Voluntary Liquidation Process Under IBC: An Update

The Insolvency and Bankruptcy Code, 2016 read with, the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2020, establish a procedure for the voluntary liquidation of solvent corporate persons.

However, in practice, it can be observed that the majority of voluntary liquidation processes are getting delayed. As per the Discussion Paper released by IBBI, as on December 31st, 2021, 1105 voluntary liquidation processes have been initiated. Of which, the liquidators have submitted final reports to the Adjudicating Authority (AA) in 546 cases only. In other words, more than 50% (i.e., 559 cases) of the voluntary liquidation processes are still ongoing. On closer perusal of the ongoing cases, it is found that 293 cases (around 52%) of them have crossed the one-year time mark. In this background, the Voluntary Liquidation Process (Amendment) Regulations, 2022 have been introduced on April 5th 2022 by the IBBI.

Brief Analysis of the Voluntary Liquidation Process Amendments

The new changes seek to complete the voluntary liquidation process in a quick and efficient manner and ensure that the company does not lose value on its remaining assets since the asset value falls drastically with time. Further, the amendment seeks to clarify the date of the commencement of the liquidation process.  Now, the liquidator shall complete the liquidation process and ensure the submission of final reports within 270 days, 90 days earlier as compared to the statutory time period of 12 months. As per the Discussion Paper released by IBBI, Voluntary Liquidation, being non-adversarial in nature, can be completed in 270 days. Further, the liquidator is directed to distribute the proceeds from realization within 30 days from the receipt of the amount to the stakeholders, as compared to the earlier mandated time period of 6 months.

For the past few years, the government has been promoting several initiatives focusing on “ease of doing business” for corporates. However, it is essential to observe that “ease of doing business” does not only include ensuring a seamless start of a business but also includes a quick and easy structure for the exit.

In this backdrop, in the Union Budget 2022-2023, the Honourable Finance Minister announced that “Now the Centre for Processing Accelerated Corporate Exit (C-PACE) with process re-engineering, will be established to facilitate and speed up the voluntary winding-up of these companies from the currently required 2 years to less than 6 months[1].”

Further, in a Discussion Paper released in February 2022[2], IBBI identified the following problems plaguing the voluntary insolvency process:

  1. It was pointed out that the values of assets fall drastically, and hence a quick and efficient liquidation process is pertinent. However, the Code has failed to stipulate a time limit for such a voluntary liquidation process.
  2. It was also observed that more than 50% of the voluntary liquidation cases had been ongoing as per the data presented to the Board (as of December 31st, 2022). Further, 52% of the ongoing cases had crossed the one-year mark.

The relevant stakeholders also observed that one of the aspects that prolong the voluntary liquidation process is the practise of seeking a ‘No Objection Certificate’ (NOC) or ‘No Dues Certificate’ (NDC) from the Income Tax Department by liquidators during the process, even though the Code and the Voluntary Liquidation Regulations have not mandated the issuance of NOC/NDC. In this regard, the Board issued a Circular in November 2021, clarifying that “an insolvency professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.”[3]

In alignment with the intention of the legislation, the Board has introduced the following amendments to optimize the voluntary insolvency process:

Section 10 (2) (r): Corporate Debtor shall be substituted by Corporate person

The amendment states that the liquidator shall maintain such other registers or books as may be necessary to account for transactions entered by the corporate debtor with the corporate person. This ensures holistic coverage of all financial transactions of the corporate debtor for the purpose of liquidation.

Section 30 (2): timeline for preparation of the list of stakeholders in case where no claims are received is reduced

 

Section 30 (2) requires the liquidator to compile a list of stakeholders within 45 days from the last date for receipt of claims. The amendment inserts the following provision; “Provided that where no claim from creditors has been received till the last date for receipt of claims, the liquidator shall prepare the list of stakeholders within fifteen days from the last date for receipt of claims.”

Previously, no differentiation between the timelines was prescribed in cases where there were no claims from creditors. This timeline was introduced because if no such claims were received till the last date, then it must not take much time for the preparation of a list of stakeholders as the list of shareholders/partners is available with the liquidator at the time of commencement.

Section 35: Timeline for distribution of the proceeds from realization reduced

The amendment reduces the period for distribution of proceeds from realisation to the relevant stakeholders to a period of thirty days from the receipt of the amount, from the earlier mandated six months.

The reason for the reduction of this timeline is that the liquidator remains in close contact with the corporate person and hence should be able to distribute the proceeds quickly.

Further, in cases where there are creditors, since the resolution regarding the commencement of the process is approved by the creditors representing two-thirds of the value of the debt of the corporate person, distribution to the creditors should also take much less time than is currently stipulated.

Section 5(2): Timeline for intimation of appointment as liquidator to the Board enhanced.

5(2) provides that an insolvency professional shall notify the Board about his appointment as liquidator within 3 days of such appointment.  As per the amendment, the regulation has changed the timeline for the intimation from 3 days to 7 days.

Section 37: Timeline to complete the liquidation process reduced.  

The amended provides that if the creditors approve the resolution, the liquidator shall complete the liquidation process and submit the final report to the registrar, board, and adjudicating authority within 270 days from the date of the commencement of the liquidation and within 90 days from the liquidation commencement date in all other cases (where there are no creditors for the company). Previously, the time period for completion of liquidation was one year and no such bifurcation of the time period for completion of liquidation on the basis of the presence or absence of creditors was enumerated. The reason for this reduction in the timeline for completion is that the liquidation estate of the corporate person undergoing the voluntary liquidation process is non-adversarial and also generally straightforward both in terms of the size and heterogeneity of the assets involved. Therefore, the realisation of the assets involved during the voluntary liquidation process takes less time as compared to the liquidation process.

Section 38(3): Final Report and Compliance certificate shall be submitted in Form-H.

Section 38 directs the liquidator to submit the final report to the adjudicating authority along with the application. The amendment has specified Form H for submission of the final report. Such specifications were not provided previously. A compliance certificate provides a summary of actions taken by the liquidator during the voluntary liquidation process. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

Section 39(3): Form H substitutes Form I

As per the amended Rules, Section 39 (3), the stakeholder claiming entitlement to any amount deposited into the Corporate Voluntary Liquidation Account, may apply for an order for withdrawal of the amount to the Board on Form H and not Form I.

Date of Commencement of Liquidation

The amendment clarified that for the corporate person who has creditors representing two-thirds of the debt of the corporate person, the date of liquidation commencement is the date on which such creditors approve the declaration passed for the initiation of the liquidation.

Note: In order to curb delays in liquidation, the Board had recently issued a circular clarifying that an Insolvency Professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.

Conclusion

The amendments effectually fall in line with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived as an initiative in the right direction. The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining a No-Objection Certificate from the Income Tax office) may ensure the early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person. Further, the proposed reduction in the time taken for distribution of proceeds would result in an early distribution to the stakeholders and thereby, promote entrepreneurship and the availability of credit. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

The amendments effectually fall in alignment with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived an initiative in the right direction.  The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining No-Objection Certificate from the Income Tax office) may ensure early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person.

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Are Reservations Adequate to Foster Diversity & Inclusion?

                                                   Non-inclusion and lack of diversity are a painful reality that needs to be urgently addressed. 

It is beyond dispute that in different parts of the world – India included – discrimination continues to exist, although constitutional provisions and a number of other laws explicitly prohibit such actions. Several factors such as race, caste, gender, economic status, religion, complexion and other aspects of physical appearance, mental abilities, sexual identity, education, linguistic skills, etc., are used to make distinctions between people that lead to various decisions. Sometimes, the inferences made are limited to an individual’s mind, but often they influence decisions that impact someone else’s life. 

In India, this challenge is visible right from the primary school level and continues till the individual’s retirement and perhaps death. Educational institutions have been directed to ensure affirmative actions to reduce the inequalities in access to and the right to education. This takes the form of reservations of seats based on specific criteria. The government as well as public and private sector organisations have reservations based on various considerations. Certain constituencies too have been identified as “reserved”, which means candidates must come from a specified caste/tribe, etc.

There is no doubt that families, organisations and countries can progress on all fronts only if there is broad societal representation. Countries that are able to achieve this will develop faster- not just in terms of economic indicators, but also in equally critical areas such as health, education, justice, environment, women’s safety, child welfare, etc. But are reservations sufficient to achieve this lofty objective?

Reservations do not Account for “Intersectionalities”

 

I believe that our experience so far in India does not support the notion that reservations are adequate or even the best option. They may be necessary, but are far from being an effective solution in practise because of the reality of “intersectionality”. An individual may not qualify for a reservation based on caste, but what if s/he comes from an Economically Weaker Section of society? Which criterion gets primacy between caste and gender? Unless a priority is determined, it is likely that caste-based reservations will benefit men more than women (from the same caste).

Even in the corporate context, reservations largely manifest during the intake of talent at the entry-level. At more senior levels, the talent pool is largely skewed towards males, who benefit from privilege in various forms (including not being impacted to the same extent by parenting responsibilities). In turn, this reduces the likelihood that women will be able to break the glass ceiling. There are shining exceptions of women who have overcome all odds, but that is more due to their individual abilities, hard work and possibly the good fortune of having excellent mentors and visionary leaders than to an environment that consciously recognises and empowers merit, irrespective of other criteria.

Fostering Diversity and Inclusion Needs More Than Just Reservations

 

A multi-pronged approach is needed to address the issue of diversity and inclusion. The central government (and state governments as necessary) needs to formulate national or state policies across sectors in order to consciously recognise and address the realities of the multiple intersectionalities that prevail in our society. While some of these elements may be conscious individual choices, most of them are “historical” or the result of factors outside an individual’s control. This means reservations must account for various elements that can co-exist and not treat them as discrete. This is easier said than done and may require experiments to figure out what works best. But, in order to reap the benefits of our demographic dividends, we must act now!

However, formulating policies is not enough, as is evident from so many other facets of our society. The key lies in ensuring that the policies are complied with not just in letter, but also in spirit. Multiple stakeholders need to be consulted, so that different views are factored in. Indeed, this is where diversity and inclusion must begin.

Private and public-sector organisations are key stakeholders in an attempt to raise diversity and inclusion in India. These organisations must consciously train their people at all levels to value diversity of thought, opinion and lived experiences. This means changing how meetings are conducted (e.g., by giving everyone the opportunity to speak and not pushing the leader’s views and opinions down everyone’s throats). It means coaching leaders to encourage diverse talent pools to make decisions around promotions, key projects etc. It means walking the talk and rejigging the organization’s rewards systems to recognise and reward diversity that translates to business value. 

“Diversity” should not be limited to gender; it must cover as many elements as possible, including, for example, generational differences. This will become an increasingly important area. It means ensuring that offices are built/modified to provide access to people with disabilities and appropriate amenities. Business/HR leaders must rethink their visions to consciously bring out elements of diversity and inclusion. Genuine efforts must be made to eliminate gender pay gaps, even if it means a hit to the P&L account. All this is not something that can be easily legislated, although some indicators can perhaps be brought under the ESG umbrella.

The problem is complex, and so it does not lend itself to simplistic, formula-based solutions. All stakeholders must have alignment in their thinking so that there is concerted action in various spheres. This alone will enable the world to ensure that diversity and inclusion moves from the ivory towers to the realm of daily life.

Image Credits: Photo by Andrew Moca on Unsplash

A multi-pronged approach is needed to address the issue of diversity and inclusion. The central government (and state governments as necessary) need to formulate national/state policies across sectors in order to consciously recognise and address the realities of the multiple intersectionalities that prevail in our society. While some of these elements may be conscious individual choices, most of them are “historical” or the result of factors outside an individual’s control. This means reservations must account for various elements that can co-exist and not treat them as discrete.

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Budget 2022: Light at the End of the Tunnel or Dark Clouds for MSMEs?

The Union Budget 2022-23 highlighted that the Micro Small and Medium Enterprises (MSME) sector is a vital pillar of the country’s economy. It contributes to approximately 45 per cent of India’s total manufacturing output, 40 per cent of exports, and almost 30 per cent of the national GDP. The COVID-19 pandemic proved to be a major blow to the sector, especially to the small enterprises as they were abruptly forced to get on the tech wagon.[1] The unforeseen and instant digitization resulted in mounting costs at a time when they could barely sustain themselves. In light of this, the sector put their faith in the Union Budget for the FY 2022-23 for support, recovery and development.

Expectations of the MSME Sector from the Budget 

 

Previously, the government had introduced the Emergency Credit Line Guarantee Scheme (ECGLS) to provide support to the micro, small and medium enterprises amidst the pandemic. This led to an increase in the expectations of the MSME sector from the 2022 Budget. They anticipated that the government would provide benefits such as simplifying taxation procedures, credit lending, and investment incentives.

 

Changes in the Credit Framework

 

Under the aforementioned ECGLS scheme, MSMEs enjoyed a reduction in the interest rates on the loans and an enhancement in the loan procurement process.[2] This was well-received as it helped the MSMEs to recover from the clutches of the pandemic. 

It is pertinent to note that occasionally the  MSMEs have to extend their credit lines and bear the brunt of delayed payments.[3] This adversely impacts the growth of their business. Due to this, they need measures to facilitate their business decisions by improving the credit lending framework.

Due to the pandemic, a number of MSMEs were unable to utilize the benefits provided by the government. This was primarily because, either the enterprises weren’t registered as MSMEs or they did not have a secured bank account.

The cash flow was also largely impacted by COVID-19. To minimize the challenges put forth by this issue, provisions for banks to lend more to MSMEs were required. This in turn would have ensured a steady supply with the NBFs and would have further enabled them to lend credit to MSMEs.

Further, it was expected that the Special Credit Linked Capital Subsidy Scheme, which was announced in 2021, would extend to enterprises with a turnover of fewer than 5 crores. The institutional credit provided under the scheme would have allowed the smaller enterprises to procure equipment for their technological development.  Ergo, certain key changes were expected in the credit framework. 

It had also been suggested that retail loans to MSMEs should be treated differently from corporate loans.[4] This suggestion came in light of the Reserve Bank of India’s notification in November, where it clarified its asset classification norms. Under this notification, the RBI asked the lenders to classify the borrower accounts as a Special Mention Account (SMA) and a Non-performing Asset (NPA) as per the day-end process.[5]

The budget was also expected to come to grips with the problem of willful defaulters and rising NPAs in the given sector by introducing appropriate policies.

 

Reduction of Taxes

 

The government was expected to provide a considerable reduction in duties and taxes. This would have encouraged the MSMEs to invest more in capital goods and in turn produce more. To further tap the manufacturing capabilities of the MSME sector, it was suggested that the Long Term Capital Gains Tax on Private Equity should be reduced. Additionally, more subsidies should have been introduced on the imports of Capital Goods.[6] The MSMEs also hoped for GST rationalization and some relaxation in the compliance burden. This would have helped in increasing the ease of doing business.[7]

 

Incentives for Investment

 

For the inducement of investment in the sector, the MSMEs pinned their hopes on the government to provide incentives such as tax benefits for the angel investors and contrive a policy to ensure that the sector is adequately funded.[8]

 

Steps Towards Digitization

 

Furthermore, it was suggested that the government should have aimed to bring the digital revolution in the backward areas as well.  For this, the government should have promoted digital payments through certain incentives. Further, it was expected that the government would provide technological solutions to enable the MSMEs to increase their production and compete better.

 

Other Incentives

 

To address the environmental concerns, steps to promote low carbon manufacturing among the MSMEs were awaited. The 2022 Budget was expected to provide support in this regard. This would have provided the Indian economy to tackle environmental concerns as well as enable the  MSMEs to explore innovative solutions.[9]

 

Budget 2022: A Beacon of Hope for the MSME Sector? 

 

In the 2022 Budget, critical factors concerning MSMEs were targeted. These include raw material, credit access, and input costs. Further, infrastructure and skill development support, digital services support, ease of doing business was assured and facilitation of ease of doing business was announced.

 

Input Costs

 

A reduction in the import tariffs on inputs was announced along with an increase in the tariffs on the import of end products. This would protect the MSMEs and make them more competitive. While there was a reduction in tariffs including customs duty and exemptions on input like steel scrap, a 7% duty on finished goods was announced. Further, the import tariffs for industries like textiles, leather products, and handicrafts were also reduced. Lastly, the steel scrap customs duty exemption, which was given last year has been extended for another year, providing relief to MSME steel producers.[10] Moreover, certain anti-dumping and countervailing duty on stainless steel and coated steel flat products, bars of alloy steel and high-speed steel were revoked in larger public interest considering prevailing high prices of metals. On the other hand, customs duty on umbrellas was raised to 20 per cent and exemption to parts of umbrellas was withdrawn. 

Removal of exemption on items which are or can be manufactured in India and providing concessional duties on the raw material that goes into the manufacturing of intermediate products will go many a step forward in achieving our objective of ‘Make in India’ and ‘Atmanirbhar Bharat. 

 

Access to Credit

 

The MSME sector would now be facilitated with an additional credit of Rs 2,00,000 crore under the credit guarantee scheme. The Emergency Credit Line Scheme has been extended till March 2023 and an increase in the guarantee cover has been announced, from Rs 50,000 crore to Rs 5,00,000 crore with an exclusive cover earmarked for hospitality.[11] Moreover, an announcement of the use of the post office infrastructure for 1.5 lakh additional physical banking facilities was made. Additionally, it was announced that 75 remote rural districts would now have digital banking units set up by commercial banks.[12] Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme will be revamped with funds infusion. This will stimulate additional credit of INR 2 lakh crore for MSEs and boost employment opportunities.

 

Infrastructure

 

Investments in multi-modal logistics parks and cargo terminals under the Gati Shakti scheme would facilitate domestic as well as global market connectivity. Thus, bringing down the cost of logistics for the sector and boosting export competitiveness. 

 

Start-ups

 

An announcement pertaining to the rationalization of capital gains surcharge was made, boosting the growth of startups. Individuals and FPOs would now be strengthened through the NABARD initiative.[13]

 

Skill Development

 

The national skill qualification framework will be oriented as per the varied industry needs. Hence, a positive initiative to bridge the gap of skilled human resources within the sector. 

 

Digital Services for the MSME Sector

 

The Union Budget 2022 declares that Udyam, e-Shram, National Career Service (NCS) and Aatamanirbhar Skilled Employee Employer Mapping (ASEEM) portals will be interlinked, and their spectrum will be broadened. They will now serve as portals with live, organic databases, delivering G2C, B2C, and B2B services. These services will relate to credit facilitation, skilling, and recruitment to formalise the economy and improve entrepreneurial opportunities.

 

Efficiency and Competitiveness

 

For MSMEs to become more efficient, the Racing & Accelerating MSME Performance (RAMP) program with the outlay of Rs 6000 crore over 5 years will be rolled out, It aims to help the MSME sector to inculcate factors such as resilience, competitiveness and efficiency.

 

Surety Bonds in Public Procurements 

 

To reduce indirect costs for suppliers and work contractors, the use of surety bonds as a substitute for bank guarantees will be made acceptable in government procurements.

 

Concessional Corporate Tax 

 

Extension of the concessional corporate tax rate of 15 per cent by one more year — till March 2024 for newly incorporated manufacturing companies has also been rolled out. 

 

PLI for Solar PV Module 

 

Budget 2022 allocated an additional Rs 19,500 crore to boost the manufacturing of solar PV modules under the production linked incentive scheme. This is to facilitate domestic manufacturing for the ambitious goal of 280 GW of installed solar energy capacity by 2030, an additional allocation of Rs 19,500 crore for Production Linked Incentive for manufacturing of high-efficiency modules, with priority to fully integrated manufacturing units from polysilicon to solar PV modules, will be made.[14]

From the above discussion, it can be seen that the 2022 Budget did oblige with the expectations of the MSME Sector. There was an increase in the budgetary allocation for the given sector. The 2022 Budget successfully addressed certain key issues such as the lacuna in the credit framework, deficiency of infrastructure, etc.

However, at the same time, it neglected a number of key issues. It ignored the needs of the unregistered MSMEs, which almost comprise 90% of the sector.[15]Further, there was a reduction in the funds allocated to key schemes. There was no allocation under the 2022 Budget for the  Credit Linked Capital Subsidy and Technology Scheme. Further, a cut of 75.56%  has been made in the Technology Upgradation and Quality Certification.[16]

The Budget failed to go beyond the schemes while exploring ways to increase the infusion of capital in the sector. In spite of the existing schemes, many enterprises are still struggling to sustain themselves. Therefore, an additional boost should have been provided by the government. 

The government also failed to tackle increased unemployment in the sector. No measures were taken to extend the benefits of the Insolvency and Bankruptcy Code to proprietorship firms. This was a serious drawback as the government failed to take the interest of more than ninety per cent of MSMEs into account amidst the pandemic.[17]

 

Some Hits Some Misses

 

The pandemic severely disrupted the MSME sector and in effect, the economic output of the country. The 2022 Budget did bring a ray of hope for the sector through schemes and incentives that shall foster a favourable ecosystem for new ventures and businesses. However, it paid little or no attention to the crucial issues that persisted. Failure to infuse funds into the market,  absolute abandonment of unregistered MSMEs and schemes aimed at supporting new enterprises while failing to extend plans to revive the existing units are some of the issues that demand a more insightful plan. Even though financial assistance extended during the pandemic did resolve the immediate sustenance issues, mounting loans and additional dues are some issues that need immediate redressal. Thus, it can be seen that India still needs a holistic approach to foster the growth of MSMEs, particularly the ones reeling under the debt of the pandemic.

References:

[1] https://economictimes.indiatimes.com/small-biz/sme-sector/why-technology-is-the-only-path-to-sustainedgrowth-for-msmes/articleshow/80281133.cms

[2] https://www.eclgs.com/

[3] https://economictimes.indiatimes.com/small-biz/sme-sector/what-can-msmes-expect-from-budget-2022/articleshow/89238615.cms

[4] https://www.financialexpress.com/industry/sme/msme-eodb-msme-budget-2022-expectations-three-key-areas-experts-say-fm-nirmala-sitharaman-must-address/2417204/

[5] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/117MCIRACP41D584957C3A43BCACEBC391B91A3FA0.PDF

[6]  http://www.businessworld.in/article/Expectations-Of-The-MSME-Sector/28-01-2021-370928/

[7] https://zeenews.india.com/economy/budget-2022-expectations-msmes-hope-for-gst-tds-reductions-relaxation-in-compliances-2429221.html

[8] https://economictimes.indiatimes.com/small-biz/sme-sector/what-can-msmes-expect-from-budget-2022/articleshow/89238615.cms

[9] https://indianexpress.com/article/business/budget/union-budget-2022-expectations-live-updates-what-market-experts-companies-industry-bodies-india-inc-economists-expect-7738854/

[10] https://economictimes.indiatimes.com/small-biz/sme-sector/govt-reduces-customs-duty-on-certain-steel-items-to-provide-relief-to-msmes/articleshow/80630835.cms?from=mdr

[11] https://economictimes.indiatimes.com/small-biz/sme-sector/budget-2022-23-eclgs-extended-to-march-2023-total-cover-up-to-rs-5l-crore/articleshow/89266189.cms?from=mdr

[12]  https://www.indiabudget.gov.in/doc/Budget_at_Glance/budget_at_a_glance.pdf 

[13] https://www.indiabudget.gov.in/doc/Budget_at_Glance/budget_at_a_glance.pdf

[14] https://knnindia.co.in/news/newsdetails/msme/msme-minister-launches-integrated-services-of-udyam-registration-portal

[15] https://www.financialexpress.com/budget/msme-eodb-budget-2022-focuses-on-ease-of-doing-business-for-msmes-but-fails-to-address-90-of-the-unorganised-sector/2423280/

[16] https://economictimes.indiatimes.com/small-biz/sme-sector/budget-2022-23-budgetary-allocation-rises-for-msmes-but-some-key-schemes-see-a-cut/articleshow/89276388.cms

[17] https://www.financialexpress.com/budget/msme-eodb-budget-2022-focuses-on-ease-of-doing-business-for-msmes-but-fails-to-address-90-of-the-unorganised-sector/2423280/

Image Credits: Image by

Image by eko pramono from Pixabay 

The 2022 Budget did bring a ray of hope for the sector through schemes and incentives that shall foster a favourable ecosystem for new ventures and businesses. However, it paid little or no attention to the crucial issues that persisted. Failure to infuse funds into the market,  absolute abandonment of unregistered MSMEs and schemes aimed at supporting new enterprises while failing to extend plans to revive the existing units are some of the issues that demand a more insightful plan.

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OECD BEPS Framework: Recent Development

Addressing tax issues arising in the digital economy has been a priority of the international community since past several years. It aims to deliver a consensus-based solution and ensure Multinational Enterprises (MNEs) pay a fair share of tax in the jurisdiction they operate. After years of intensive negotiations, the Organization for Export Co-operation and Development (OECD) / G20 has recently introduced a major reform in the international tax framework for taxing the Digital Economy.

The OECD / G20 inclusive framework on Base Erosion and Profit Shifting (BEPS) [“IF”] has issued a Statement, on 8th October 2021, agreeing on a two pillar-solution to address the tax challenges arising from the digitalization of the economy. There are 136 countries, including India, out of a total of 140 countries, representing more than 90% of the global GDP, that have agreed to this Statement. All members of the OECD countries have joined in this initiative and there are four G20 country members  (i.e. Kenya, Nigeria, Pakistan & Sri Lanka) who have not yet joined. The broad framework of the two-pillar approach as per the Statement is as follows:

 

Pillar One

 

Introduction and applicability:

  • Pillar One focuses on fairer distribution of revenue and allocation of taxing rights between the market jurisdictions (where the users are located), based on a ‘’special purpose nexus’’ rule, using a revenue-based allocation.
  • Applicable to large MNEs with a global turnover in excess of  Euro 20 Billion and profitability above 10% (i.e. profit before tax)[1]. This revenue threshold is expected to be reduced to Euro 10 Billion, upon successful review, after 7 years of the IF coming into force.
  • The regulated financial services sector and extractive industries are kept out of the scope of Pillar One.

 

Calculation Methodology:

  • Such allocation will help determine the ‘’Amount A’’ under Pillar one.
  • The special-purpose nexus rule will apply solely to determine whether a jurisdiction qualifies for Amount A allocation based on which 25% of residual profits, defined as profit in excess of 10% of revenue, would be allocated to the market jurisdictions using a revenue-based allocation key.
  • Allocation vis-à-vis nexus rule will be provided for market jurisdictions in which the MNE derives at least Euro 1 Million  of revenue  [Euro 250,000  for smaller jurisdictions (i.e. jurisdiction having  GDP lower than Euro 40 Billion )]
  • Profits will be based on financial accounting income, subject to:
    • Minimal adjustments; and
    • Carry forward of losses
  • Detailed revenue sourcing rules for specific categories of transactions shall be developed to ensure that revenues are sourced to end market jurisdiction, where goods or services are consumed.
  • Safe harbour rules will be separately notified, so as to cap the allocation of baseline marketing and distribution profits of the MNE, which may otherwise already be taxed in the market jurisdiction.

 

Tax Certainty:

  • Rules will be developed to ensure that no double taxation of profits gets allocated to the market jurisdiction, by using either the exemption or the credit method.
  • Commitment has been provided to have mandatory and binding dispute prevention and resolution mechanisms to eliminate double taxation of Amount A and also resolve issues w.r.t transfer pricing and business profits disputes.
  • An elective binding dispute resolution mechanism for issues related to Amount A will be available only for developing economies, in certain cases. The eligibility of jurisdiction for this elective mechanism will be reviewed regularly.

 

Implementation:

  • Amount A will be implemented through a Multilateral Convention (MLC), which will be developed to introduce a multilateral framework for all the jurisdictions that join the IF.
  • The IF has mandated the Task Force on the Digital Economy (TFDE) to define and clarify the features of Amount A (e.g. elimination of double taxation, Marketing and Distribution Profits Safe Harbour), develop the MLC, and negotiate its content so that all jurisdictions that have committed to the Statement will be able to participate.
  • MLC will be developed and is expected to be open for signature in the year 2022, with Amount A expected to come into effect in the year 2023.
  • IF members may need to make changes to domestic law to implement the new taxing rights over Amount A. To facilitate consistency in the approach taken by jurisdictions and to support domestic implementation consistent with the agreed timelines and their domestic legislative procedures, the IF has mandated the TFDE to develop model rules for domestic legislation by early 2022 to give effect to Amount A.
  • The tax compliance will be streamlined allowing in-scope MNEs to manage the process through a single entity.

 

Unilateral Measures:

  • The MLC will require all parties to remove all digital service tax (DST) and other similar taxes (eg: Equalisation levy from India perspective) with respect to all companies and to commit not to introduce such measures in the future.
  • No newly enacted DST or other relevant similar measures will be imposed on any company from 8 October 2021 and until earlier than 31 December 2023 or coming into force of the MLC.

 

Pillar Two

 

Introduction:

 

  • Pillar Two consists of Global anti-Base Erosion Rules (GloBE) to ensure large MNEs pay a minimum level of tax thereby removing the tax arbitrage benefit which arises by artificially shifting the base from high tax jurisdiction to low tax jurisdiction with no economic substance.
  • Pillar Two is a mix of several rules, viz. (i) Income Inclusion Rule (IIR); (ii) Undertaxed Payment Rule (UTPR); and (iii) Subject to Tax Rule (STTR).
  • IIR imposes a top-up tax on parent entity in respect of low taxed income of a constituent entity
  • UTPR denies deductions or requires an equivalent adjustment to the extent low tax income of a constituent entity is not subject to tax under an IIR.
  • STTR is a treaty-based rule which allows source jurisdiction to impose limited source taxation on certain related-party payments subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the GloBE rules.
  • There would be a 10-year transition period for exclusion of a certain percentage of the income of intangibles and payroll which will be reduced on year on year basis
  • GloBE provides de minimis exclusion where the MNE has revenue of less than Euro 10 Million and profit of less than Euro 1 Million and also provides exclusion of income from international shipping.

 

Calculation Methodology:

 

  • Pillar Two introduces a minimum effective tax rate (ETR) of 15% on companies for the purpose of IIR and UTPR and would apply to MNEs reporting a global turnover above Euro 750 Million under country-by-country report.
  • The IIR allocates top-up tax based on a top-down approach, subject to a split-ownership rule for shareholdings below 80%. The UTPR allocates top-up tax from low-tax constituent entities, including those located in the Ultimate Parent Entities (UPE) jurisdiction. However, MNEs that have a maximum of EUR 50 million tangible assets abroad and that operate in no more than 5 other jurisdictions, would be excluded from the UTPR GloBE rules in the initial phase of their international activity.
  • IF members recognize that STTR is an integral part of Pillar Two for developing countries and applies to payments like interest, royalties, and a defined set of other payments. The minimum rate for STTR will be 9%, however, the tax rights will be limited to the difference between the minimum rate and tax rate on payment.
  • GloBE rules would not be applicable to Government entities, international organizations, non-profit organizations, pension funds or investment funds that are UPE of an MNE Group or any holding vehicle used by such entities, organizations, or funds.

 

Implementation:

  • Model rules to give effect to the GloBE rules are expected to be developed by the end of November 2021. These model rules will define the scope and set out the mechanics of the GloBE rules. They will include the rules for determining the ETR on a jurisdictional basis and the relevant exclusions, such as the formulaic substance-based carve-out.
  • An implementation framework that facilitates the coordinated implementation of the GloBE rules is proposed to be developed by the end of 2022. This implementation framework will cover agreed administrative procedures (e.g. detailed filing obligations, multilateral review processes) and safe-harbors to facilitate both compliance by MNEs and administration by tax authorities.
  • Pillar Two is proposed to be effective in the year 2023, with the UTPR coming into effect in the year 2024.

 

FM Comments :

 

With the introduction of the OECD/G20 inclusive framework on BEPS, OECD expects revenues of developing countries to go up by 1.5-2% and increase in overall reallocation of profits to developing countries of about USD 125 Billion. India, being a huge market to large MNEs, has always endorsed this global tax deal. However, with the introduction of this framework, India will have to abolish all unilateral measures, such as equalization levy tax and Significant Economic Presence (digital permanent establishment) provisions. MNEs will also have to re-visit their structure to ring-fence their tax positions based on the revised digital tax norms.  This Statement lays down a road map for a robust international tax framework w.r.t taxing of the digital economy,  not restricted to online digital transactions.

References

[1] Calculated, using an “averaging mechanism”, details of which are awaited.

Image Credits: Photo by Nataliya Vaitkevich from Pexels

With the introduction of the OECD/G20 inclusive framework on BEPS, OECD expects revenues of developing countries to go up by 1.5-2% and increase in overall reallocation of profits to developing countries of about USD 125 Billion. India, being a huge market to large MNEs, has always endorsed this global tax deal.

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Bad Bank in India: A Concept Note

The Indian banking system has been grappling with the ballooning Non-Performing Assets (NPAs) crisis on its balance sheets for decades now. The pandemic marked a further downward spiral for the Indian economy; proving specifically detrimental to individual borrowers and large corporates across sectors, who were adversely affected by the cash flow in businesses which led to defaults in outstanding obligations. The consequential increase in the NPAs revived the discussions for institutionalizing an independent entity that would exclusively deal with the bad loans and help in cleaning up the NPAs off the balance sheets. As of March 2021, the total NPAs in the banking system amounted to Rs 8.35 lakh crore (approx). According to the Reserve Bank of India’s (RBI) financial stability report, the gross NPAs ratio for the banking sector could rise to 9.8% by March 2022.

Following India’s first-ever Bad Bank announcement in the 2021-22 Union Budget by the Finance Minister; India, Debt Resolution Company Ltd (“IDRCL”), an Asset Management Company (“AMC”) has been set up that shall work in tandem with the National Asset Reconstruction Company Ltd (“NARCL”) to streamline and square away bad loans as per the documents and data available with the Registrar of Companies (“RoC”).

Proposed Mechanism of Bad Bank in India

  • The Government of India (“GOI”) has primarily set up two entities to acquire stressed assets from banks and then sell them in the market.
  • The NARCL has been incorporated under the Companies Act, 2013. NARCL will buy stressed assets worth INR 2 lakh crore from banks in phases and sell them to buyers of distressed debt. NARCL shall also be responsible for the valuation of bad loans to determine the price at which they will be sold. Public Sector Banks (PSBs) will jointly own 51% in NARCL.
  • The IDRCL will be an operational entity wherein 51% ownership will be of private-sector lenders / commercial banks, while the PSBs shall own a maximum of 49%.

NARCL will purchase bad loans from banks and shall pay 15% of the agreed price in cash, and the remaining 85% in the form of Security Receipts. If the bad loans remain unsold, the government guarantee shall be invoked; a provision worth INR 30,600 crore has been structured for the same.

Benefits of Bad Bank in India

Since non-performing assets have majorly impacted Public Sector Banks, the institutionalization of a Bad Bank shall equip PSBs in selling / transferring the NPAs, while simultaneously improving and promoting credit quality, strategically minimizing efforts in loan recovery and enhancing the macroeconomy.

Additionally, the profits of the banks were mostly utilized to cut losses. With the NPAs off their balance sheets, the banks will have more capital to lend to retail borrowers and large corporates.

The issues faced by Asset Reconstruction Companies (ARCs) relating to the governance, acceptance of deep discount on loans, and valuation may not concern the Bad Bank, owing to the government’s initiative and support that engages appropriate expertise.

 

Challenges of Bad Bank

As per the operational structure, bad banks shall buy bad loans, that have been recorded in the books of the PSB’s or private lenders. If the institution fails to secure buyers and record appropriate prices for the assets, the entire exercise shall prove to be futile.

In India, 75% of the bad loans are defaulted corporate loans, including a consortium of banks that had loaned corporations to finance major infrastructure and industrial projects. Countries such as Mexico, Greece, South Korea, Argentina, and Italy have portrayed that bad banks rarely yield positive outcomes in settings dominated by industrial, corporate, and conglomerate-level bad loans. Hence, structural and governance issues at various levels with state governments, judiciary, and political interests shall have to be streamlined and implemented efficiently to steer away from making them a repository of bad loans and for cleaning up the books of the PSBs.

Bad Bank: A One-Time Exercise?

The Government of India will have to undertake appropriate reforms/lending norms to reduce the number of NPAs. Setting up Bad Bank is most likely to tackle only the existing NPAs problem and should be a one-time exercise.

The concept of Bad Bank has been a success in certain European countries and the United States of America, however, it is pertinent to understand that they were structured to tackle home loans and toxic mortgages, unlike in India. Hence, in-depth analysis of the experiences of these countries should be utilized and intricately be revamped in alignment with key differences to ascertain the role of Bad Bank in the near future in the country.

Banks will get a huge financial boost with the transfer of the NPAs off their books and help in credit growth in the country. The success of Bad Bank is also crucial in restoring the faith of the taxpayer in the banking system. With the existence of the Insolvency and Bankruptcy Code, 2016 and Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, it remains to be seen how a Bad Bank will be a complement in the resolution of the bad loans.

 

Image Credits: Photo by Visual Stories || Micheile on Unsplash

The concept of Bad Bank has been a success in certain European countries and the United States of America, however, it is pertinent to understand that they were structured to tackle home loans and toxic mortgages, unlike in India. Hence, in-depth analysis of the experiences of these countries should be utilized and intricately be revamped in alignment with key differences to ascertain the role of Bad Bank in near future in the country.

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Education in India: Time to Connect the Dots and Look at the Big Picture

In the last few days, I read news reports that are seemingly unrelated on the surface. However, I think there exists a deeper connection for those willing to think outside the box. I thought I would use this article to articulate my thoughts on the connections and their possible implications for India. 

India’s New Education Policy expected to gain traction

The first item was about various initiatives announced by the Union government on the first anniversary of India’s National Education Policy (NEP). While internationalization, multiple entry/exit options, and digital education will be key pillars, one other important component is to enable students to pursue first-year Engineering courses in Indian languages.

In the context of the broad-brush changes envisioned to India’s education system, it is time to rethink the role of the UGC as a body that enables the nation’s higher education system in ways beyond disbursing funds to be recognized universities. There also ought to be more harmony between the various Boards that govern school education. The roles of bodies responsible for governing professional education in India- e.g., AICTE, NMC (which replaced the MCI), ICAI, ICSI, ICWAI, Bar Council of India etc. should also be redefined to ensure that India’s professionals remain in tune with the needs of a fast-changing world.

English will play an important role in our continued growth

The second report that caught my attention was on two main points made by Mr. Narayana Murthy (the Founder of Infosys), in a recent media interaction. He stated that it is high time that English be formally acknowledged and designated as India’s official link language, and greater emphasis is given to its teaching and learning in Indian schools. He said that his opinion is based on his first-hand knowledge of many technically qualified students in Bangalore/Karnataka who lose out in the job market largely because they lack a certain expected level of proficiency in English.

In the same interview, Mr. Murthy went on to say that on a priority basis, India needs overseas universities and vocational educational institutions to set up facilities in India to train students and teachers in key areas like nursing. This too makes sense because our healthcare infrastructure needs massive upgrades- and human resources will be critical.

China’s tightening regulations threaten its US$100 Billion EdTechc industry

The third report was on China’s recent decision to tightly regulate its online tutoring companies. The new rules bar online tutoring ventures from going public or raising foreign capital. There are also restrictions on the number of hours for which tutors can teach during weekends and vacations. In fact, the rules go so far as to make online tutorial businesses “not for profit”.

Different views have been expressed on why Chinese authorities have taken this step. Some see it as a means to reduce the cost of children’s education- and thus encourage couples to have more children. They point to this as a logical enabler of the recent relaxations in China’s two-child policy. Others view it as a step designed to clip the wings of Chinese tech companies that are deeply entrenched in many consumer segments, and have, over the past decade, acquired significant financial muscle.

To put into perspective the size of Chinese EdTech companies, consider this data point: Byju’s, arguably India’s largest EdTech company, was valued at over US$16.5 Billion as of mid-June 2021. Despite this high valuation, Byju’s would have been smaller than the top 5 Chinese EdTech players (on the basis of valuations that existed before the recent draconian rules came into effect).

Implications for India

The majority of China’s EdTech ventures are financed through significant venture capital investments from the west. Analysts expect that China’s sudden actions will, at least in the short run, divert capital to other locations. India could be a potential beneficiary because it already fosters a large EdTech ecosystem.

Given our demographics, we have a significant domestic market for education across all levels- primary, secondary, and college. Since digital education will likely become the norm, this space is ripe for newfangled innovations in the days ahead. If online education can bridge the gaps that employers currently perceive in our fresh graduates, unemployability rates shall notably decline. . This will not only contribute directly to our GDP but also indirectly stimulate innovation and entrepreneurship.

India has a large technical skill base. Some of these resources can easily be harnessed to develop next-gen education solutions using cutting-edge technologies such as AI, ML, Language Processing, Augmented Reality, etc. To begin with, Indian start-ups can build, test, and scale EdTech platforms and solutions for our domestic market. Over time, these can be refined and repurposed for global markets. Similarly, features built for the global market can be adapted to Indian markets, thus creating a virtual cycle. Such a trend will not only proffer legs to implementing India’s NEP but will also enable us as a society to improve access to education to underprivileged sections of the society. This is critical to sustaining our growth on the path of socio-economic development.

By taking the right decisions now, we can attract capital, talent, and world-famous institutional brands to this critical sector. EdTech in India has the potential to become a powerful engine of growth for our services sector. Done right, I have no doubt that in a few years, India can become a “Vishwaguru” not just in the spiritual sense, but also literally.

PS: As with many other sectors in India, the legal framework that governs education too needs to be made more contemporary and relevant, but that’s for another time.

Image Credits: Photo by Nikhita S on Unsplash

By taking the right decisions now, we can attract capital, talent and world-famous institutional brands to this critical sector. EdTech in India has the potential to become a powerful engine of growth for our services sector. Done right, I have no doubt that in a few years, India can become a “Vishwaguru” not just in the spiritual sense, but also literally.

 

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Taxation (Amendment) Bill, 2021: Regaining Investor Confidence

The retrospective clarificatory amendment regarding taxability of indirect transfers and consequent demand raised in a few cases, had created doubts and serious concerns for potential investors in our country and had also tarnished India’s image in the international community. The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic, is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment.  With this objective in mind, the Hon. Finance Minister of India has proposed this Taxation Laws (Amendment) Bill 2021 (“the Bill’), to put an end to the protracted litigation on this subject matter.

 

The issue regarding taxability of indirect transfer of assets located within the country, by transferring shares of an intermediary foreign company, was first analyzed in the case of Vodafone International Holdings (‘Vodafone’). In that case, Vodafone had acquired 100 percent shares of a Cayman Island based subsidiary company, from Hutchison Telecommunication International Ltd. (‘HTIL’), which was holding 67 percent controlling interest in Hutchison Essar Limited (‘HEL’), an Indian Joint venture company. Through this transaction, Vodafone had indirectly acquired a controlling interest of 67% in HEL, without triggering any taxable event in India. However, the Indian Revenue authorities had served a notice on Vodafone for not withholding tax under section 195 of the Indian Income Tax Act, 1961 (‘the Act’) on the consideration that was paid by it to HTIL.

The controversy was finally settled by the Hon’ble Supreme Court (‘SC’) in 2012 in favour of Vodafone[1]. The SC had ruled that the word “through” in section 9 of the Act does not mean “in consequence of” and “sale of share in question to Vodafone, did not amount to transfer of capital asset within the meaning of section 2(14) of the Act”. Accordingly, an indirect transfer of Indian assets by transferring shares in a foreign company was not chargeable to tax in India and therefore was not liable to any withholding tax.

Retrospective Amendment in Finance Act, 2012:

In order to override the SC decision and tax such Indirect transfer transactions, the Central Board of Direct Taxes (CBDT) had introduced an amendment under section 9(1) of the Act, which was made effective retrospectively from 01 April 1962. The Finance Act, 2012 had inserted a clarificatory Explanation 4 and Explanation 5 to section 9(1)(i), as under:

“Explanation 4— For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.

Explanation 5— For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”

The above retrospective amendments created doubts in the minds of the stakeholders regarding the stability of India’s tax laws and also invited huge criticism and embarrassment at the international level.

Pursuant to this retrospective amendment, income tax demand had been raised in seventeen cases by the Revenue authorities. In four cases, the aggrieved taxpayers had preferred arbitration under India’s Bilateral Investment Protection Treaty with the United Kingdom and the Netherlands, respectively. Recently, the respective Arbitration Tribunals have, in the case of Vodafone International Holding BV vs. The Republic of India as well as in Cairn Energy PLC vs. The Republic of India, ruled in favour of the assessee and against the Government of India. The government of India has challenged both this arbitration award.

Proposed Amendment:

The Bill [2] proposes to amend the Act and abolish the retrospective tax on indirect transfer of Indian assets, if the transaction was undertaken before 28 May 2012 [3].

The amendment proposes to insert three provisos (fourth, fifth and sixth) under Explanation 5 to section 9(1)(i), thereby nullifying:

  • any pending or concluded assessment or reassessment; or
  • any order enhancing the demand / reducing the refund; or
  • any order deeming a person to be an “assessee in default” for non-withholding of tax; or
  • any order imposing a penalty

with respect to any income accruing or arising from the transfer of an Indian asset pursuant to the transfer of shares in a foreign company.

Therefore, all assessments or rectification applications (pending/ concluded) before the Revenue authorities, to the extent it relates to the computation of income from any indirect transfer of assets, shall be deemed to have concluded/ have never been passed without any additions.

Specified Conditions:

Relief under the proposed amendment would be available only to assessees fulfilling the following specified conditions:

  • The assessee shall either withdraw or submit an undertaking to withdraw any appeal filed before the Tribunal, High Court or Supreme Court with respect to the indirect transfer, in such form and manner as may be prescribed [4];
  • The assessee shall either withdraw or submit an undertaking to withdraw any proceeding for arbitration, conciliation or mediation, with respect to the indirect transfer, in such form and manner as may be prescribed [3];
  • The assessee shall furnish an undertaking waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to indirect transfer in such form and manner as may be prescribed [3].

Pursuant to fulfillment of the specified conditions, where any amount becomes refundable to the person referred to in the fifth proviso, then, such amount shall be refunded to such person, without any interest on such refund under section 244A of the Act.

FM Comments:

The amendment is a proactive step aimed at neutralizing the criticism and embarrassment caused by retrospective amendment and regaining the stakeholder’s confidence in Indian judicial system. Such measures from the Government will certainly create a positive sentiment and a sense of tax certainty amongst the investors and hopefully, help in attracting incremental foreign investment into the country, which will play an important role in promoting faster economic growth and development.

 

References:

[1] Vodafone International Holdings B.V. vs. UOI (2012) 341 ITR 1 (SC)

[2] President is yet to give his assent on the said Amendment Bill

[3] Date on which Finance Bill, 2012 received assent of the President

[4] Form for submitting undertaking is yet to be prescribed

 

Image Credits: Photo by Michael Longmire on Unsplash

Such measures from the Government will certainly create a positive sentiment and a sense of tax certainty amongst the investors and hopefully, help in attracting incremental foreign investment into the country, that will play an important role in promoting faster economic growth and development.

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India Needs New Regulations - But Simplification of Compliance is Just as Critical

In earlier posts, I have touched upon the need for Indian laws to be updated to better reflect the current environment and foreseeable changes to it brought about by various forces, primarily technology-led innovation. This is not just because of the need to plug legal loopholes that are exploited to the nation’s detriment but also with the objectives of streamlining compliance and better enforcement.

 

Recently, the union government did exactly this when it announced a new set of rules to govern the operations of drones in India. A new draft of the Drone Rules, 2021, now out for public consultation, will, when approved and notified, replace the UAS Rules, 2021, which were announced in March 2021. The fact that the government has come out with a new set of rules within 4 months of issuing the earlier version is a welcome sign of change, as it signals recognition of a rapidly-changing environment as well as the importance of timely and appropriate responses.

Changes are aimed at simplification and less regulatory control

The new rules are remarkable for other reasons as well. At about 15 pages in length, the new rules are only a tenth of the earlier rules. The changes are not limited to the form; there are substantive changes too. The new rules seek to do away with a large number of approvals (e.g., Unique Authorization Number, Unique Prototype Identification Number etc.).  Licensing for micro drones for non-commercial use has been done away with. Recognizing the immense potential for drones to revolutionize our society and economy, the government proposes to develop “drone corridors” for cargo delivery. Prior authorization of drone-related R&D organizations is being removed. A drone promotion council is to be set up, in order to create a business-friendly regulatory regime that spurs innovation and use of drones. All this augurs well for the development of a robust drone ecosystem in India.

Implementing the “spirit” of underlying regulations is vital

The change to the drone rules is a welcome step- just as the consolidation of 29 of the country’s labour laws into four Codes during 2019 and 2020 was. But rationalization becomes futile if there is no element of reform- e.g., doing away with requirements that have outlived their utility or need significant changes to remain relevant in the current environment? There were many expectations around the Labour Codes, but in the months that followed, it is fair to say that there was also much disillusionment amongst industry stakeholders because sticky issues, such as the distinction between “employees” and “workers”, payment of overtime, role of facilitator-cum-inspector etc., remained.

Simplifying compliance is necessary to improve “ease of doing business” further

The World Bank’s 2020 “ease of doing business” report ranks India 63rd; we were ranked 130 in 2016. The 2020 report considered three areas: business regulatory reforms (starting a business, paying taxes, resolving insolvency etc.); contracting with the government, and employing workers. 

But there are miles to go before we sleep. To ensure that India’s entrepreneurial energies and creative intelligence are directed to areas that will be critical in the years to come- e.g., space, AI, robotics, electric vehicles, clean energy etc. all need new regulations or revamp of existing legislations and rules. But this alone will not suffice. Implementing the spirit, and not just the letter of the law and rules and the simplification of regulatory compliance are important angles that government must pay attention to. These are going to be key determinants in improving our “ease of doing business”.

 

Technology is a necessary enabler but it is not sufficient

All regulatory filings- whether for approvals or compliance- should ideally be enabled in digital format. Digital dashboards in the government and other regulatory bodies should facilitate real-time monitoring. Only exceptions or violations should need further actions. To be sure, the government has initiated some steps in this direction- e,g., “faceless” interactions between business and the Income Tax authorities with the intention to reduce human interventions and thus, the possibility of corruption. But if the underlying income tax portal itself is not working properly, as was widely reported soon after it was launched, the desired outcomes will not be achieved.

Moreover, it is not just about having the right technology platforms in place. It is equally critical to bring about a mindset change in the administrative machinery that helps political leadership formulate policy and thereafter, enable implementation and performance monitoring.

Given India’s large domestic market and attractiveness as a base for exports, we as a nation stand on the threshold of a phase of significant economic growth. Many Indian entrepreneurs are establishing businesses overseas; this means that the benefits of jobs, tax revenues and IPR creation all move to other jurisdictions. The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

Image Credits: Photo by Medienstürmer on Unsplash

The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

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The draft EIA notification, 2020: what went wrong?

India has witnessed consistent and rapid environmental degradation since the past 50 years which can be attributed to the depletion of forests, vehicular emissions, use of hazardous chemicals, improper disposal methods and various other undesirable human activities.  Incidents such as the Bhopal gas tragedy and the LG Polymers gas leak incident have accentuated the seriousness of the matter and the need for introspection and rectification as well as timely action. Implementation of regulatory norms to curb pollution may seem plausible, but it is even more crucial to check whether industrial units and other polluting entities are complying with the safety norms and standards laid down to check the adverse impact of their operations. In that light, The draft Environment Impact Assessment (EIA) Notification is bound to suffer implementational challenges and demands thorough revision to meet the environmental, developmental and sustainability parameters.

 

Concatenation of EIA in India

The current environmental laws seek to strike a balance between ‘ecology’ and ‘economy.’ The EIA framework is the practical aspect that guides towards striking this balance. Environmental Clearance (EC) is one of the most important features of an EIA framework. It refers to the process of assessing the impact of planned projects on the environment and people with an aim to abate/minimize the consequent environmental pollution. The clearance is mandatory of areas that are ecologically fragile, regardless of the type of project. 

The first EIA notification was notified in the year 1994, however, it covered only a few industries, leaving many out of the scope of impact assessment. In order to reflect upon the shortcomings of the 1994 framework, it was updated as EIA notification 2006[1].

However, the system curated by the EIA notification 2006 has been a far cry from perfect. Over the 15 odd years of its implementation, there have been quality issues with respect to the EIA reports,[2] and poor track record of post environmental clearance monitoring and compliance[3]. Over these years, it has also undergone numerous changes. In 2017, the Expert Appraisal Committee of the Environment Ministry exempted public hearings for coal mining projects which were undergoing capacity enhancements of up to 40 percent. However, the relaxation was subjected to due diligence of the EAC[4]. In 2015, the Ministry extended the validity of environmental clearance from 5 years to 7 years[5]. In March 2020, a draft notification[6] to replace the 2006 notification was issued for public comments. Since then, there have been many protests seeking a revaluation of the draft proposal.

In the meanwhile, vide an Office Memorandum dated 18th November 2020, the government proposed new set of rules to streamline the process to reduce the number of days taken by the authorities in granting EC.[7] This was in line with the government’s efforts to ensure the country’s growth trajectory in not blocked. Post that, another Office Memorandum was issued on 15th March 2021 that sought to streamline the process of granting environmental clearances with regard to essential details demanded.[8]

Very recently, another Notification dated 18th March 2021 was issued where the center exempted all projects from public hearing whose environmental clearance had expired and therefore had to apply afresh.[9]According to the notification, the prior environmental clearance for a project was granted for a maximum period of ten years, and in some cases five years. The projects which failed to complete within the granted time period had to undergo all the processes of scoping afresh, including conducting a public hearing. However, as per the new amendment, the compulsory step of conducting public hearing has been done away with if minimum 50% of the physical form of the project has been implemented. This was essential to remit further delay in such projects.

The notification has been introduced amidst the countrywide opposition to the contentious EIA Draft Notification 2020[10], that seeks to overhaul the environmental clearance process for large infrastructures and projects like dams, roads, mines townships, etc. The prepared draft proposes three major changes:

  1. Exemption from public consultation for certain construction projects.
  2. Powers to regularise projects retrospectively.
  3. Exemptions for process with strategic consultation.[11]

 

Contentious Issues in the Draft EIA Notification

Environmentalists across the country took an abhorrent view of the proposed Draft EIA Notification 2020, since it provided time and liberty to project proponents while strategically keeping the public uninvolved.

  1. Ex post facto environmental clearance

This rule allows any industry working in violation of the Environment (Protection) Act to apply for clearance. This seemed quite arbitrary since India has already witnessed severe disasters caused due to the lack of compliance to environmental clearances. Recently, in addition to the LG Polymers gas leakage at Vishakhapatnam, a natural gas well of Oil India Ltd. blew up and caught fire in Tinsukia, Assam.  Assam’s State Pollution Board reported that Oil India Ltd. was operating without any consent from the Board for more than 15 years!

  1. Defeats the purpose of public consultation

Generally, the interested stakeholders are given a period of 30 days to raise any concerns regarding the preliminary report of the assessment. The draft EIA 2020 seeks to reduce this period to a mere 20 days. Very often, the concerned stakeholders belong to poor communities residing in and around the project sites. The news of such a report usually reaches late, by the time consultations are considered, clearances are granted. This provision is in violation of Principle 10 of Rio Declaration which states that “Environmental issues are best handled with the participation of all concerned citizens”.

  1. Reducing the Number of Compliance Reports

The Compliance Report contains all the norms and regulations which are being followed by industries on a regular basis. It is an essential aspect of EIA since it helps the concerned authorities to put a system of checks and balance. However, as per the draft EIA 2020, this period has been increased to one year, granting unwarranted freedom to industrial units to grossly violate the environmental norms and cover it up with ease.

  1. Empowering the central govt. to declare certain projects as ‘strategic’ may have adverse outcomes

It is the Technical Expert Committee that has been endorsed with the power to categorize new projects rather than the Ministry of Environment, Climate and Forest Change. Once a particular project has been labelled/categorised as ‘strategic’ by the central government, information regarding it shall be removed from the public domain. Any information regarding environmental violations thus remain a privy to the government. Not being able to report violations except by the government or regulatory authority goes against the principles of natural justice. Diluting the norms with regards to detailed scrutiny by the Expert Committee, EIA studies, or public consultation leaves many projects and polluters out of the regulatory net.

  1. Exclusion of projects

Clause 26 of the Draft EIA Notification 2020 excludes a long list of projects from the purview of EIA. Further, Clause 14 of the said Notification excludes a number of projects from public consultation. Further, public consultation has also been exempted for the projects falling under Category B2.

 

Judicial Approach on the Draft EIA Notification

Since the issuance of the draft notification, various petitions have been filed in courts across the country demanding judicial scrutiny over specific controversial aspects as discussed above.

The notification allowing for grant of ex post facto environmental clearance for project proponents who have already commenced or completed projects without obtaining a prior EC was challenged in the case of Alembic Pharmaceuticals Ltd. v. Rohit Prajapati & Ors.[12], the Supreme Court held that the concept of ex post facto clearance as opposed to the fundamental principles of environmental jurisprudence and is violative of the previous EIA Notifications. It was further held in this case that such a clearance would lead to irreparable degradation of the environment. The grant of such problematic environmental clearances violates the precautionary principle and sustainable development. Furthermore, such clearances overturn the ‘polluter pays principle’ to make it ‘pay and pollute’ principle.

The court placed reliance on its previous ruling in the matter of Common Cause v. Union of India.[13] In this case, the Supreme Court held that “the concept of an ex post facto or a retrospective EC is completely alien to environmental jurisprudence including EIA 1994 and EIA 2006.” Therefore, relying on the verdict of the Hon’ble Supreme Court in the above two cases, it can be stated that ex post facto clearances are unsustainable is law and void.

In the case of Puducherry Environment Protection Association v. The Union of India.[14], the Madras HC addressed the issue in a different light. The question of whether an establishment providing livelihood to hundreds of people must be closed down on the grounds of non-compliance with prior EC, was addressed. After much deliberation, the HC arrived at the conclusion that violation of environmental norms can conveniently and effectively be checked. It also stressed on the fact that an ex post facto clearance takes away the scope of EIA.

Previously, the National Green Tribunal in S. P. Muthuraman v. Union of India[15], remarked that the law does not recognise any such examination which is made post-commencement and upon completion of a project. The Tribunal further went to acknowledge that the practice of conducting an EIA is internationally recognised. It also stated that granting post facto approvals could legalise and legitimise illegal and irregular projects which are in contravention of environmental norms and thus would defeat the purpose of the Environment Protection Act, 1986.

Another contention raised by the stakeholders was that the draft notification dilutes the EIA process making it easier for industries to escape accountability. Various courts also took stock of these concerns and the Delhi High Court granted an extension in the time allowed to the general public for giving suggestions to the Draft EIA Notification till August 11, 2020. It also suggested that the notification must be translated into other languages so that it can reach to even the remotest groups and seek recommendations.[16] However, the centre responded by saying that it was giving ‘thoughtful consideration’ to the HC’s views on translating the EIA Notification 2020 in twenty-two languages of the eighth schedule of the constitution.[17]The Karnataka High Court also took a similar approach and restrained the Ministry of Environment, Forest, and Climate Change from releasing the final notification till September 7, 2020, on the grounds of the ongoing pandemic.[18]

 

Giving Voice to the Voiceless

EIA is a part of participatory justice which gives voice to the voiceless[19].

The present EIA draft notification appears to be an attempt to promote the growth of industries and the corporate community at the cost of biodiversity, human rights and the environment. The draft is bound to suffer implementational challenges and demands thorough revision to meet the environmental, developmental and sustainability parameters. However, the final notification is not out yet and the judicial bent towards scrapping the post-commencement sanctions and increasing the period for public consultation period would most likely lead to a revision of those aspects. Moreover, provisions such as discretionary powers for the determination of strategic projects as well as a reduction in key compliance norms dilute the very essence of environmental assessments. Ease of doing business was ideally implemented to subvert bureaucratic dawdle but it should not become a veil for corporate subterfuge. Then again, too many compliance burdens deter participants in a sector from undertaking developmental projects. Some fine-tuning keeping the regulatory pressures minimal while balancing environmental repercussions would be the ideal course of action.

References 

1 GOVERNMENT OF INDIA – THE ENVIRONMENTAL IMPACT ASSESSMENT NOTIFICATION 2006,
http://www.environmentwb.gov.in/pdf/EIA%20Notification,%202006.pdf (last visited Aug. 29, 2020).

2 http://moef.gov.in/wp-content/uploads/2017/09/OM_IA_ownershipEIA.pdf

3 https://cag.gov.in/en/audit-report/details/27540

4 http://environmentclearance.nic.in/writereaddata/Form1A/Minutes/010820176ABWO9WXApprovedMOM15thEACheldon25July2017Coal.pdf

5 https://economictimes.indiatimes.com/news/economy/policy/government-extends-validity-of-environmentclearance-to-7-years/articleshow/49452693.cms?from=mdr


6 http://parivesh.nic.in/writereaddata/Draft_EIA_2020.pdf


7 http://dghindia.gov.in/assets/downloads/5fbb4c3cc3135moefccom.pdf

8 https://ficci-web.com/link/OMStreamlining.pdf


9 http://environmentclearance.nic.in/writereaddata/EIA_Notifications/52_SO1240E_12032021.pdf


10 http://parivesh.nic.in/writereaddata/Draft_EIA_2020.pdf

11 https://www.bloombergquint.com/law-and-policy/environment-law-proposed-norms-dilute-the-processrigours-experts-say

12 Alembic Pharmaceuticals Ltd. v. Rohit Prajapati & Ors., 2020 SCC OnLine SC 347

13 Common Cause v. Union of India, (2017) 9 SCC 499.


14 Puducherry Environment Protection Association v. The Union of India, (2017) 8 MLJ 513.


15 S.P. Muthuraman v. Union of India, 2018 (8) FLT 498.


16 Vikrant Tongad v. Union of India, W.P. (C) 3747/2020 & CM APPL. 13426/2020.


17 https://www.newindianexpress.com/nation/2021/mar/26/giving-thoughtful-considerationto-hc-view-totranslate-draft-eia-in-22-languages-centre-2281924.html

18 United Conservation Movement Charitable and Welfare Trust v. Union of India, W.P. No. 8632/2020.


19 Samarth Trust and Anr. v. Union of India and Ors., Writ Petition (Civil) No 9317 of 2009

 

 

Image Credits: Photo by Alan Rodriguez on Unsplash

The present EIA draft notification appears to be an attempt to promote the growth of industries and corporate community at the cost of biodiversity, human rights and environment. The draft is bound to suffer implementational challenges and demands thorough revision to meet the environmental, developmental and sustainability parameters. However, the final notification is not out yet and the judicial bent towards scrapping the post commencement sanctions and increasing the period for public consultation period would most likely lead to revision of those aspects

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Toy Manufacturing - BIS Compliances, Schemes, and Incentives

One of the key flourishing industries in the world, India’s toy market is currently valued at $500 million out of a booming $90 billion global market. Statistics reveal that 80% of Indian toys are Chinese imports, while non-branded Chinese toys account for 90% of India’s market. Even though exports by the toy manufacturing industry from India amounted to $130 million during 2019-2020 with the USA and UK [1]being the lead exporters, the disparity and unutilized potential do not escape one’s attention.

As the second-most populated country in the world with almost 26% of its population below 15 years old, India has one of the largest consumer bases in the world. In fact, when the global average for demand growth is 4.6% [2]it is forecasted to have a growth of 13.3% CAGR [3]within 2026 i.e. almost thrice the global average. Adding on to this the toy industry of the country is also expected to reach $3.3 billion dollars by 2024!

India’s economic growth has also increased the disposable income of its citizens, thus driving up demand in a market with a whopping consumer base of roughly 338 million. Moreover, there has been a major shift from traditional, medium- to low-end battery-operated toys, towards innovative electronic toys, intelligent toys as well as upmarket plush toys.[4] The boom of e-commerce in India has also had a role to play, with customers turning to shop for toys within the comfort of their own homes.

Associations and Committees Representing the Toy Industries in India:

 

1.Toy Association of India

  • Headquartered in New Delhi, the toy Association of India was established in 1995 with a view to bringing together toy manufacturers, traders and end-users to promote higher business relations.
  • It has a presence all over the country and has 600 registered members, out of which 275 are toy manufacturers.
  • Assists the toy industry in up-gradation of the industry’s units with modern machinery to maintain quality standards.
  • Attempts at creating a more conducive relationship between the government and the industry by offering policy recommendations, communicating the industry’s problems in the interest and growth of the toy industry.

2.The All-India Toy Manufacturer’s Association

  • Headquartered in Mumbai, All India Toy Manufacturer’s Association has nearly 150 registered members, out of which 100 are toy manufacturers.
  • It seeks financial assistance and subsidies from the government for the growth of the toy industry, educates and encourages suppliers to conform to the BIS regulations. 
  • Encourages the organization of toy fairs and exhibitions for the promotion of the toy industry.

 

Compliances Requirements for Toy Manufacturing Industry under the Bureau of Indian Standards (BIS) 

Apart from the general compliances which amount to over 700 ranging from the Companies Act, SEBI Act, FEMA Act to Income Tax and Foreign Trade Act for factories and MSME’s, regulations were required to be specifically made to ensure that the toy industries are safeguarded from unfair and excessive exploitation as well as products meet the international quality requirements.

According to a study, about 67% of toys sold in India had failed all safety and standard tests, while about 30 per cent of plastic toys failed to meet the safety standards of admissible levels of heavy metals and phthalates. Phthalates are a group of chemicals.

A lack of regulation in the past had resulted in degradation of the quality of our products and failed endeavours to keep up with the international standards. However, this is no longer the case as the government has not only strengthened the existing key factors but has also set up new compliances to steer clear of the past policy miscalculations and lapses. The said compliances are as follows:

The Toys (Quality Control) Order, 2020[5]

Issued by the DPIIT, Ministry of Commerce and Industry, vide order 25 February 2020, the safety of toys has been brought under compulsory BIS certification, which is granted after the successful assessment of the manufacturing infrastructure, production process, quality control, and testing capabilities. The toys shall bear the standard mark under a licence from BIS as per Scheme-I of Schedule II, of BIS (Conformity Assessment Regulations), 2018. The said QCO was initially slated to come into effect from 1st September 2020 but was later extended to 1 January 2021[6].

Exceptions:

  • The order is not applicable to goods and articles manufactured and sold by artisans registered with the Office of Development Commissioner (Handicrafts), under the Ministry of Textiles.
  • The order is not applicable to goods and articles manufactured and sold by registered proprietor and authorized user of geographical indication, by the registrar of geographical indications, Ministry of Commerce and Industry.[7]
  •  Goods or articles manufactured/meant for export purposes.

BIS Licence and Certification

For the purpose of BIS certification, toys have been classified into the following two categories. While applying for a licence, the manufacturer can apply under any one of the classifications:

 

If a licence is required for more than one type of toy (i.e., non-electric and electric), separate applications shall be made for each type. (However, samples shall be tested by BIS for conformity to the primary standard and the secondary standards which are applicable i.e., IS 9873 parts 1,2,3,4,7, and 9 etc.)[1]

While applying for a license the manufacturers must also specify the type of toy in order to choose the applicable standard it would be subjected to. The specifications of toys and their corresponding standards are as follows:

 

For Entities Manufacturing hundreds of toy models/SKU’s
  • Since testing hundreds of toy samples individually shall prove to be practically difficult for the purpose of BIS certification. The issue has been addressed in the Product Manual for the safety of toys[1].
  • The product manual is a guidance document containing product-specific guidelines for certification. It incorporates “Grouping Guidelines” which allows certification to be granted for a group of toy models based on the testing of certain representative models.
  • These grouping guidelines have been framed based on the Indian Standard IS 9873 (Part 8):2019 which is identical with the International Standard ISO/TR 8124-8:2016 (Safety of Toys Part 8 Age Determination Guidelines) which classifies toys into 7 Categories and 146 Sub-Categories based on the appropriate starting age and the specific purpose or function of the toy.
  • For the purpose of certification, all the models of toys of similar design, made from the same materials and covered under a single sub-category, shall be considered as a series. A sample of any one model from each series shall be drawn and tested to cover all the models in that particular series.

Schemes Floated for the Toy Manufacturing Industry in India

Along with the set of existing and new compliances, the government has also introduced various schemes and incentives with the aim of promoting the industry.

Micro, Small, Medium Enterprises (MSME)

Approximately four thousand[2] enterprises in India, engaged in toy manufacturing fall under the category of micro and small-scale sectors. The MSMEs in the toy manufacturing sector is an unorganized sector, accounting for a whopping 60% of the national market share. These MSME’s are spread all across the country with a large chunk operating in the Northern and Western regions.

The Indian toy market is 70% larger thanks to the existence of MSMEs and the support they received from our government. In pursuance of the same, the government has amended the classification of MSMEs in the Aatmanirbhar Bharat Abhiyan to ensure that they receive the aid and recognition required to keep up with the changing times. The amended classification is as follows:

 

With the advent of Aatmanirbhar Bharat Abhiyan various schemes have been introduced to promote MSMEs:

•       Technology and Quality Upgradation Scheme

Enrolling in this scheme will help the micro, small and medium enterprises to use energy-efficient technologies (EETs) in manufacturing units to diminish the expense of production and adopt a clean development mechanism. The scheme guarantees to cover up to 75% of the expenditure.[1]

•       Grievance Monitoring System:

Enrolling in this scheme is advantageous when it comes to addressing complaints of business owners. Additionally, the owners may also check the status of their complaints and file an appeal if they are not satisfied with the result.

•       Incubation: 

It assists innovators in implementing their new design or product ideas. It provides financial assistance for “Business Incubators”. Financial assistance of 75 % to 85 % of the project cost, up to a maximum of 8.00 Lakh is extended to the innovators.[2]

•       Credit Linked Capital Subsidy Scheme:

Under this scheme, new technology is provided to the business owners to replace their old and obsolete technology. A capital subsidy is given to the business to upgrade and have better means to do their business. These small, micro and medium enterprises can directly approach the banks for these subsidies. The ceiling on subsidy would be Rs. 15 lakh or 15 per cent of the investment in eligible plant and machinery, whichever is lower[3]

•       Scheme of Fund for Regeneration of Traditional Industries: 

The government aims at establishing a total of 35 toy clusters in various states under this scheme. Once set up, these will boost the manufacturing of toys made of wood, lilac, palm leaves, bamboo and fabric. This scheme offers incentives such as skill development, capacity building, e-commerce assistance to local industries.

•       Product Specific Industrial Cluster Development Programme: 

The programme aims to establish dedicated SEZ’s and customize them into self-sustaining ecosystems catering to export markets.

 

Incentives Provided to the Toy Manufacturing Industry in India

The Centre and State governments have implemented various incentives to promote the toy industry.

A. For Toy Manufacturing Entities

 

1.Hiked import duty:

The import duty on toys was raised from 20% to 60% [4]making it difficult for foreign companies to compete in our market as well as making Indian companies’ entry into the market easier.

2.Handicraft and GI Toys exempted from Quality Control Order[5]:

This allows any traditionally made toys by artisans registered with Development Commissioner (Handicrafts) to be exempted from the quality compliances newly introduced.

3.Custom Bonded Warehouse Scheme:

Central Board of Indirect Taxes and Customs (CBIC) has launched a new scheme expected to play a critical role in promoting investments in India and in enhancing the ease of doing business. According to this, the unit can import goods (both inputs and capital goods) under a customs duty deferment program.[6]

4.Export Promotion Capital Goods (EPCG) Scheme: 

Enables the import of capital goods (toys/ spare parts thereof) in the pre-production, production and post-production stage without the payment of customs duty.

5.Increase in BCD for Electronic Toys (under HSN 9503) from 5% to 15%[7]:

This will increase the expenditure incurred for foreign companies to sell products in India and thus help relax the competition for Indian manufacturers. An example of how these steps have been implemented and made into a reality is the Product-Specific Industrial Cluster Development Program. An initiative taken up by the Karnataka government in partnership with Aequs Infra, is a first-of-its-kind project aimed at promoting toy industries by dedicating 400 acres of self-sustained ecosystem including an SEZ to serve export markets and Domestic Tariff Area (DTA) through state-of-the-art industrial infrastructure and facilities. It has the potential to create 40,000 jobs in five years and attract over INR 5,000 crore in investments. [8]The toy cluster aims to capitalize on the presence of key elements essential for the sector’s growth like manpower, R&D and raw material.  It is also in a strategic position to cater to 50% of the domestic toy market needs, and has an efficient connectivity network with access to highways, ports, airports, and major cities.[9] This program was touted as a one-stop-shop solution catering to the needs of both large MNCs and small and medium enterprises.

6. Duty Drawback Scheme: 

The scheme was introduced to rebate duty chargeable on any imported materials or excisable materials used in the manufacture or processing of goods, manufactured in India and exported.

B. For MSME’s

Apart from extending financial aid as discussed above, the government initiatives for MSME’s are largely based on undertaking initiatives to promote homegrown toy manufacturers and boost domestic demand for indigenous and locally produced toys. Some of these initiatives are:

Phased Manufacturing Programme (PMP): 

The programme will make the assembly of toys cheaper than imports, offering benefits similar to the PMP for mobile phones introduced back in 2015. The government has offered tax reliefs and differential tariffs among other incentives for components and accessories to push local manufacturing.

Toy Labs: 

In a bid to promote traditional toys, the government has chalked out a plan to create toy labs – a national toy fair for innovative Indian themed toys. The Atal Tinkering Lab is one such toy lab to provide support for physical toys promoting learning and innovation. Additionally, due to literacy programmes like Sarv Siksha Abhiyan and the new education policy, toys nurturing innovation and creativity are in focus.

Involving various sectors:

The education ministry has been asked to include indigenous toys as a part of learning resource, under the new education policy. The IIT’s are set to be roped in to look into the technological aspect of toys, while the NIFT’s shall study the concept of toys and national values, by using non-hazardous materials. The Ministry of Science and Technology has been directed to explore how India’s indigenous games can be featured in the digital space. While the Ministry of culture will work on ‘Indian Toy Museum’.

Labour law reforms:

The Indian toy industry is labour intensive, the new labour law reforms have a significant impact on the ease of doing business, thereby providing a competitive advantage to the Indian toy industries.

The toy industry is one sector that contains a lot of untapped potentials. The compulsory BIS certification as per the Toys (Quality Control) Order, 2020, will ensure that the quality of toys is at par with international standards along with the strengthening of existing conditions of the market. These are significant steps in the right direction to ensure that the domestic markets pick up once the pandemic wanes. The domestic production and sales could catch up with exports and thus make sure that the future of this sector will not be as grim as in the past and will light up, once again.

References 

1 https://www.investindia.gov.in/sector/consumer-goods/toys-manufacturing

2 Koppal Toy Manufacturing Cluster; https://static.investindia.gov.in/s3fs-public/2021- 01/Koppal%20Toy%20Manufacturing%20Cluster%20-%20For%20International%20Investors.pdf

3 Ibid

4 Indian Toys Market: Industry Trends, Share, Size, Growth, Opportunity and Forecast 2021-2026, https://www.imarcgroup.com/indian-toys-market

5 https://bis.gov.in/wp-content/uploads/2020/03/Toy_QC_order.pdf

6 https://dipp.gov.in/sites/default/files/orderToy-26February2021_0.pdf

7 https://dipp.gov.in/sites/default/files/QC-AmendmentOrder-Toys-21December2020.pdf

8 https://bis.gov.in/wp-content/uploads/2020/09/toys-faqs-bilingual.pdf

9 https://bis.gov.in/wp-content/uploads/2020/08/safety-of-toy.pdf

10 Toy industries in India; https://www.ibef.org/indian-toys

11 Impact of Aatmanirbhar Bharat Abhiyan on MSMEs; https://cleartax.in/s/impact-aatmanirbhar-bharat- abhiyan-msmes/

12 https://msme.gov.in/3-technology-upgradation-and-quality- certification#:~:text=Technology%20and%20Quality%20Upgradation%20Support%20to%20MSMEs&text=50%

13 https://msme.gov.in/incubation25%20of%20actual%20expenditure%20subject,licenses%20from%20National%20%2F%20International%20bodies.

14 http://laghu-udyog.gov.in/schemes/sccredit.htm

15 Budget 2020: Govt hikes customs duty on toys, furniture, footwear products; https://www.financialexpress.com/budget/budget-2020-govt-hikes-customs-duty-on-toys-furniture-footwear- products/1848123/

16 Handicraft and GI Toys exempted from Quality Control Order; https://pib.gov.in/Pressreleaseshare.aspx?PRID=1680181

17CBIC and Customs launch scheme to attract investment and support Make in India programme; https://knnindia.co.in/news/newsdetails/sectors/cbic-and-customs-launch-scheme-to-attract-investment-and- support-make-in-india-programme

18 Union budget 2021; https://www.indiabudget.gov.in/doc/budget_speech.pdf

19 https://www.investindia.gov.in/sector/consumer-goods/toys-manufacturing

20 Koppal Toy Manufacturing Cluster; https://static.investindia.gov.in/s3fs-public/2021- 01/Koppal%20Toy%20Manufacturing%20Cluster%20-%20For%20International%20Investors.pdf

 

 

Image Credits: Photo by Nguyen Bui on Unsplash

The toy manufacturing industry is one sector that contains a lot of untapped potentials. The compulsory BIS certification as per the Toys (Quality Control) Order, 2020, will ensure that the quality of toys is at par with international standards along with the strengthening of existing conditions of the market.

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