The results of the first ever survey of Indian States on implementation of ease of doing business is out and has thrown up interesting results. A long needed clarification on facility sharing by foreign group companies brings in the desired relief. The Government recalled its decision to levy MAT with retrospective effect, which provided the icing on the cake with respect to good news for foreign investors in the last few weeks.

Assessment of State Implementation of Business Reforms – India is large country with a federal governance structure. The States play a vital role in furthering the cause of the central Government. Hence, their participation largely decides the fate of any business reform.

On December 29, 2014, Chief Secretaries of States participating in a “Make in India” workshop finalized a 98-point Action Plan on “Ease of Doing Business” and subsequently it was decided that an evaluation will be conducted to assess progress by June 2015. The World Bank captured the findings of the evaluation of this unique exercise, the first of its kind, and ranked States in terms of their implementation of the Action Plan in the period January 1 to June 30, 2015.

The report titled “Assessment of State Implementation of Business Reforms” is a scorecard to take stock of what reforms have happened and to identify the way forward for States. As reported by this website in June 2015, data was collected through a structured questionnaire that was completed by local Government of each State and Union Territory. The responses were validated through a series of in-depth workshops with State and Union Territory Government representatives and collection of supporting evidence on each of the parameters of the questionnaire.

The implementation status of each State were converted to a percentage, and, on the basis of this total percentage, the rankings were calculated as shown in the table below:

Rank State Score Rank State Score
1 Gujarat 71.14% 17 Himachal Pradesh 23.95%
2 Andhra Pradesh 70.12% 18 Kerala 22.87%
3 Jharkhand 63.09% 19 Goa 21.74%
4 Chhattisgarh 62.45% 20 Puducherry 17.72%
5 Madhya Pradesh 62.00% 21 Bihar 16.41%
6 Rajasthan 61.04% 22 Assam 14.84%
7 Odisha 52.12% 23 Uttarakhand 13.36%
8 Maharashtra 49.43% 24 Chandigarh 10.04%
9 Karnataka 48.50% 25 Andaman and Nicobar Islands 9.73%
10 Uttar Pradesh 47.37% 26 Tripura 9.29%
11 West Bengal 46.90% 27 Sikkim 7.23%
12 Tamil Nadu 44.58% 28 Mizoram 6.37%
13 Telangana 42.45% 29 Jammu and Kashmir 5.93%
14 Haryana 40.66% 30 Meghalaya 4.38%
15 Delhi 37.35% 31 Nagaland 3.41%
16 Punjab 36.73% 32 Arunachal Pradesh 1.23%

To assist in understanding the results and in analyzing the detailed data in the subsequent chapters, the States were placed into four groups:

  • Leaders: States with an overall implementation status of 75% and above. This assessment revealed that no States had attained this status.
  • Aspiring Leaders: States with an overall implementation status between 50% and 75%. 7 States were found to be within this group: Andhra Pradesh, Chhattisgarh, Gujarat, Jharkhand, Madhya Pradesh, Odisha and Rajasthan.
  • Acceleration Required: States with an overall implementation status between 25% and 50%. 9 States were found to be within this group: Delhi, Haryana, Karnataka, Maharashtra, Punjab, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal
  • Jump Start Needed: States with an overall implementation status between 0% and 25%. 16 States were found to be within this group: Andaman and Nicobar, Arunachal Pradesh, Assam, Bihar, Chandigarh, Goa, Himachal Pradesh, Jammu and Kashmir, Kerala, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Tripura and

The World Bank expressed its pleasure in supporting the Government of India in undertaking this unique endeavor, because it takes a “competitive federalism” approach to business reform. It is hopeful that the central and State governments will move in unison to make India an easier place to do business.

Partly Paid Up Shares & Warrants – The Consolidated FDI Policy of India has been reviewed recently and the Government has decided to allow partly paid up shares and warrants as eligible capital instruments for the purpose of the FDI Policy.

Facility Sharing Arrangements between Group Companies – In India, FDI is not permitted in real estate business. Foreign companies faced this peculiar predicament for years altogether – whether 2 group companies sharing premises and splitting lease rent or one group company paying lease rent to another would amount to ‘real estate business’. The practice continued surreptitiously with twisted contractual agreements between group companies amongst each other or with the premises owner, albeit conflicting legal opinions due to lack of clarity in the law. The author also routinely faced queries relating to this from his clients. This issue has finally been addressed now much to the relief of foreign companies. Facility sharing agreements through leasing/sub-leasing arrangements will not be treated as ‘real estate business’ provided such arrangements are at arm’s length price as per the Income Tax Act, 1961.

No Retrospective Levy of MATThe Government accepted a report on applicability of Minimum Alternate Tax (MAT) submitted by a committee headed by Justice A. P. Shah, chairman of Law Commission of India, which recommended that the Income Tax Act be amended to exempt foreign institutional investors and foreign portfolio investors from MAT on transactions prior to April 1, 2015. The MAT issue and its progress had been covered in this website in April & May this year. This step has been cheered by foreign investors and is seen as another step to make the Indian regulatory regime more receptive towards their grievances.

Posted by Sourish Mohan Mitra

Sourish Mohan Mitra is an India-qualified lawyer from Symbiosis Law School, Pune and currently working as an in-house counsel with a global research firm in Delhi, India; views expressed are personal; he can be reached at sourish24x7@gmail.com; Twitter: @sourish247

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