Employees work at the Truly Madly Matchmakers Pvt. office in New Delhi, India. (Photographer: Sara Hylton/Bloomberg)

One Year Later ‘Startup India’ Grapples With Taxes, Funding, Infrastructure 

Last year, in his speech on India’s 69th Independence Day, Prime Minister Narendra Modi rallied India’s youth to the cry of “Startup India, Standup India” and five months later in January 2016, he charted out a startup action plan. A month after that, in his annual union budget presentation, Finance Minister Arun Jaitley announced the details of tax incentives for startups and promised the government would soon enable one-day-incorporation.

But this Independence Day, startup founders say they are yet to be freed from the many infrastructure and funding problems that plague India. They also question the tax incentives on grounds of utility and clarity.

Summary

Modi’s Startup Action Plan

  • Self certification to reduce regulatory hurdles
  • Startup India hub
  • Simplify startup process - Go digital
  • Patent protection - Make procedure transparent
  • ‘Fund of Funds’ - Corpus of Rs 10,000 crore for four years
  • National Credit Guarantee Fund
  • Exemption from capital gains tax & income tax
  • Setting up parks & incubators
  • Relaxed regulations - Public procurement for startups
  • Faster exits - Business closure norms included in Insolvency and Bankruptcy Act

Tax Exemption: Good or Bad?

The government’s Startup India policy offers startups a few tax exemptions - the main being an income tax exemption for the first three years after incorporation.

“There are three types of tax incentives - income tax exemption for three out of five years, investments above fair market value of start ups won’t be taxed any more, capital gains arising out of land, property will get tax exemption,” Ramesh Abhishek, secretary at the government’s Department of Industrial Policy and Promotion (DIPP) told BloombergQuint in an interview.

But many startups have questioned the rationale of such exemptions, even in meetings with the Ministry of Commerce and Industry.

“Traditionally startups start with no or penny investments, and we don’t reach profit for years,” said Amol Goel, founder and Chief Executive Officer Helpost, an online network that connects people seeking a wide range of services, from plumbing to accounting.

It’s a view echoed by others as well.

There is no clarification on the tax regime yet. It does not make sense to give tax exemptions to start ups as we are already making losses for first three years. There should be some tax exemption for employees as we do not have adequate infrastructure to streamline Provident Fund and other benefits. 
Bhuvan Rustagi, Co Founder & COO Lendbox

Some startups say the process of availing this income tax exemption and other tax exemptions is not clear. Others complain that a complex tax structure robs them of much needed working capital flexibility.

Anu Acharya, chief executive officer of Mapmygenome India, says a simplified tax structure will aid start ups. “If there is a way to reduce burden of managing cash flows, it is by reducing the number of taxes and the time given to pay them. It becomes easier for a startup to pay taxes than paying high penalties. It would be great if centre and state related information is compiled in one place along with timelines,” Acharya told BloombergQuint in an interview.

When asked about the futility of a three year income tax exemption and the lack of a simple tax structure, DIPP secretary Ramesh Abhishek said, “There is no lack of clarity but there is demand for more, people know what tax incentives have been given.”

Funds of Funds: More Clarity Needed?

A January 2016 survey by the Internet and Mobile Association of India and IMRB International said the mismatch between fund raising and expenditure will be a major challenge for startups going ahead.

In order to provide funding support to startups the government set up a ‘Fund of Funds’ this year with a corpus of Rs 10,000 crore, to be disbursed over a period of four years.

The government has already given Rs 1,100 crore towards funding for start ups so far from this year’s Rs 2,500 crore target.
Ramesh Abhishek, DIPP Secretary

But the startups BloombergQuint spoke to, complained about the lack of information on how to access these funds.

Helpost’s Amol Goel said, “Where is the money and who got it? Please I would love to know any single startup who has benefited from the ‘bundles of money’ that was raised and kept aside for us.”

Co-founder of IT industry group Nasscom and the Indian Angel Network, Saurabh Srivasatava is also a member of the Venture Capital Committee set up by the Small Industries Development Bank of India (SIDBI), which is responsible for disbursing funds from the Funds of Funds’ Rs 10,000 crore corpus. He clarifies that the government is not investing directly in start ups.

It (government) gives money to funds that in return invest in start ups. The philosophy is clear with the government making Rs 10,000 crore available as funds. Government is not directly pumping money into start ups. it will be via funds/venture capital.
Saurabh Srivastava, Co founder of Nasscom and Indian Angel Network

Rohit Chadda, founder of online payments company Paylo, concurred with other startup entrepreneurs that there isn’t much clarity on how the Fund of Funds is being put to work. He said, in an interview to BloombergQuint, “With no clarity, the process for startups for accessing these funds largely remains the same. I assume since the startups would continue approaching the same funds as they were doing earlier. The good part however is that those funds will have more to invest which means more startups may end up getting funded,” he said.

Infrastructure, Regulatory Woes

A common complaint across all startups, whether in food, online shopping, peer to peer lending, financial technologies, service market place or others, is that the lack of infrastructure is a big impediment to new business in India. And the complex web of regulations across different states make starting up a tedious task.

Some of the issues that are critical for our sector would be base-level infrastructure gaps. For someone like us, the supply chain from farm to market is ancient and broken, and without direct involvement it is impossible to scale up to provide modern solutions to a population that is increasingly demanding them.
Prashant Verma, Assistant Vice President-Marketing, Grofers
The government can get involved in building infrastructure. Most startups have problems marketing their products and matching government restrictions in business and turnover. This needs to be removed to create a better marketplace. The ecosystem needs to develop further. The government role should be in strengthening infrastructure and funding.
Anu Acharya CEO, Mapmygenome India
The biggest challenge being faced by someone who wants to set up a business today is the fragmented nature of regulatory information basis each state’s laws. While the government is making an effort to improve ease of doing business, the information asymmetry continues to exist.
Rohit Chadda, Co Founder FoodPanda and Founder, Paylo
Want the government to create a financial policy tailored to our industry, as most banks do not entertain start up loans. Make a startup district, where local economies would support startups, from infrastructure to taxation, something like an SEZ and EPZ.
Amol Goel, Founder and CEO, Helpost

Solutions?

Helpost’s Amol Goel says the fault lies as much in the approach as the fineprint of policies. He proposes that the Startup India program be run by a young entrepreneur.

No offence but a 60 year old employee with no exposure to simple online product will not be able to pull off this strategy. They will need us, they will need to bootstrap this. 
Amol Goel, Founder and CEO, Helpost

Paylo’s Chadda says “A single portal/directory with industry wise list of regulations with e-filing and payments could save time, energy and money for entrepreneurs looking to set up a new business. As per our discussions with the commerce ministry in the last meeting, we may see something on these lines very soon.”
He’s also hopeful that the introduction of GST will help streamline the many indirect taxes.

Anu Acharya of Mapmygenome asks the government to create a “more conducive public partnership model for large scale projects by giving grants to projects of national importance and those that require high risk.”

Many of these suggestions were presented by entrepreneurs to Commerce Minister Nirmala Sitharaman in a meeting last month. Now they are awaiting the day that brings them freedom from all the hurdles and impediments that are stalling Startup India.

BloombergQuint