(Un)Ease of doing Business

Exactly 25 years ago in 1995 a very iconic and life changing event took place. The first-ever mobile phone call was made in India. West Bengal Chief Minister Jyoti Basu, from the Writer’s Building in Kolkata, spoke to Union Telecom Minister Sukh Ram at Sanchar Bhavan in New Delhi. And thus began the advent of mobile phones in India. The historic call was made on a GSM network between two Nokia handsets over Modi Telstra’s MobileNet service. This sparked the telecom revolution in India.

Even thought RK Group started with textiles and fabrics, we soon moved to dealing with mobile phones, envisioning the future of this incredible device, starting our first outlet in Bangalore. Probably no other category, other than IT, has seen such massive development and change in a short span of 25 years. While the world moved from PCs to laptops to tablets the masses in India jumped from personal computers to mobile phones as technology developed rapidly and prices became more affordable.

Every economic activity is associated with the word TAX. The history of Indirect Taxation in India dates back to the days of Arthasashtra. In those days taxes would be collected in form of agricultural produce. The British used taxation as a tool to discourage manufacturing in India. In the late 1930’s sales tax was first introduced by the government, in the province of Bombay, on the sale of tobacco. Thereafter, a significant number of indirect taxes were added to our system before the GST was implemented in 2017. Prior to this Value Added Tax (VAT) was introduced to India in 2005. It is a tax paid on the amount by which the value of an article keeps increasing at each stage of its production or distribution.

As RK Groups business grew we expanded into the neighbouring state of Andhra Pradesh by becoming a distributor there. Under the VAT regime the erstwhile state of Andhra Pradesh had notified us that mobile phones would be taxed between 4%-5%. Throughout the entire state everyone started doing business using the 4%-5% slab. In 2013 the entire industry was in for a rude shock when the High Court passed a judgment. The order passed by the government of Andhra Pradesh in 2005, regarding the classification of mobile phones was invalid as per law. The High Court said that the government had not bothered to follow proper procedure which led to the state government revoking the 2005 GO in March 2013. Imagine what a turmoil we went through playing a waiting game to see what the government would do next.

These circumstances even forced the then Union Minister to issue a formal request to the state government of Andhra Pradesh to maintain taxing mobile phones under the 4%-5% slab. Accordingly, the state government of Andhra Pradesh passed another order in May 2014 stipulating that mobile phones would continue being taxed under the 4%-5% slab. This decision was met with much relief.

In 2014 another massive change took place where the state of Telangana was carved out of Andhra Pradesh with Hyderabad as its capital. The newly formed state of Telangana in September 2014 withdrew the May 2014 government order which had clarified that mobile phones would be sold under the 4%-5% category. This came as a huge surprise because the neighbouring state of Andhra Pradesh continued to follow the May 2014 order of taxing mobile phones under the 4%-5% category. Again we went into a tail spin, and in the absence of a written ruling, worked on a verbal clarification from the revenue department, continuing to collect VAT under the 4-5% slab. With firm belief that the government would come back and maintain the 4-5% slab. It didn’t make economic sense to charge more. The state would end up losing crores to Andhra Pradesh. A customer from Telangana could just cross the border to purchase a mobile or the grey market in Telangana would balloon.

A good two years later in December 2016, the government of Telangana passed a new law stating that it was going to tax mobile phones under the 4%-5% slab from 2016 onwards. But what about the period from 2013 – 2016? Mobile phones were liable, under Schedule IV to be taxable at 5%, from the financial year 2016. However from the financial years of 2013-16, mobile phones had no place under Schedule IV and hence were classified under Schedule V thus attracting a VAT of 14.5%. Their reason was the government had lost out on a lot of revenue because of its decision to maintain the 4%-5% slab.

What a perplexing move! It meant huge losses for the mobile phone industry in Telangana with its retrospective ruling. How could they do this, how could the government decide unilaterally, without consultation to go against the prevailing norm and change the classification of mobile phones? This is a thin margin business and every rupee matters. How could this change without any consideration as to how it would impact business.

We went to court to get justice but it was to no avail. The witch hunt started and the state revenue department started relentlessly pursuing the entire cell phone industry, from distributors to manufacturers to sellers, issuing multiple notices. We received ours in March 2020. Can you believe it 3 years after the ruling was passed in Dec 2016, for unpaid taxes from 2013-16, a period dating back 7 years.

The revenue department dictated that the tax which had been paid under the 4%-5% slab was insufficient and hence we had to cough up the difference of 9.5% under the new slab of 14-15% from 2013-16. It amounted to losses of crores to pay the 9.5% difference.

It appears that the Telangana government had little interest in it’s economy. A short-sighted and totally dysfunctional approach. So we ended our business with the Telangana Government, completely burnt by the experience and with little desire to work there again.

In the World Bank Ranking of “Ease of doing business” India has moved from 130th position to an aspirational 77th position in the last two years. What a massive achievement that is for the country. However the ground realities we experience seem to be a far cry from this index. If it is so tough for Indians to do business in their own country, imagine the plight of foreigner investors who get caught up forever in bureaucratic red tapism.

Opinions in this piece belong to the author: Ramesh Kumar Shah
Ramesh Kumar Shah is the founder of the RK Group, founder of RK Trust (rktrust.in) and co-founder of Harvard Business School Angels of India. Apart from being a businessman, he is keenly involved in making as much of a difference in people’s lives as he can, most recently through the Let’s Mask India initiative, that provides a free mask to all the residents of Bangalore.