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Bureaucracy is a bigger challenge for startups in India than funding

The Wider Image: Thousands laid off as India pushes biggest tax reform
Reuters/Adnan Abidi
Dealing with it.
By Durba Ghosh
Published Last updated This article is more than 2 years old.

2018 was not a great year for startup funding in India. But that’s not what’s worrying entrepreneurs the most.

Over 45% of the firms are most concerned about corruption and bureaucratic hurdles, a survey by citizens engagement forum LocalCircles said.

The survey is based on over 40,000 responses from over 15,000 startups, SMEs, and entrepreneurs.

“When compared with the last year’s survey results, the situation does not look very bright for startups and SMEs in the country,” the report said.

The angel tax, for one, has been the most irksome bureaucratic challenge for startups till now. Angel tax is triggered when a startup receives equity infusion in excess of “fair valuation.” Tax authorities treat the premium paid by the investors as income, taxable at 30%.

“Angel tax is one area that falls under corruption and bureaucratic inefficiencies as it takes the focus of startup entrepreneurs away from building a product or service to responding to tax notices and filing appeals, something that startups can clearly do without,” the report said.

In December, the tax authorities sent notices to several startups for angel tax evasion. 

Over 30% of the startups that were included in the survey received multiple tax notices in 2018, while 6% got at least one.

This is despite the fact that the central board of direct taxes (CBDT), just a week before issuing tax notice to startups, issued a notice asking tax officers not to use “coercive measures” to recover the outstanding amount from the startups. 

The department of industrial policy and promotion (DIPP) is looking into the angel tax issue and has assured that the government that it would not harass investors and startups.

Meanwhile, young companies feel the tax authorities don’t get them.

Over 97% of the startups and small businesses feel an urgent need to educate tax authorities on startup valuations to avoid the harassment.

Another pain point is the goods and services tax (GST), introduced in July 2017, to simplify complex state and central taxation structures, among other reasons.

Early-stage startups with little or no revenue are at a disadvantage with GST. The startups, by law, are required to pay 18% GST under reverse charge for specialised services and products procured from overseas suppliers.

Over 75% of the respondents in the LocalCircles survey said startups and small businesses must be exempt from GST under this reverse charge. And 84% of businesses also feel that any foreign company billing Indian customers should be required to register for GST compulsorily. Currently, startups have to deposit an “equilisation levy” of 6% on behalf of the foreign companies they deal with. 

“Companies like Facebook, Twitter, and so on, which startups use for advertising and promotions are classic examples of this and these companies must be required to bill from their India-based entities,” the report said.

Bureaucratic challenges apart, the Modi government’s pet project, Startup India, hasn’t done much for the ecosystem. Over 80% of the startups said they did not see any value in the programme, while only 18% claimed they received some benefit from it.

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