Clarity on taxation is high on the agenda of entrepreneurs, investors and incubators as the government gets set to host its first start-up event on Saturday with an aim to become a global start-up hub.
“The biggest challenge facing start-ups is the confusion in the investment climate,” says Ravi Narayan director at Microsoft Ventures.
“There is plenty of money in the ecosystem, but raising money is still hard in India than overseas, ” he said.
For instance, the poster boys of the Indian start-up ecosystem are the e-commerce companies such as Flipkart, Snapdeal and Shopclues. These online retailers have taken major chunk of the private investments and have helped in the growth of start-up ecosystem. But they are stuck in tax wrangles.
The case in point is the move by various state governments including Karnataka, Kerala and Delhi, that have proposed to impose a 1% value added tax on e-commerce firms.
State tax officials are of the view that since e-commerce companies hold, store and deliver products on behalf of the sellers, they can be considered as “dealers” and are liable to pay tax. E-commerce websites allow sellers to sell products using their platforms but they don’t sell it themselves. This creates ambiguity on value added taxation, says Rupak Agarwal business head at Godrej Properties. In one such dispute, Flipkart successfully got a favourable judgement when the Kerala High Court said the Bangalore-based company need not pay tax. Delhi has clarified on its tax rules as well, while Rajasthan has classified e-commerce firms as marketplaces thus exempting them from paying VAT.
However, the lack of a law to define this is yet to be made in many states. Next is the case of service taxes on every sale and transaction, especially in the first three years when they grapple to get a foothold and are burning cash to acquire new customers and offer deep discounts. In fact, none of the start-ups have made profits as yet in the country, while the service tax adds to their bag of woes. Keshav R Murugesh, Group CEO of WSN Global Services says, “No taxes on start-ups for 5-7 years will enable them to focus on their business first and pay taxes when they actually have some earnings”.
“It is not that they don’t want to pay, but they have survival issues and this takes a back seat and penalties just make start-ups’s life harder,” the Internet and Mobile Association of India said in a note on the Start-up event.
IAMAI has suggested that the government should waive off the service tax for the first three years, or incentivise the companies if they pay it in time. Implementation of the long-pending Goods and Services Tax is one of the key measures that “will help in making India a global start-up hub” said KA Srinivasan co-founder of Amagi, a Bangalore-based media start-up.
For investors and incubators such as Ravi Narayan, director of Microsoft Ventures the “biggest challenge facing start-ups is the confusion in the investment climate”.
The unclear rules makes it hard for entrepreneurs to raise money in India, he says. IAMAI says that Angel Tax as defined by the Indian Income Tax Act “has not been actually tailored to restrict start ups funding but it has put the start-ups under the Income Tax scanner.” The association further suggested that angels and investors supporting start-ups with capital should be given tax breaks and incentives, because all start-ups need early stage funding. Microsoft Venture’s Narayan says the government should also extend tax breaks to incubators as well.
“Given their role in mentoring and connecting innovators to business growth opportunities, we believe that funds contributed to incubators should be treated at par with investments in research and development (R&D) activities for businesses, and proportionally we believe that the entities that contribute funds to incubators should also be eligible for the 200% tax benefit that is currently applicable to R&D investments,” Narayan said.
The National Association of Software and Services Companies, or Nasscom, the technology industry lobby is also batting for exemption from direct and indirect taxes as well as minimum alternate tax for start-ups, saying such a move “would reduce compliance burden and reduce cash outflows.” Apart from taxation, start-up founders say they also want the government to boost physical and communications infrastructure. “We have some changes to make at every basic levels when it comes to the Wi-Fi and 4G networks, technology penetration in tier 3 and 4 cities…” says Supam Maheshwari founder and chief executive of Firstcry.com. In the meantime, the Reserve Bank of India has designated an email id to receive and answer queries from start-ups to act as a help desk for entrepreneurs, according to a note from Nasscom, the technology industry trade body.