Solutions to Formalization

Solutions

Given the barriers to formalization, this section of the paper deals with an analysis of steps taken by various countries to promote formalization. It further tries to analyze the effectiveness of these policies in India.

One-stop shop reforms in registration

Colombia introduced reforms by establishing "Business Service Centers" in several municipalities to ease registration burdens. The measures adopted included introducing a one-stop-shop registration to ensure that registration procedures were completed in one place and in the same day at minimum cost. This led to, raising business registration by about 5 percent.^[1] Brazil also simplified procedures for small businesses by introducing  “one-stop shop”, a popular way of streamlining the registration process for firms worldwide. In India, however this will not be very effective means as the charges for one-time setup fee of a new enterprise ranges from Rs. 7,000/- upto even Rs. 75,000. Apart from this high fee, there is an additional yearly maintenance charge. Therfore, Registration procedures continue to be very expensive in India in relation to the benefits that the enterprise would receive by formalizing.

Fast-Track Business Creation System

In India, the average number of days required to register is as high as 71 and this acts as a barriers to formalization and entrepreneurial activity. Mexico, however, has progressed and increased its formalization rates by 4 to 8 percent by introducing Fast-track Business Creation System in 2002.^[2] This reduced the length of registration procedures from eight to two days. Learning from Mexico’s success ,similar procedure should be adopted in India as well.

Municipal licensing reform in Lima, Peru

Reform increased number of provisional licenses issued to informal firms. A municipal license is often the first license that informal firms receive, and because it typically then requires only a small annual license fee, but no sizeable local tax payments, it is less expensive for firms than registering with the national (and state) governments for business taxes.^[3]

Tax Simplification

Argentina is noteworthy for its tax simplification, e-government and single service window initiatives in municipal and provincial governments (2003-2013).^[4]

E-filing of tax returns can reduce administrative and compliance costs and offers good opportunities for capacity-constrained governments to cooperate with the private sector. For eg; tax payments via mobile phone-based banking systems could allow businesses to pay taxes and fees directly, thus reducing interactions with tax collectors and ensuring that payments arrive at their destination. E-governance in India however, seems to be very difficult to achieve. It requires heavy capital investments for the purchase of hardware and software. Information needs to be provided in the local language, i.e. Hindi and other regional languages. Therefore, it further requires the cumbersome task of using technology for transliteration from English to other languages. While numerous steps have been taken towards e-governance, the lack of awareness, and the adoption and use of government services electronically by the larger community makes it inefficient.