Ram Iyer 27 Jul 2017 10:00am

Letter from India

Ram Iyer captures how India’s rich history and culture are merging with superfast regulatory changes

Caption: To say that India is a happening place would be a gross understatement..

To say that India is a happening place would be a gross understatement.

India enjoys one of the highest GDPs in the world; unprecedented foreign and domestic investment flows; a hyperactive start-up environment; accelerating (and volatile) capital market indices; challenging times for the banking industry (due to bad loan clean-up); headwinds for Indian IT (particularly in the US context); and above all, a proactive government that is rolling-out laws and investment red-carpets with the same speed as improving access to bureaucrats and ministers and making government and businesses more transparent and accountable.

Challenges persist, including improving literacy, reducing income disparities, curbing unaccounted money, formalising more sectors of the economy (such as agriculture and real estate) and simplifying government procedures. But there is clear action and direction in all these areas.

The common theme in all this is technology, which has enabled quick implementation of laws, convenient transactions and seamless data flow.

The most high-profile recent government action was the overnight “de-monetisation” of high-value currency notes. Aimed to force unaccounted money out into the open, this was controversial, painful and saw limited success, but is positive in the long run. This is reflected in some key examples of recent legislative action. GST (Goods and Services Tax) is a pioneering new indirect tax law planned for the second half of 2017. India’s 29 states and seven union territories each currently have their own indirect tax laws. GST replaces all these state (and central) laws on indirect taxes, reducing complexity, transaction costs and the burden of compliance, converting the vast country into one economic zone.

A sophisticated GST network will enable real-time reporting of transactions, auto-matching of supplier and customer transaction data, online payments, self-assessment and flexible input credit claims across central and state tax ledgers. Another big plus will be replacing cascading costs with tax pass-through across the value chain (under the old law, several indirect taxes could not be claimed, such as excise duty). GST rates range from exempt and 0% to 28% with additional “cess” tax on “de-merit” goods such as luxury cars. One of the positive fallouts of this law could be the close co-operation between central and state finance ministries, which worked really hard to finalise the law.

The Companies Act 2013 brought company legislation much closer to global standards, covering the concept of one-person companies, private placement of shares, director’s responsibility statements, class-action suits, insider-trading rules, better financial statement disclosures, alternative dispute resolution and winding-up.

In 2016, the IBC (Insolvency and Bankruptcy Code) modernised India’s bankruptcy laws. Significantly, technology will be leveraged to create a common repository of debtor data. Judges too have given muscle to this law through several recent decisions. Ind AS (Indian Accounting Standards) is India’s new GAAP. The best way to capture India’s accounting convergence is the implementation of IFRS 9 (known as Ind AS 109), the effective date of which in India is earlier than the IASB’s official date. Ind AS is India’s converged version of IFRS and includes for the first time accounting for business combinations, financial instruments and fair values, along with significant improvements to other standards. Ind AS will be adopted in a phased manner, based on defined net worth criteria. Small companies are currently exempt from Ind AS. Overall, Ind AS is quite close to IFRS, making Indian company accounts comparable with IFRS.

Other important laws introduced recently include RERA (Real Estate Regulation Act) which tightens real estate laws; the Benami Transactions Act, which makes it illegal to use secret proxies and to be a secret proxy in property transactions; and finally, a new law that limits the use of cash in transactions.

Implementation of all these laws will be extremely tough because knowledge needs to percolate, businesses need to be more governance-conscious and the government needs to train all officers to become more effective in implementation. However, there is a positive and earnest energy all around.