ET BureauFor the second year in succession, startups found mention in the annual budget speech last week, as the finance minister announced a host of allocations for the fast-growing sector that has the potential to galvanise national economic growth.
The intention, said entrepreneurs, is laudable but little has been spelt out to trim red-tape and remove roadblocks on the ground. From comic to serious, the list of irritants that entrepreneurs face while starting a business is only growing said industry members who are of the view that action, not intention is the need of the hour. “Implementation of such schemes is the billion dollar question, the government should differentiate the role of an operator from a regulator,” said Krishnan Ganesh, a technology entrepreneur who has invested in companies like online grocery portal BigBasket.
Reading the fine-print has provoked discontent among industry members who perceived the budget to be “startup- friendly” at first glance. Short-term capital gains tax on angel investments, dual taxation on software products as well as lack of clarity on regulations for startups in the Companies Act are some of the critical issues. Apart from these, the time taken to register a company, allot shares and collect online payments are other factors that stymie growth of new ventures. The World Bank ranks India at 134 out of 189 countries in the ease of doing business.
“If countries like Singapore can incorporate a company in a day, we should better it from the nearly 40 days it takes at present,” said K Srikrishna, executive director of the National Entrepreneurship Network. Industry bodies such as iSpirt and Indian Angel Network which were hopeful of a resolution to issues of taxation – on software products and with regard to angel investments-were left disappointed.
Angel investors who liquidate investments in a portfolio company before the mandated three years are subject to short-term capital gains tax. “Angel investors want quick exits. The short term capital gains tax - does not help at all,” said Rehan Yar Khan, who has backed startups such as online taxi rental OlaCabs, product recommendation platform UnBxd and security software company Druva.
In addition India-based angel investors can be questioned by Income Tax Officers about the valuation they ascribe to a startup company and can be taxed on investments, even as overseas investors are exempt. The community terms this as ‘angel tax.’ “We now have a piquant situation where startups in India can raise money from foreigners but have to relocate overseas to raise money from Indians,” said Padmaja Ruparel, president of Indian Angel Network which has about 350 members.
Software product think tank iSpirt had lobbied hard on behalf of software firms which were complaining of a dual tax levied on them. “When we file for a refund or raise an invoice for service tax, it takes months for that amount to be realized and it affects our cash flows,” said Arvi Pani, cofounder of Bangalore based Reverie Technologies, which makes language conversion software.
“We were hoping to get a resolution to issues of dual taxation (VAT and Service Tax) on software products as well as the removal of tax deduction at source,” said Sharad Sharma, angel investor and cofounder of iSpirt who is hopeful that a government committee will look into the matter soon.
Experts said the issue of taxes can prove to be a contentious one if not dealt with speedily and could also have a cascading effect on inflow of risk capital into the country. This year, nearly Rs 3,600 crore has been invested by venture funds in early stage companies, equal to the total amount invested in all of 2013, according to data from consultancy EY.
“The government has been saying that they will refrain from any retrospective amendments to taxation, but this change is retrospective,” said Rajesh Laddha, group chief financial officer of diversified conglomerate Piramal Enterprises who feels the levy of short –term capital gains tax on investments if withdrawn before three years will impact private equity and venture capital flow Also, with the government and public sector regarded as potential customers for products and services sold by technology startups, industry members are of the view that procurement norms should have been spelt out more clearly. “There is no direction given in the budget to the finance ministry to ease procurement norms for startups in government tenders,” said R Chandrashekhar, president of industry lobby Nasscom.
Lack of permission to store credit card details for online transactions is also proving to be a hindrance for software product companies that sell primarily to overseas customers from India. “We are being forced to relocate outside India,” said Laxman Papineni, 27-year-old cofounder of AppVirality, as he cannot charge recurring payments to customers, without re-entering data for every transaction.
Chennai-based cloud software player Freshdesk has already moved its headquarters to the US. “If you want to build a company that offers software as a service paid for by credit cards from international customers and charge them on a monthly recurring basis, it’s not possible in India,” said Girish Mathrubootham, CEO of Freshdesk.
THE UNFULFILLED DEMANDS
• Allowance of 100 per cent FDI in retail e-commerce
• Removal of double taxation on angel investors and their capital gains
• Amendments to New Company Act, 2013 Reduction of penalties (Rs 2 crore as of now) on startups for non-compliance
• Allowance of recurring e-payments for cloud and SaaS startups by RBI
• Efforts to improve IT infrastructure in tier 2 and 3 towns
• Easing government software procurement norms from Indian startups
• Exempting royalty payments for product software, and clarity between a service and product
• Resolution of TDS for software product companies who have to now apply for a refund thereafter
• Making exits easier by allowing startups to list on BSE by removing clauses that require three year profitability
NEW ISSUES WHICH CROPPED UP THIS YEAR
• Imposition of a service tax on online and mobile ads has ruffled web-based companies
• Imposition of a lock-in of 3 years for angel investments else it will be taxed at 30 per cent if money taken out prior to that.
• Increase in penalty to 30 per cent interest per year on pending tax liabilities
• No clarity on fund manager for Rs 10ooo crore VC fund.
• Service tax on radio taxi industry has created concern amongst taxi aggregation startups
• SEBI crowdfung guidelines has left platforms such as LetsVenture and Catapoolt worried.
• Allow Virtual or Shared Offices for digital cos (Amendment in New Cos Law)
• Startups have to now open a separate bank account to receive funding. They can’t touch the money, before share allotments
The intention, said entrepreneurs, is laudable but little has been spelt out to trim red-tape and remove roadblocks on the ground. From comic to serious, the list of irritants that entrepreneurs face while starting a business is only growing said industry members who are of the view that action, not intention is the need of the hour. “Implementation of such schemes is the billion dollar question, the government should differentiate the role of an operator from a regulator,” said Krishnan Ganesh, a technology entrepreneur who has invested in companies like online grocery portal BigBasket.
Reading the fine-print has provoked discontent among industry members who perceived the budget to be “startup- friendly” at first glance. Short-term capital gains tax on angel investments, dual taxation on software products as well as lack of clarity on regulations for startups in the Companies Act are some of the critical issues. Apart from these, the time taken to register a company, allot shares and collect online payments are other factors that stymie growth of new ventures. The World Bank ranks India at 134 out of 189 countries in the ease of doing business.
“If countries like Singapore can incorporate a company in a day, we should better it from the nearly 40 days it takes at present,” said K Srikrishna, executive director of the National Entrepreneurship Network. Industry bodies such as iSpirt and Indian Angel Network which were hopeful of a resolution to issues of taxation – on software products and with regard to angel investments-were left disappointed.
Angel investors who liquidate investments in a portfolio company before the mandated three years are subject to short-term capital gains tax. “Angel investors want quick exits. The short term capital gains tax - does not help at all,” said Rehan Yar Khan, who has backed startups such as online taxi rental OlaCabs, product recommendation platform UnBxd and security software company Druva.
In addition India-based angel investors can be questioned by Income Tax Officers about the valuation they ascribe to a startup company and can be taxed on investments, even as overseas investors are exempt. The community terms this as ‘angel tax.’ “We now have a piquant situation where startups in India can raise money from foreigners but have to relocate overseas to raise money from Indians,” said Padmaja Ruparel, president of Indian Angel Network which has about 350 members.
Software product think tank iSpirt had lobbied hard on behalf of software firms which were complaining of a dual tax levied on them. “When we file for a refund or raise an invoice for service tax, it takes months for that amount to be realized and it affects our cash flows,” said Arvi Pani, cofounder of Bangalore based Reverie Technologies, which makes language conversion software.
“We were hoping to get a resolution to issues of dual taxation (VAT and Service Tax) on software products as well as the removal of tax deduction at source,” said Sharad Sharma, angel investor and cofounder of iSpirt who is hopeful that a government committee will look into the matter soon.
Experts said the issue of taxes can prove to be a contentious one if not dealt with speedily and could also have a cascading effect on inflow of risk capital into the country. This year, nearly Rs 3,600 crore has been invested by venture funds in early stage companies, equal to the total amount invested in all of 2013, according to data from consultancy EY.
“The government has been saying that they will refrain from any retrospective amendments to taxation, but this change is retrospective,” said Rajesh Laddha, group chief financial officer of diversified conglomerate Piramal Enterprises who feels the levy of short –term capital gains tax on investments if withdrawn before three years will impact private equity and venture capital flow Also, with the government and public sector regarded as potential customers for products and services sold by technology startups, industry members are of the view that procurement norms should have been spelt out more clearly. “There is no direction given in the budget to the finance ministry to ease procurement norms for startups in government tenders,” said R Chandrashekhar, president of industry lobby Nasscom.
Lack of permission to store credit card details for online transactions is also proving to be a hindrance for software product companies that sell primarily to overseas customers from India. “We are being forced to relocate outside India,” said Laxman Papineni, 27-year-old cofounder of AppVirality, as he cannot charge recurring payments to customers, without re-entering data for every transaction.
Chennai-based cloud software player Freshdesk has already moved its headquarters to the US. “If you want to build a company that offers software as a service paid for by credit cards from international customers and charge them on a monthly recurring basis, it’s not possible in India,” said Girish Mathrubootham, CEO of Freshdesk.
THE UNFULFILLED DEMANDS
• Allowance of 100 per cent FDI in retail e-commerce
• Removal of double taxation on angel investors and their capital gains
• Amendments to New Company Act, 2013 Reduction of penalties (Rs 2 crore as of now) on startups for non-compliance
• Allowance of recurring e-payments for cloud and SaaS startups by RBI
• Efforts to improve IT infrastructure in tier 2 and 3 towns
• Easing government software procurement norms from Indian startups
• Exempting royalty payments for product software, and clarity between a service and product
• Resolution of TDS for software product companies who have to now apply for a refund thereafter
• Making exits easier by allowing startups to list on BSE by removing clauses that require three year profitability
NEW ISSUES WHICH CROPPED UP THIS YEAR
• Imposition of a service tax on online and mobile ads has ruffled web-based companies
• Imposition of a lock-in of 3 years for angel investments else it will be taxed at 30 per cent if money taken out prior to that.
• Increase in penalty to 30 per cent interest per year on pending tax liabilities
• No clarity on fund manager for Rs 10ooo crore VC fund.
• Service tax on radio taxi industry has created concern amongst taxi aggregation startups
• SEBI crowdfung guidelines has left platforms such as LetsVenture and Catapoolt worried.
• Allow Virtual or Shared Offices for digital cos (Amendment in New Cos Law)
• Startups have to now open a separate bank account to receive funding. They can’t touch the money, before share allotments
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