What do Indian startups fear even more than a funding crunch?

Looking into 2018.
Looking into 2018.
Image: Reuters/Danish Siddiqui
We may earn a commission from links on this page.

Despite the government’s efforts to ensure ease of doing business, entrepreneurs in India believe corruption and bureaucratic inefficiencies are the biggest hurdles to growing their businesses.

More than half of the respondents in a recent survey of startups nationwide said they are more concerned about navigating bureaucratic hurdles than funding. The survey conducted by community-based social networking platform LocalCircles polled over 33,000 startups across India.

The Narendra Modi government has promised entrepreneur-friendly reforms in the country, especially through its Startup India programme, which was launched in January 2016. Under the programme, the government offered some tax exemptions, patent reforms, and incubation programmes, besides reducing red tape for young companies.

But very few entrepreneurs have benefited from the scheme so far.

Entrepreneurs say that although they were promised exemptions under the Startup India mission, they still continue to have trouble with income tax authorities. “Many of them have reported getting frequent tax notices due to fund-raise, change in valuations, etc. thereby leading to entrepreneurs spending significant time in tax offices and on compliance related matters,” LocalCircles said in a statement.

Such hurdles have in the past led startups to move to other countries, where they have to pay less in taxes and spend lesser time on compliance. For example, India’s biggest unicorn Flipkart moved its registered office to Singapore in 2013.

The goods and services  tax (GST), which was rolled out in July 2017 to simplify India’s complicated tax structure by integrating multiple taxation layers into one, has only added to these woes. Entrepreneurs feel that GST has done more harm than the Indian startup ecosystem than good.

Among other things, startups that use technology expertise or pay-per-use services from non-Indian companies have to pay 18% GST under reverse charge, a mechanism where the recipient of a goods or service is liable to pay GST instead of the supplier. “The whole GST reverse charge on foreign services used by startups goes against the Startup India mission as Indian startups need to go to foreign countries for services and expertise in new areas,” LocalCircles said.

While central government policies haven’t given India’s startups much to cheer about, different state governments have made the environment easier for entrepreneurs. Around 38% respondents said that the state they were based in had made it easier to do business than before and 43% said the situation was more or less the same as before, according to LocalCircles, while 19% said their state had made it harder to do business than earlier.