Growth through ease of compliance
Compliance procedures need rationalisation and integrated digital systems
During the annual Budget exercise, we are so taken with concerns about expenditure and resource constraints that there’s little room for much else. Reflecting on a wider canvas, however, leads to the realisation that there is a monster lurking just under the radar, a “dog that didn’t bark” that is a curse on productivity and ease of living.
This is the burden of compliance, the essential but unglamorous, oft-overlooked processes related to following regulations, and filing the requisite reports to various authorities. This activity happens through the year, every year. Consider some aspects of this to appreciate how much of a drag it is on growth, and why it deserves much more attention for efficiency, productivity, and living standards.
The amount of effort and difficulty in addressing compliance increases, naturally, with the size and spread of the enterprise. The levels can escalate quickly, because quite apart from taxes, there are requirements at local, state, and national levels, in areas relating to economic, environmental, and public interest matters. A portal set up to facilitate compliance in India1 indicates the plethora of conditions, licences/registrations, laws, rules, and compliance requirements, ranging from a handful for very small, single-location enterprises, to thousands for large, multi-location businesses. Annual filings alone can be in the several hundreds. Enterprises in multiple states deal with different sets of laws, rules, and requirements, so that for a large countrywide undertaking, the effort required is monumental. What seems to be missing in India are the benefits of rationalisation and digitisation. It is as though we have overlooked the need for overarching integration, for syncing the front and back ends, and connecting parts in between, to achieve the greatest benefit of digitisation, namely productivity gains. Add to this the ease that could be but often isn’t there of accessing a portal and uploading compliance data in the first attempt, with the notable exception of the filing portal for income tax.
According to a 2013 Cii-deloitte report on compliance costs in manufacturing,2 respondents cited outdated requirements, unfriendly procedures, and lack of clarity in rules and legislation as the key issues faced in non-tax related compliance. While there must have been improvements since then, the Economic Survey highlights the problems of over-regulation and absence of ease in compliance, resulting in India’s poor performance because of delays, rent-seeking, complexity, and regulations of poor quality.3
India’s global ranking in the ease-of-doing-business improved from 130 in 2016 to 63 in 2020, placing it among the top third of countries. If only our everyday experiences with compliance reflected such facility, instead of the hopeless tangle of rules, regulations, and incompetent implementation that render achievement of compliance outcomes difficult and arduous. The reason improving inefficient processes is so important, apart from that being a logical expectation of digital systems (if they work!), is that there is no way to recoup the wasted effort and productivity loss. Part of that loss is the distraction of management attention from the primary responsibility of running their undertakings. Imagine the impact this must have on most of India’s enterprises, which are small- and medium-sized.
While efforts have been made over the years to reduce the burden of compliance, they have not resulted in bringing about systematic rationalisation and standardisation of regulations and filings, to move the country towards becoming more of a common market. Indeed, the introduction of the goods and services tax was one such initiative in the area of tax compliance. Yet, it created severe disruptions for years because of the manner in which it was designed and implemented. There are some solid takeaways from this experience, which mirrors other efforts at improvements on a similarly massive scale that seem equally hastily put together. Policymakers would do well to learn from these and compensate with corrective action going forward, instead of repeating the same mistakes.
One is that glossing over or rushing through incomplete or defective design and execution does far more damage than good. As with the COWIN app most recently, this has been true of previous initiatives, beginning with Aadhaar. Second, digital transformation and automation can certainly deliver considerable benefits, but only if (a) the systems are well designed and integrated so that processes flow through efficiently to deliver results, and (b) the input data are of good quality. These initiatives need to be overhauled and redesigned with rigorous standards to ensure seamless process flows with results, instead of tolerating and explaining away shoddy incompetence with a “baad mei dekha jayega” (we’ll see later) attitude.
There is a paradox in India’s being a leading Itsystems and solutions provider to the world, yet not being able to design and build integrated internal Itsystems to address its own needs. Scale is an obvious attribute that adds complexity, as is the highly variable range of capacity of our population. But these in themselves do not account for deficiencies in system design and execution. Could it be that the quality of skill applied to domestic versus offshore client problems varies, whether because of differences in compensation levels for domestic and offshore projects, or for some other reason? Implying that premium output is unlikely to be made available at a discount, even from within the same talent pool. Perhaps the fact that government projects are typically awarded to the lowest bidder does have this effect on outcomes. Another reason could be the lack of an informed, overarching strategy and vision driving these subsystems.
All these issues have to be addressed and rectified if we want better results. Considerable effort will be needed to clean up the systems and data in our digitisation initiatives, including those relating to the Aadhaar and Aarogya Setu. There may be a need for material changes in fundamental design. Processes right from the acquisition and organising of data need review from perspectives of standards and systems for digitisation.