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Compliance Reform in India: Challenges & Key Solutions

Compliance Reform in India: Challenges & Key Solutions

Introduction

India’s business environment faces several regulatory challenges, including corruption, frequent compliance updates, and inefficiencies in governance. Despite reforms such as the Jan Vishwas Act (2023) and the proposed Jan Vishwas 2.0, businesses continue to struggle with complex compliance systems. Establishing a unified compliance identity system and ensuring predictable regulations is essential for improving India's ease of doing business and attracting investments.

Key Challenges in India’s Compliance Framework

1. Pervasive Corruption in Regulatory Compliance

  • The India Business Corruption Survey 2024 highlights that 66% of businesses admitted to paying bribes, with 54% coerced into making payments for obtaining permits, licenses, or approvals.

  • Corruption increases operational costs, making compliance expensive and inefficient.

2. Excessive and Frequent Compliance Updates

  • In 2024 alone, India witnessed 9,420 compliance updates, averaging 36 daily regulatory changes.

  • The frequent alterations lead to confusion, increasing the risk of penalties and enabling corruption among regulatory officials.

3. Exploitative Regulatory Practices

  • Government inspectors often misuse their discretionary powers to threaten businesses with shutdowns or legal actions, even if companies comply with the regulations.

  • Arbitrary inspections and excessive penalties deter investment and increase operational difficulties.

4. Delays in Implementing Labour Codes

  • While the government consolidated 29 colonial-era labour laws into four Labour Codes, delays in their implementation continue to burden businesses.

  • The absence of clear timelines results in regulatory uncertainty, impacting industrial productivity.

5. Fragmented Compliance Identity System

  • Businesses are required to maintain 23 different identity numbers, including PAN, GSTIN, and CIN, leading to excessive paperwork and frequent renewals.

  • Managing multiple identifiers creates unnecessary complexity and administrative burdens.

Implications of a Complex Compliance System

1. Increased Compliance Costs Due to Corruption

  • Even after fulfilling regulatory requirements, businesses are forced to pay bribes to ensure approvals, driving up operational expenses.

2. Reduced Productivity and Business Efficiency

  • Frequent compliance changes require businesses to allocate resources for regulatory adjustments, diverting focus from growth and innovation.

3. Hindrance to MSME Growth

  • Startups and Micro, Small, and Medium Enterprises (MSMEs) struggle with navigating complex regulations, delaying permits and increasing compliance costs.

4. Erosion of Business Trust in Governance

  • The unchecked power of regulatory inspectors and frequent changes in compliance norms weaken business confidence in governance structures.

5. Disruptions in Business Operations

  • Unpredictable rule changes impact business operations, supply chains, and production cycles, creating inefficiencies across industries.

The Global Perspective: Why India Needs Compliance Reforms

1. Competitive Disadvantage Against Global Peers

  • The United States has established the Department of Government Efficiency (DOGE) to simplify business operations, making compliance smoother for enterprises.

  • If India does not streamline its regulatory framework, it risks losing foreign investments to more business-friendly economies.

2. Hindrance to India’s Manufacturing Growth

  • Regulatory complexities have slowed India’s ambition to become a global manufacturing hub, particularly in high-potential sectors like pharmaceuticals and textiles.

3. Negative Investor Perception

  • India’s complicated compliance structure discourages long-term foreign investments, undermining the impact of initiatives like Make in India and Atmanirbhar Bharat.

4. Entrepreneurial Exodus to Business-Friendly Nations

  • Indian startups are increasingly relocating to countries with simpler compliance frameworks, reducing India’s potential as a hub for innovation and entrepreneurship.

5. Digital Divide in Compliance Systems

  • While India’s Digital Public Infrastructure (DPI) has transformed sectors like digital payments, compliance mechanisms remain outdated and fragmented.

Key Reforms and Solutions for a Simplified Compliance System

1. Jan Vishwas (Amendment of Provisions) Act, 2023

  • Decriminalized 180 provisions, reducing the risk of imprisonment for minor business violations and regulatory harassment.

2. Jan Vishwas 2.0 – The Next Step in Reform

  • Proposes decriminalization of 100 additional provisions but requires further expansion as 20,000 imprisonment clauses still exist.

3. FSSAI’s Annual Update Model

  • The Food Safety and Standards Authority of India (FSSAI) now limits food label regulatory changes to once a year, improving stability in compliance requirements.

4. ‘One Nation, One Business’ Identity System

  • Unifying PAN, GSTIN, CIN, and other identifiers into a single business identity would reduce paperwork, minimize corruption, and improve regulatory efficiency.

5. DigiLocker for Businesses

  • Implementing a tamper-proof document repository for businesses to store verified documents can eliminate the need for repeated approvals, reducing corruption.

Conclusion

To ensure sustained economic growth, India must transition to a transparent, predictable, and digital-first compliance system. Implementing Jan Vishwas 2.0, enforcing Labour Codes, and adopting a ‘One Nation, One Business’ Identity System are critical steps toward reducing corruption, attracting investments, and promoting business expansion. Delay in compliance reforms could undermine India’s economic potential and deter global investors.

Multiple Choice Questions (MCQs) for UPSC CSE

  1. What is the primary objective of the Jan Vishwas Act (2023)?
    a) Increase penalties for corporate violations
    b) Decriminalize minor business violations
    c) Introduce new labour laws
    d) Increase corporate taxes
    Answer: b) Decriminalize minor business violations

  2. Which country recently established the Department of Government Efficiency (DOGE) to simplify business operations?
    a) China
    b) United Kingdom
    c) United States
    d) Germany
    Answer: c) United States

  3. What is the primary benefit of a ‘One Nation, One Business’ Identity System?
    a) Higher corporate taxes
    b) Simplified compliance processes
    c) Increase in government control
    d) Expansion of tax slabs
    Answer: b) Simplified compliance processes

  4. Which Indian initiative aims to improve the business environment by simplifying regulatory compliance?
    a) Make in India
    b) Atmanirbhar Bharat
    c) Jan Vishwas Act
    d) Startup India
    Answer: c) Jan Vishwas Act

Mains Question for UPSC

Q: India’s compliance framework has long been criticized for its complexity and inefficiency. Discuss the challenges businesses face due to regulatory compliance and suggest key reforms to improve ease of doing business in India. (250 words).

Also Read:

Universal Basic Income (UBI) in India: A Comprehensive Analysis

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