For more than three decades, India has told itself a comforting story. That the License Raj—a system synonymous with inefficiency, corruption, and state overreach—was dismantled in 1991. That liberalization freed enterprise. That digitization replaced discretion. That entrepreneurs today operate in a fundamentally different India.
On paper, this narrative holds. In practice, it collapses almost immediately.
What India dismantled was not the logic of the License Raj, but merely its architecture. The visible choke points were removed, only to be replaced by a sprawling, fragmented web of approvals, certificates, registrations, and criminal liabilities—distributed across dozens of departments that neither coordinate nor accept responsibility for the whole.
The result is not freedom, but permanent vulnerability.
The Promise of Simplicity—and Its First Betrayal
The modern Indian state presents business formation as deceptively simple. For a proprietorship, all one needs is a PAN card and Aadhaar. This minimalism is frequently cited in global ease-of-doing-business rankings and government press releases.
But business does not occur in abstraction. It occurs in physical space.
The moment an entrepreneur attempts to operate from a real location, the system reveals its true nature. A rental agreement must be executed—often requiring registration. This is rarely procedural. Registering officers exercise discretionary power, frequently demanding clarifications, corrections, or informal “assurances” before proceeding.
If the entrepreneur owns the property, the burden multiplies. Ownership must be proven through a constellation of documents: sale deeds, encumbrance certificates, Patta, Khata, or 7/12 extracts depending on state law, property tax receipts, electricity connection records, and sometimes historical documents predating digitization itself.
None of these requirements are uniform across India. What is sufficient in one district may be rejected in another. The entrepreneur learns quickly that legality is not binary—it is negotiable.
GST: The False Finish Line
GST registration is widely perceived as the point at which a business becomes “legal.” The system itself reinforces this belief. Once GST is issued, invoices can be raised, bank accounts opened, payments accepted.
But GST is not a license to operate. It is merely a tax identifier.
This distinction is never made explicit. As a result, thousands of businesses begin operations believing they are compliant—when in fact they have merely entered the regulatory battlefield.
Infrastructure Compliance: Where Time Goes to Die
Setting up even a modest commercial establishment requires navigating a cascade of infrastructure approvals.
Planning permission must be obtained from development authorities. Fire departments require No Objection Certificates, followed by formal fire licenses. Municipal corporations demand health and sanitation licenses. Structural stability certificates must be issued by registered engineers. Completion certificates must be obtained after construction.
Occupation of the premises then requires an occupancy certificate.
Each step is sequential. Each department operates independently. Delays in one stage stall all others. No authority is accountable for the overall timeline.
Even after occupation, further licenses emerge: building licenses, public building licenses issued by the Tahsildar, and revised property classifications triggering higher property taxes, water charges, and electricity tariffs.
Each conversion involves development charges, deposits, arrears, penalties, and often retrospective assessments.
The entrepreneur is never told when compliance ends.
Business Licensing: Death by a Thousand Registrations
Once physical infrastructure is in place, the business itself must be legalized—again.
A trade license from the municipal corporation is required. Registration under the Shops and Establishments Act follows. Businesses dealing with measured goods must obtain Legal Metrology licenses. Food businesses require FSSAI approval. Liquor sales invoke excise licensing regimes. Elevators require elevator licenses. Diesel generators require approvals from electrical inspectorates, often accompanied by generation taxes.
Depending on location and activity, police NOCs, traffic clearances, and pollution control approvals may be demanded.
These licenses do not follow a hierarchy. They accumulate.
Crucially, there is no central authority that certifies: This business is now compliant across all applicable laws.
Employment Regulation: From Protection to Paralysis
Employment is where the system turns punitive.
The moment staff are hired, Provident Fund and ESI registrations become mandatory. These departments wield extraordinary powers—imposing penalties, interest, and retrospective demands that can exceed the original liability.
Professional tax must be collected and remitted. Labour Welfare Fund registrations follow. Migrant labour triggers additional acts. Contract labour invokes separate compliance regimes. Gratuity provisions complicate termination.
Police verification of employees may be required even before employment begins.
What emerges is a system where hiring is risky, termination is dangerous, and informality becomes rational.
Labour litigation, often prolonged and unpredictable, structurally favours employees—not necessarily in pursuit of justice, but due to political economy. Small businesses lack the endurance to survive multi-year disputes.
Employment, instead of being incentivized, becomes something to be avoided.
Tax Law as Criminal Law
India’s tax regime introduces a uniquely destabilizing element: the criminalization of procedural error.
Under TDS and TCS provisions, business owners are liable for failing to collect or remit taxes owed by others. Errors invite penalties, interest, and prosecution—even when no tax evasion is intended.
This transforms entrepreneurs into enforcement agents of the state, without training, protection, or margin for error.
For small businesses, one missed deduction can spiral into financial ruin.
A State That Does Not Coordinate With Itself
Perhaps the most profound failure is institutional.
No department shares data meaningfully with another. Municipal authorities do not align with development authorities. Labour departments operate independently of tax departments. Fire, police, pollution, and electricity regulators function in isolation.
This fragmentation ensures perpetual non-compliance.
A business may comply fully with one authority only to be penalized later by another—for reasons that could have been identified at inception.
Surprise inspections are not anomalies. They are structural features.
Operating Illegally by Design
The unspoken reality is this: India allows businesses to operate illegally—until it decides not to.
Most enterprises function with only GST registration. They unknowingly violate dozens of acts daily. The system tolerates this because enforcement is selective.
But tolerance is not protection. At any moment—triggered by a complaint, audit, or political shift—the full weight of accumulated non-compliance can be unleashed.
This is not accidental. It is how control is maintained.
The Economic Cost of Regulatory Fear
The consequences are profound.
• Businesses stay small to avoid scrutiny
• Employment remains informal
• Capital investment is delayed
• Innovation is stifled
• Compliance replaces creativity
India does not suffer from lack of entrepreneurship. It suffers from lack of regulatory trust.
Reform or Repetition
India must decide what kind of economy it wants.
Either:
• A true step-based incorporation system, where no business may operate until fully cleared, and once cleared, is protected
Or:
• Radical simplification: one building license, one business license, clear thresholds, limited criminal liability
Anything else is cosmetic reform.
The License Raj is not gone.
It has simply learned to hide behind portals, dashboards, and compliance jargon.
And until that reality is confronted honestly, India’s promise will remain constrained—not by lack of ambition, but by fear of the state itself.
