Start-ups need to understand the implications of taxes from day one of starting an enterprise to avoid any shocks in the future. Divakar Vijayasarathy, partner, DVS Advisors, an international professional services firm offering tax, legal, risk and M&A advisory services for domestic and global business, speaks about the taxation environment for Indian start-ups in an interview with PP Thimmaya. Excerpts:
What are the key aspects of taxation that a potential start-up should look into?
One of the earliest decisions which a start-up needs to make is about the constitution of the enterprise—whether to form it as a sole proprietorship, partnership, limited liability partnership or a private limited company. Tax and regulatory consequences differ for each of the above. Simpler the constitution, better it is for the entrepreneur.
Though most start-ups do not foresee a taxable profit in the initial years of existence, there are regulatory requirements such as TDS, equalisation levy, labour law compliances, indirect tax compliances such as service tax returns, statutory audit, annual tax filings, etc. Further, it is imperative for start-ups, especially the loss making ones, to file their tax returns on time to ensure that losses are eligible for carry forward for set-off against future incomes.
Where overseas payments such as online advertising, cloud server charges, etc., are involved, start-ups need to comply with cross border withholding, FEMA compliance and equalisation levy rules. The larger concern lies with indirect tax non-compliance as these are levies on gross revenues and the consequences can be excruciating on a fledgling start-up.
An entrepreneur should clearly understand the regulatory framework applicable to his venture before starting operations to avoid regulatory ramifications.
What are the challenges faced by Indian start-ups in dealing with taxation?
Lack of awareness of the tax and regulatory landscape applicable to their business is the biggest challenge. Taxation and compliance are not generally considered an integral part of core business functions, at least during the initial years of existence. Restricted access to quality and unbiased professional guidance is another challenge. Many entrepreneurs are non-finance professionals and are engaging with bureaucrats/regulators for the first time.
You might also want to see this:
How can tech start-ups deal with the issue of cross-border taxation, especially when their markets are developed economies?
Cross-border taxation has been a grey area even for the most-learned professionals, leave alone start-ups. Unlike a domestic transaction, cross-border transactions could be affected by the applicability of domestic taxation laws of either or both the countries as well as any double tax avoidance treaty (DTAA) between India and another country. Further, the impact of RBI regulations need to be considered. While dealing with developed countries, the DTAA provisions together with parallel regulations like equalisation levy, income tax procedures need to be considered.
Where the start-up engages with clients overseas, import export code needs to be obtained. There are tax benefits and fiscal incentives available for export of goods and services which needs to be considered and availed wherever found practical.
What should the government do on the taxation front for the benefit of start-ups?
The government has been promoting start-ups and tangible efforts have been made in the recent past. However, India is still a complicated country to do business with many procedures and overlapping regulations. A few of the immediate steps on the taxation front can be: Eliminate discretionary powers for bureaucratic action, reduce the time frame available for regulatory scrutiny, promote self assessment and self certification, simplify registration and closure of entities and provide/simplify fiscal incentives for direct investment in start-ups.