives, like:

The Report is organised in three parts: Pre-operational issues; Operations issues, and Restructuring / exit related issues.

1. Pre-Operational Stage

Issue (1): Multi-layered clearance process involves voluminous paperwork and loss of crucial time. Over 30 clearances, 25 government offices to deal with for a typical medium / large size industrial project. Documents and copies running into over 2,000 pages to be submitted for a typical project.

• It is understood that the P. C. Jain Committee has reviewed this matter and made suitable recommendations, which should be implemented within a time-bound schedule.
• Government should have a clear-cut compliance policy, defining in unambiguous terms the list of compliances, which an investor has to meet. If all the compliances have been met, sanction should be forthcoming automatically.
• Network the Central Government departments with each other as also the State Government departments. Also network the Central and State Governments with each other.
• Introduce a "Paperwork Reduction Act", which would result in reducing paperwork through use of information technology, thus, enhancing efficiency of the government.
• Hold officials accountable for delays; link their service performance to quarterly / annual assessments.

Issue (2): Land records are highly disputable and there is a problem of conversion of land for industrial use.

• Set in motion computerisation and updating of land records (as done in Andhra Pradesh).
• State Planning Board to prepare ‘logistics plan’ for classified industrial areas and spell out the terms for private development of infrastructure.

Issue (3): Many large projects are often stalled due to environmental objections, even after environmental clearance.

• All objections on environmental grounds should be invited only prior to granting clearance. Once the clearance is given, no environmentally related objections should be entertained.

Issue (4): Powers vested with inspectorates are discretionary and are often misused.

• Gradually replace inspectorates by moving to professional audits for all compliances by accredited certifying agencies.

1. Operations Stage

Issue (5): An average corporate has to file about 40 compliance reports over the year. In many cases, the information sought is no longer relevant and hence compliance forms need modifications and changes.

• Companies should be allowed to file returns only annually in a suitable format, based on self-declaration and compliance status certified by an accredited independent agency. This procedure should be deemed to be a compliance. Otherwise, returns during the year to be filed only in the event of exceptions like fire, deaths, accidents, etc.
• A statement attested by the agency should be appended to the company’s audited annual statement of accounts certifying that the company has fulfilled all requirements. The same should also be certified by the Managing Director and the Board.

Issue (6): Processing of excise, sales tax and customs returns by the Government takes an inordinately long time.

• Government to move to IT more intensively in all its departments. Target a time frame for computerising various forms, say at a rate of 10% every month. Introduce electronic filing of applications / returns through the Net.
• Government’s response time to various returns / forms to be capped at about 4-6 weeks.
• No response by this time to be taken as a deemed approval.

Issue (7): Extremely slow and over-burdened judicial process, which lends itself to misuse by unscrupulous elements.

• Recent amendments to the Civil Procedure Code (CPC) seeks to limit the incidence of appeals to higher Courts. This approach, along with measures facilitating arbitration, needs to be pursued so as to reduce the burden of cases on the judicial machinery.
• Establish Central Tax Courts, which will deal with all income tax cases and will be the appellate authority for appeals from the tribunal level. Findings of these Courts will be final. Appeal to the Supreme Court will only be on interpretation of law.
• At the same time, judicial infrastructure needs to be strengthened by : (a) establishing more law courts in various States, (b) setting up benches of the Supreme Court in other metros, (c) enhancing the "pecuniary jurisdiction" of the Small Causes courts from Rs. 50,000 to about Rs. 3 crores and (d) increasing the number of Small Causes and Civil courts as there would be more cases with these courts now due to the increase in the pecuniary jurisdiction limits.

Issue (8): Contract labour employed for casual work have often been made permanent employees of a company by law courts.

• Allow contract labour in all non-core activities of a company by making it explicit in the Act, thereby debarring contract labour specifically from only the continuous manufacturing processes of a company.

(B) Fiscal

Issue (9): The first stage of appeal after assessment is with the Commissioner (Appeals). He is a department man and is only a transitory holder of the post. The appeal, being a judicial process, should be independent and not a function of the Department of Income Tax, which may be subject to departmental influence and pressures.

• Abolish the Appellate Commissioner stage. The first stage of appeal should be to the Tribunal, which is independent, and a Quasi-Judicial Body.

Issue (10): Demands made by the Income Tax Department, even though disputed, become immediately due.

• Officers’ demands should be enforceable only after the appeal is confirmed by the Tribunal.

Issue (11): Numerous deductions and exemptions lead to distortions and often a cause of litigations and disputes.

• A Task Force consisting of independent professionals and members of CBDT should be formed to rationalise and clearly spell out various permissible deductions and exemptions.

Excise and Customs

Recommendation made above with regard to appellate procedure for income tax should be followed in the case of excise and customs duty. In other words, the first level of appeal before the commissioner should be dispensed with. The first level of appeal with thus be with CEGAT and the final appeal will be only under Special Leave with the Supreme Court.

Issue (12): Lack of co-ordination between the Ministry of Finance (MoF) and Ministry of Commerce (MoC) has often caused multiple interpretations of duties leviable on products.

• There should be one single uniform classification of goods between the MoF and the MoC. In matters of foreign trade and exim policy, the MoC’s notifications should be binding on the MoF.

(III) Restructuring / Exit

Issue (13): Need for government permission for closure of an industrial establishment in the Industrial Disputes Act virtually implies lack of an exit route. Cases drag on for over 10 years, which goes against the very rationale of timely exit from an unviable activity.

• Abolish the need for government permission for closure / retrenchment / layoff. Allow unit to be closed down after paying a mutually agreed compensation to the employees.
• For agreement of the compensation package, consent of at least 75% of the affected employees be deemed sufficient and the same compensation package be made applicable to all the employees.
• Install an institutional framework for re-skilling of workers retrenched from the private sector also. Fund it through a statutory contribution (small proportion of the closure compensation) from the employers of the closed units.

Issue (14): Current BIFR mechanism has not served its purpose of expeditious revival or liquidation. Its cumbersome procedure leads to inordinate delays.

• It is recommended that a time-bound bankruptcy procedure with BIFR’s role as a facilitator, rather than as a court. Three options in case of a sick company - viz. rehabilitation, sale and winding up - should be explored in a time-bound manner so that a failure in finalising in favour of the first option within a specified time frame automatically leads to the exploration of the second option and so on. BIFR may be empowered to enforce stay on the claims of the creditors only for the specified period (maximum 3 months) while all these options are being explored.

Issue (15): Winding up of a company through the Official Liquidator takes a very long time. Very often, the realisable value of the assets gets eroded by the time the liquidation process is completed.

• Introduce an institution of ‘Liquidation Authority’ with powers to assist liquidation of company through the official liquidator. The proposed committee would have representation from the potential beneficiaries of an early liquidation, viz. workers and lenders.

Issue (16): Globalisation has made it imperative for the industry to restructure. However, the restructuring exercise suffers from: heavy incidence of stamp duty, need to approach different High Courts and massive paperwork involved in transfer of permits and approvals.

• In order to further facilitate restructuring of business:

• Cap the ad-valorem percentage of stamp duty and the absolute upper limit, which should be uniform across all states.
• The Courts are already overburdened. Hence, establish judicial benches of experts under the Company Law Board (CLB) and transfer to them the powers currently vested with High Courts in matters of restructuring, mergers, acquisitions, demergers, etc; and
• Order of the CLB should also cover aspects related to transfer of property, permits and approvals.