Entrepreneurs in post-colonial India have been at the mercy of microscopic prescriptions embedded into the business regulatory framework. The framework for employer compliance in the country has remained stagnant, reflecting practices and principles from the 19th and 20th centuries. The current regulatory framework is designed so that employers can face imprisonment for even minor offences resulting from procedural irregularities and technical lapses. More than half of the 1,536 business laws carry imprisonment clauses, with 2 out of every 5 compliances imposing jail terms for violations. Take, for instance, a pharmaceutical MSME involved in manufacturing. It must comply with 998 compliance obligations; however, 486 (48.7%) of these prescribe incarceration as a penalty for non-compliance. The prevalence of criminalisation within business laws can be attributed to the indiscriminate imposition of criminal penalties without considering the principles of "necessity" and "proportionality". The distrust towards entrepreneurs has impeded the organic growth of innovation, jobs, value and wealth in the economy.
The monograph titled "Jailed for Doing Business" sheds more light on using incarceration to exert authority over entrepreneurs. It examines macro-level data and highlights that 26,134 imprisonment clauses are incorporated within over 50% of business laws. 40% of the clauses within the business regulatory framework impose jail terms as penalties. An overwhelming 87% of these clauses can lead to a prison sentence of up to 3 years. At the state level, the situation is equally worrisome. Five states, namely Gujarat, Punjab, Maharashtra, Karnataka, and Tamil Nadu, possess over 1,000 provisions with jail terms within their respective business laws. 4 out of these 5 states are among the largest in India in terms of gross state domestic product (GSDP), with each state contributing over $200 billion. Rationalisation and decriminalisation of state-level compliances thus can push them towards the $1 trillion mark.
The Jan Vishwas Act, 2023 (Act) is another milestone in the quest for ensuring ease of doing business by demystifying the business regulatory framework in the country. The Act helps establish a framework for examining the decriminalisation of employer compliance. While decriminalising 183 of the staggering 26,134 provisions does not significantly move the needle, it lays the groundwork for the next wave of reforms. Almost 68.2% (17,819 provisions) of all employer compliance violations are related to labour laws. The labour laws themselves are set to undergo a complete overhaul, with the four labour codes up for implementation. This codification is expected to reduce entrenched criminality by up to 80%. The Act tackles the issue of criminality by its horns and removes provisions that prescribe both imprisonment and fines as methods of penalty. It further provides for an increase in the fines and penalties by 10% every 3 years. While it removes imprisonment as a possibility and retains fines, it has also introduced the possibility of compounding offences in certain cases. The methodology used is similar to the one used for decriminalising the Companies Act, 2013 (Companies Act).
The Ministry of Corporate Affairs (MCA) decriminalised the Companies Act with subsequent amendments in 2019 and 2020. The amendments decriminalised the regulatory framework using 4 facets. It recategorised offences from compoundable to in-house adjudication mechanisms with separate categories for different types of offences; omitted jail-term with offences now being punishable with fines only; reduced penalties, removed penal provisions and provided for alternate mechanisms. Companies became able to rectify their mistakes with fines, with courts only being concerned with serious crimes and offences. The decriminalisation allowed entrepreneurs ease of mind and business, and removing criminal liability from compliance issues led to a hike in FDI in the country.
On a granular level, enterprises are required to be aware of applicable regulatory requirements for all their business activities. For instance, a representative mid-sized service sector company needs up to 20 distinct licences, registrations, permissions, and certifications. These encompass trade licenses, pollution certificates, fire safety certificates, authorisations for outdoor advertising, and motor vehicle registrations. Afterwards, companies must adhere to a diverse array of regulatory requirements consistently. A company operating a single premise within a specific jurisdiction encounters over 50 requirements related to submitting tax returns, providing information, and notifications. As such, it is not easy for a startup to keep track of all its obligations, even more so when a significant number of them prescribe imprisonment as a penalty. Decriminalising minor offences will bestow upon entrepreneurs with greater flexibility and confidence in their business decisions. This in turn will eliminate the fear of incarceration associated with running a business and open up avenues for the growth of startups and entrepreneurs.
To fully realise India's economic potential, it is imperative to treat entrepreneurs with dignity. Decriminalisation of the regulatory ecosystem assumes the topmost priority, starting with rooting out criminal liability for defaults due to procedural and technical lapses. Incarceration has to be reserved for grave offences paired with criminal intent, with monetary fines being the primary form of deterrence. The successful implementation of the three-vector framework encompassing Rationalisation, Digitisation, and Decriminalisation in order to enhance Ease of Doing Business (EoDB) necessitates persistent dedication and resolve.