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Startups: Waiting for regulatory relief

Entrepreneurs want a stable policy environment, a longer time horizon to carry forward losses and to pay taxes on ESOPs only during sale. To raise funds, startups tend to approach a large number of venture funds – sometimes up to 400. However, under Section 42 of the Companies Act, if a startup sends information to more than 200 investors, it is deemed to be a public company.

, ET Bureau|
Last Updated: Jan 11, 2020, 11.00 PM IST
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Startups have received a lot of appreciation from all quarters about their role in the growing Indian economy, yet these ventures continue to be bogged down by red tape.

Entrepreneurs, already hard-pressed for time to raise funds and scale their businesses, have to spend a considerable amount of time and energy sorting out tax issues and coping with frequent regulatory changes. They are now hoping for faster processing of tax refunds and taxing of employee stock ownership plans (ESOPs) only at the time of sale. “The angel tax issue has been laid to rest but there are other issues that hinder a startup’s smooth functioning,” says Padmaja Ruparel, president of Indian Angel Network.

For instance, the income tax department seeks detailed information about investors in a venture even if they put in small sums. “If an angel puts in Rs 10 lakh, is it fair to ask the angel to reveal information about her entire portfolio, which the department already has?” says Ruparel.

“We expect the focus of the budget to be on spurring investments, creating jobs and bolstering consumer confidence. Startups can play a big role in this,” says Sanjiv Singhal, founder of Scripbox, a fintech startup.

Besides, many feel the current regulatory and tax environment lacks stability. “The plethora of changes on the tax and regulatory regime has dented India’s image as an attractive destination for foreign investors,” says Amarjeet Singh, partner of tax regulatory & internet business at KPMG India.

To raise funds, startups tend to approach a large number of venture funds – sometimes up to 400. However, under Section 42 of the Companies Act, if a startup sends information to more than 200 investors, it is deemed to be a public company. “Startups do share information with more than 200 investors but receive replies from just 20 or 30. The government must appreciate the nature of startups and keep them outside this provision,” says Ruparel.

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New ventures also need to attract and retain the right talent. But under the present tax regime, employees have to pay taxes upfront to exercise their ESOPs, resulting in huge cash outflows for them. They hope this can be changed to the date of actual sale of the stocks by employees.

Entrepreneurs also feel an environment should be created to encourage creation of new businesses. “Easing of regulatory and compliance policies is needed. Regulations for setting up a company and for doing business in India have to be made easier to encourage entrepreneurship,” says Niraj Ranjan Rout, the CEO of Hiver, a SaaS startup.

While the ease of starting up will help, startups also incur losses during their initial years and may not even approach breakeven point within the first decade of incorporation. “The direct tax regime should be amended to allow these companies to carry forward their losses for at least 15 years as against the present eight years,” says Singh.

There are also many grey areas that need to be sorted out. For instance, certain relaxations provided to recognised startups on the angel tax issue are prescriptive and applicable only to a small section. Additionally, entrepreneurs feel the recognition of a venture as a startup for availing tax holidays is subject to conditions that are subjective and can lead to varied interpretations impacting chances of obtaining approval.

While a lot of existing issues need to be addressed, Sangeeta Gupta, senior VP and chief strategy officer at Nasscom, says, "The budget must encourage deep tech startups. AI, IoT and blockchain ventures need patient capital as they take a long time to build. Government should create a Rs 3,000 crore fund for such ventures." Such ventures need a stable regulatory environment as well to help India become a digital economy.

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