Startups find overseas nations more attractive than India

Already struggling due to stiff competition and limited cash flows, tax compliance burdens and conflicting tax positions cause serious inconvenience to the startups to do business in India

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India has witnessed a large number of startups over the past few years especially in the ecommerce space, back office operations, internet and telecommunications services and information technology-enabled services.  Modern lifestyle demanding fast-paced services and convenience has led to the evolution of countless startups in India, but only a few of these are able to withstand the test of time and survive efficaciously through the initial gestation period. Among other socio‑economic considerations, a conducive government policy and a facilitative administrative machinery are a sine-quo-non to support such ventures in this world’s largest democracy, while focusing on entrepreneurial talent and fostering an environment of innovation. Hence, the moot question when it comes to growth of startups is whether the ecosystem in India, currently, is friendly enough to be a catalyst in an entrepreneur’s journey to success? The answer may be a big NO, especially when it comes to the complex tax and regulatory environment in India.

The challenges for a startup in India commence right from the inception itself entailing time-consuming registration requirements and overlapping approval/clearance mechanisms. Already struggling due to stiff competition and limited cash flows, tax compliance burdens and conflicting tax positions cause serious inconvenience to the startups to do business in India. This is one of the prime reasons as to why the startups find other nations more attractive to establish their base instead of India. Even the existing ones are finding shelter outside India in search of relaxed norms and easy regulations; for instance, Flipkart and InMobi have relocated to Singapore.

The ‘Doing Business 2016’ report by World Bank suggests that on an average, Indian businesses need to make 33 tax payments annually with around 243 hours spent to prepare and pay taxes in a year. India is ranked 130th out of 189 economies on the ease of doing business, 133rd on the ease of trading across borders and 157th on the ease of paying taxes. In contrast, the scenario in other economies is quite encouraging. While China requires just nine tax payments annually, the world’s biggest economy, the US, doesn’t trouble its taxpayers more than 11 times annually for tax payments. How should then the present tax regime in India be improved to stimulate the bold initiatives of the country’s brilliant minds and not force them to succumb to complex tax framework and restrictions?

It is desired to have simplified compliances for startups to let them focus primarily on their business promotion and development rather than dealing with multiple tax authorities and obtaining time-consuming approvals. A single window platform, whether online or offline, for different formalities can benefit the startups to save time and cost on procedural requirements.  Owing to limited resources and manpower during a startup’s initial phase, government-run helplines can also be initiated to advise startups regarding various initial procedural formalities and requirements along with clear-cut guidelines. A recent initiative by the government targeting to bring down the go-live time for startups to one day from the current 27 days is a welcoming move which proposes single registration for labour laws, electricity connection, property registration, taxes and other permits required.

Besides procedural ease, focus must also be to incentivise startups by way of special grants and schemes which are meant specifically for development and growth of entrepreneurial projects. For this purpose, the Indian government can take a cue from other countries, for instance, the Australian government has launched the ‘Entrepreneurs' Programme’[1] as part of their industry policy.  This programme uses quality facilitators and advisers, drawn from industry, to ensure businesses get the advice and support to improve their competitiveness and productivity. The primary focus is on providing access to the best advice and networks to solve their problems rather than focusing on financial assistance. As part of the programme, the government also provides Business Growth Grant which can be used by the businesses to engage consultant(s) to make improvements to their business. Such schemes and initiatives go a long way in providing the necessary stimulus and backing to startups in the initial years, which form the backbone for a successful venture.

The need of the hour is also to simplify the present indirect tax regime in India and lay down clear guidelines for tax implications in case of new evolving business models wherein complex transactions are happening, not seen by the world before. For instance, the latest startups working on the models of e-delivery of certain items like music files, videos and e-books continue to face ambiguities regarding taxation as goods or services.  Similarly, the software industry which is seeing most startups bears the brunt of double taxation on various transactions involving transfer of intellectual property rights, etc. Upcoming ecommerce marketplace portals, delivery companies, etc are also continuously facing tax issues and are not provided with an environment, wherein the tax issues relating to new business models are dealt with proactively at the policy level. The typical approach of the authorities is to treat these issues as anti-evasion and then launch lengthy investigations leading to litigation involving uncertainty for years. To counter the problem, a shift in the attitude of policymakers and revenue authorities is necessary, so that tax issues pertaining to upcoming business models are envisaged upfront and necessary guidelines/clarification(s) afforded to the taxpayers. In this regard, the current scheme for advance rulings which is available only to a restricted class of taxpayers and in limited situations should be made more effective. It should be made open to all especially the local startups to enable them to secure accurate tax positions in reasonable time and cost-effective manner.

Apart from the above issues, the greatest woes faced by any startup in the country today is existence of multiple indirect tax laws in India complying to which may turn their dreams into a nightmare. It is suggested to introduce a uniform indirect tax code to simplify the tax procedures and clear the dense clouds of tax uncertainty for startups. A move in this direction has already been made by the government by introducing the Constitution (100th Amendment GST Bill, 2015) in order to implement the Goods and Services Tax in India, which shall subsume majority of the present indirect taxes.

The tax reforms under GST aim at providing standard tax rates, minimum exemptions and broader tax base to provide a simple yet effective indirect tax climate across the country. Inter-state transfers are likely to be made zero rated in the long run to ensure seamless flow of tax credits and promote a level playing field across the nation. The government should also focus on providing equal incentives for both the service and the manufacturing sector under GST for bringing both the goods and services at par and to provide relief from the cascading effects of tax and issues of double taxation.

It is imperative that legislature and tax authorities must recognise the fast-changing business models and gear themselves to provide instant tax solutions and ease of compliance in such cases. The much propagated ‘Make in India’ campaign initiated by the Indian government also cannot attain its desired success, until the efforts of the government are geared to ensure that the potential investors ‘Start in India’. Hence, simplified tax reforms to provide a holistic economic environment to the young startups have become indispensable or India may lose the opportunity of laying the foundation stone today for tomorrow’s successful ventures.

- By Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP with inputs from Poonam Harjani, Nimisha Chaudhary and Himanshu Gupta

The thoughts and opinions shared here are of the author.