 "The newly renamed NITI Aayog building in New Delhi on Friday")
A panel of experts asked by the NITI Aayog to examine the current initiatives on innovation and entrepreneurship in India has found the country's business environment unfriendly and not conducive for corporate investment.
Complicated tax regime, difficulty in shutting down failing businesses, weak intellectual property regime, unfavourable regulatory frame-work, complex and cumbersome labour laws and infrastructure defict all create barriers to entrepreneurship, the report said.
To change this, the panel wants the government to have a thorough look at the Companies Act, review Section 56 of the Income Tax Act in terms of investment by angel investors in start-ups, frame a bankruptcy law to tackle the bad debts of banks and undertake reforms in the labour sector.
Officials said some of the recommendations could form part of the 2015-16 Union Budget.
Headed by academician Tarun Khanna and comprising representatives from corporate India, including Swati Piramal of Piramal Enterprises, the panel was entrusted with the task of framing a detailed contours for the Atal Innovation Mission (AIM) and Self Employment and Talent Utilisation, both announced by Finance Minister Arun Jaitley in the 2014-15 Union Budget, with an initial outlay of Rs 150 crore and Rs 1,000 crore, respectively.
Section 56 of the I-T Act, it has said, greatly impacts the fair market valuation norms on angel investments. Under the current rule, introduced in the Finance Act of 2012, capital raised by an unlisted company from any individual against an issue of shares in excess of fair market value would be taxable as "income from other sources". Start-ups are liable to pay 33 per cent tax on any investment they receive.
As for the Companies Act, it is actually only around three years old, having replaced the earlier legislation of 1956, with several amendments. The Niti Aayog panel wants it to be further changed, to distinguish between closely held private companies, public companies, and publicly listed companies.
It also wanted changes in the Act to lift a ban on employee stock options to independent directors of unlisted companies. "Such rules deter talented and experienced individuals from taking up these positions," the report said.
As for the proposed bankruptcy law, it said this would be a key for improving access to capital. The aim is to allow faster closure of troubled businesses and give creditors easier and faster exit options. Therefore, it should expedite the cleansing of bank balance sheets, and allow fresh lending.
The government has already said it plans to introduce a bankruptcy law in the winter session of Parliament.
The report said AIM should be headed by the vice-chairman of NITI Aayog and secretaries from seven major ministries should form its board of directors. Of these, four should have voting rights.
To improve access to capital, the committee favoured granting of more bank licences, deepening the corporate bond market, giving a level playing field for offshore and onshore private equity and venture capital, and a stable and transparent regulatory and taxation regime.
For the corporate sector, the report also recommended a "central identification number", where all other corporate identities such as tax-payer identification number for commercial taxes and service tax number would converge.
"A single number for enterprises is a key initiative for ease of doing business and the basis for the online portal proposed for enterprises," the report said. AIM should chart a year's schedule for all enterprise numbers to converge on the central ID.
It said as part of labour law reforms, employers should be given a choice of compliance under the Factories Act or the Shops and Establishments Act in all non-hazardous industries, and all the 44 central labour laws should be consolidated into four labour codes.
It wanted the Trade Unions Act to be amended to reduce, if not remove, the role of outsiders in TUs because the politicisation of trade unions is toxic for the Make in India campaign, it felt. States should be encouraged to use Article 254 (2) of the Constitution (whereby they may, with central assent, legislate on matter where there is already Union legislation) to amend labour laws.
To prevent the growth of unaccounted money, the committee recommended, creation of an online nationwide portal for the registration of all land purchase, sale deals by all entities and their beneficiaries, within 48 hours of a transaction, with strict penal provisions.
India's intellectual property regime (IPR) is weak, and a deterrent to innovation. It ranks at the bottom of the US Chamber of Commerce's Global Intellectual Property Center's ranking of 25 countries, in terms of its intellectual property environment. To change this, the committee said enforcement of IPR laws should be made more prompt.
It said that apart from issues related to infrastructure and capital, business leaders often complain of a slow and inefficient bureaucracy, which leads to delay in decisions and in implementation. To overcome these, the panel in the short term has favoured incentivising those innovations which provide low-cost solutions to India's most intractable problems.
On education and skilling, the committee said the private sector can be tapped to fund research and development at universities and one per cent of corporate profit could be directed towards research labs for this.
To improve the standard of education, it favoured a system of annual assessment of schools and faculty on basic science, maths and literacy, on the lines of the one being done in Pratham's Annual Status of Education Report.
On skilling, the report said the number of apprentices need to be increased to 10 million a year from the current 400,000. And, employment exchanges need to be converted to career centres (last year, the 1,200 exchanges led to only 300,000 jobs for the 40 mn registered).
"Loan programmes for skilling need to be scaled up. One option is to fund students directly rather than institutions," the report added.
SPEEDING INNOVATION
n Change Companies Act, I-T Act to boost innovation; speed new bankruptcy law
n One central ID number for each firm, to subsume all other corporate identities
n Simplifying labour law application
n Online nationwide portal for registration of all land purchase and sale deals, within 48 hours of a transaction
n Incentives for low-cost solutions to complex problems
n Annual measure of schools and faculty on basics; involving private sector in skilling, including funding directly to students, not institutions
