Respecting Wealth Creators: With Companies Act Rationalisation, Government Recognises That Businesses Can Commit Inadvertent Errors When Dealing With Regulations

by Karan Bhasin - Sep 21, 2020 01:09 PM +05:30 IST
Respecting Wealth Creators: With Companies Act Rationalisation, Government Recognises That Businesses Can Commit Inadvertent Errors When Dealing With RegulationsFinance Minister Nirmala Sitharaman.
  • 35 penal provisions of the Companies Act have been totally decriminalised;

    Six have witnessed reduced penalties and;

    11 penal provisions have witnessed a removal of imprisonment.

Many provisions of India’s Companies Act have often been ridiculed by business owners, lawyers and policy experts. More so by those who decided to shift to foreign countries after being disillusioned by the state of compliances in India.

There has been a genuine attempt at changing this over the last few years as the government initiated the process of improving processes and putting people at the heart of the compliance system.

Whether it is simplification of the taxation form, e-assessment or now the faceless customs assessment, the intent is to move towards a system that rewards Indian citizens rather than intimidate them.

This has happened as the government has recognised the need to reward India’s wealth creators rather than subject them to the burden of compliances. More importantly, there has been a cultural shift that has been accelerated by the Covid-19 pandemic.

A key development has been the process of decriminalisation of the Companies Act.

The move is timely as it will not just ensure greater ease of doing business but at the same time create a new regulatory framework built on respect for India’s wealth creators. This move is just as significant as the taxpayers charter which has recognised the rights of taxpayers and has formalised the same.

A total of 48 sections have been either decriminalised or have witnessed a removal of imprisonment as a penalty for various procedural or technical offences.

This is important as many times small companies end up facing hefty penalties or penal charges which dissuades them and chokes their bandwidth to contribute productively to the economy.

Consequently, these changes will benefit micro small and medium enterprises (MSMEs) the most as the bigger firms have extensive resources to meet their legal compliances.

Moreover, the burden of litigation will also reduce as the new changes reduces imprisonment for non-compliances and they also eliminate subjectivity in the adjudication process. A consequence of the subjectivity is greater authority with the adjudicating officer which can often result in rent-seeking (corruption) in certain cases.

The move has also rationalised several penalties under the act for procedural lapses and delays in filing of important documents such as financial statement with the registrar of companies.

These changes have been done keeping in mind the present pandemic and its impact on companies while at the same time also to reduce the extent of regulatory cholesterol which often chokes India’s small businesses.

In total, 35 penal provisions have been totally decriminalised while six have witnessed reduced penalties and 11 penal provisions have witnessed a removal of imprisonment.

This comes as a formal recognition of the fact that businesses can make genuine mistakes while dealing with compliances and heavy penalties on such mistakes would only dampen the risk-taking appetite of our entrepreneurs.

Many may view these changes in the law governing our corporate sector to be too small or inconsequential – however, these changes are going to impact the day-to-day functioning of India’s medium and small enterprises that often find compliances and its related penal provisions to be suffocating.

Needless to say, that these changes should have come a long time ago – as with most of our other reforms.

With these changes, there is also a message that has been sent to the world and global corporations that have intentions of setting up a base in India. The message is that India is committed to its path of reforms and improving the rules, regulations, and the legal framework for undertaking business in India.

One hopes that the continued push towards lowering tax rates, improving ease of doing business and a focused path of reforms are sufficient to make the most of the reorientation of global supply chains to make India an integral part of the value chain.

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