Three demands. That’s what entrepreneurs in Bengaluru have for any government that comes to power at the centre. One, iron out issues related to angel tax for startups that have already received notices. Two, offer regulatory clarity on emerging business models and create a balance between the state and the central government. Three, don’t bury startup entrepreneurs with paperwork.
“The government came up with a regulation that will exempt companies from angel tax in the future,” said one of the 2,000 entrepreneurs who received angel tax notices. “However, for companies that received a notice, there is no clarity on what’s the way forward,” said the entrepreneur mentioned above.
About 2,000 startups received notices in December when the companies were asked to pay “angel tax”—a tax on startups that receive an equity infusion in excess of their “fair valuation”. The premium paid by investors is treated as income taxable at 30%. The government later changed the definition of a startup and relieved them of this tax, but companies that had received notices will still have to go through an appeal.
Regulatory clarity for startups coming up with innovative business models is paramount. “The issue is not which government is ruling, but how open are the central and state governments to new ideas,” said a startup entrepreneur, requesting anonymity.
“The government needs to be a bit flexible and have provisions for new ideas and even if existing frameworks don’t support the innovation. They need to give a new idea some breathing space, while setting some metrics if they want to regulate a particular industry,” he said, citing the recent suspension of cab aggregator Ola’s licence as it ran bike-taxi pilots, which are not allowed in the state.
The central government in its draft guidelines in December 2016 allowed state governments to draft their own transport regulations. Several states, including Telangana and Rajasthan, then authorized the use of bike taxis. However, other states haven’t authorized them, leading to trouble for companies such as Ola and Rapido in Karnataka.
“All states need to consider the impact of services,” said an entrepreneur in the mobility space. “During that time, the entire sector can be disrupted. If one state authorizes it, other states should follow suit,” said the entrepreneur.
Startup entrepreneurs also said they are bogged down by paperwork. Some suggested that the government should create certain exemptions for startups with respect to compliance and regulatory paperwork at least for the initial years when the entrepreneur is building the product and the company.
The latest is the regulation issued by the ministry of corporate affairs. It is mandatory for more than 1.2 million active registered companies in India to upload all details of the company, including particulars of the registered offices, in an e-filing to the government, according to the new know-your-customer (KYC) norms.
“The government is only increasing compliance. The new KYC norms are the latest to be added to the list of filings and paperwork to be done,” said Subramanya S.V., founder of fintech startup Fisdom. “I understand the intent behind it, but because of this genuine entrepreneurs end up spending more time on paperwork and paying their chartered accountants and company secretaries rather than focusing on building the product and growing the company,” said Subramanya.
Some founders also said the paperwork and processes involved in winding up a company are too many and too complicated. This prevents founders from shutting down quickly.
However, several investors believe that while issues such as angel tax are problems, they aren’t the biggest hurdles to growth and expansion for a startup in the Indian startup ecosystem.
“Issues such as angel tax are irritants but they are not the main hurdle for a startup. Of course, they need to be resolved and we need more clarity in regulation,” said Anand Lunia, partner at India Quotient. “Let’s focus on the opportunity, market, growth, disposable income because of low inflation and low housing costs. The only negative is high interest rates, which is a shame,” he said.
This article was first published on livemint.com