Moneycontrol Be a Pro
Get App
Last Updated : Jan 21, 2016 04:58 PM IST | Source:

Start up India: Greater clarity on tax rules, regulation

According to the last population census, globally India has the largest illiterate population. Amidst this rural backdrop, we have start-up story that is predominantly technology driven and is attracting billions of dollars in funding.

Preeti Balwani

“To me Start-up India is synonymous with Stand-up India” were the words that resonated with some of the top CEOs and over 150 prospective entrepreneurs that attended the Prime Minister’s unveiling of the action plan at the tail end of a day long summit that began with Finance Minister’s announcement earlier at the launch of the initiative.

While we have all anxiously awaited these announcements, Start-up India was very clear that they had very high expectations. Here’s a look at some of the major announcements:

Tax exemptions to start-ups for 3 years and no tax on capital gains. Tax exemptions on investments above the FMV.

While these tax holidays are a welcome step in the right direction, Indian entrepreneurs will eagerly await clarity on the existing tax regime, particularly with respect to indirect taxes viz. VAT, Service Tax, etc. amidst reports of service tax evasion by few online travel portals.

A fund of funds to be created by the government with corpus of Rs. 2,500 crore and later of up to Rs. 10,000 crore. Credit guarantee fund of Rs. 500 crores.

Introduction of the Bankruptcy bill in the parliament as exit option to start-up within 90 days.

The present legislation that deal with bankruptcy laws in India are the Sick Industrial Companies Act (SICA), and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB) have proven to be grossly inadequate. The Insolvency and Bankruptcy Code 2015 attempts to recognise that businesses can fail for genuine reasons as opposed to those defaulters who misused the insufficiency in the present regime to circumvent the law and drag out the recovery process such as Kingfisher Airlines. A deal can be signed, sealed and delivered in just over four months’ time.

Less government interference, no inspection for 3 years for labour, environmental clearances and other compliances – start-ups to follow a self-certification model for compliance.

What still remains to be seen is the implementation of this model since compliances for labour, fire safety and other clearances vary from state to state. Companies looking to expand their operations from one state to another or those that have employees plugged on to virtual networks may need to consider whether such situations warrant multiple compliances in various states.

Patent filing procedures to be simplified. Significant reduction in fees for filing Patents. Better protection for IP rights.

Technology has driven innovation and has been the cornerstone of the e-commerce boom. Better data protection policies, tighter copy right norms will bring India at par with global data protection regulations that may some of their overseas customers may already be accustomed to.

Launch of a mobile app that will allow companies to register in a day. Single window clearance for clearances, approvals, registrations, etc.

Highlights from Finance Minister Arun Jaitley’s address

Final break from the conventional “license raj”. India ostensibly broke away from it in 1991 but only partially which was conceived with the idea that the government would decide what businesses could be carried out, who could carry out those businesses, geographical locations and the volumes of the businesses. It was partial due to several reasons viz., lack of funding, invisible role of state governments, land permissions, foreign investment proposals, environmental clearances, political assent. The focus of the government has been to restrict the role of the state as a facilitator.

This new initiative would mean eventual freedom from the State. State to provide a supportive role to entrepreneurs to provide access to capital, a friendly tax regime (through executive orders and in the forthcoming budget) and other policy support. The private sector has limited ability to create jobs and entrepreneurs will be valuable in job creation.

Start-ups should be less regulated. India’s IT sector grew because there were no laws restraining them.

The India story

India’s demographics indicate that of its population of 1.29 billion, about 65 per cent are below the age of 35 with the urban population of about 27 per cent. According to the last population census, globally India has the largest illiterate population. Amidst this rural backdrop, we have start-up story that is predominantly technology driven and is attracting billions of dollars in funding.

So if you’re a young Indian living in India or recently re-located back to the motherland, this is probably a good time for you to explore those entrepreneurial genes that many Indians are said to have been born with.
Here are some statics that support why the Modi government’s India Start-up policy was anxiously awaited
1. India’s rankings have improved in the World Bank’s report on Ease of Doing Business to 130 in 2016 from 132 in 2015.
2. India’s majority rural population is huge market for Indian entrepreneurs that have a local advantage over their foreign competitors.
3. India is home to 5.7 per cent of the world’s start-ups that have been valued at over 1 billion U.S. dollars.
4. Indian start-ups have only scratched the surface of the global funding available with online market places raises nearly 3 billion U.S. dollars by October last year according to data supplied by venture capital analytics from Tracxn.

Some of the sectors that attracted the most funding were mobile start-ups, technology start-ups in advertising, education, on-line marketplaces and finance.
The Modi government has authorised the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce to administer this ambitious project over the Ministry of Skill Development and Entrepreneurship.
There were some concerns expressed regarding the appropriateness of the DIPP being helmed to steer this initiative as the start-up eco-system in India has evolved organically and hasn’t been subject to the typical “license raj” that we have only partially escaped from post the 90’s.

With a growing number of large foreign funding finding its way to e-commerce start-ups and online marketplaces, there has been ambiguity regarding 2 key areas of concern that still plague the majority of the online marketplace start-ups: ambiguous FDI norms and complex tax regime.

E-commerce activities

At present, the FDI policy formulated by the DIPP permits a ceiling of up to 51 per cent FDI in multi brand retailing with prior approval from the government and several conditions. It permits 100 per cent FDI in the whole sale business-to-business model (B2B) as well as in B2B e-commerce activities (defining e-commerce activities as those which refer to buying and selling by a company through the e-commerce platform - such companies would engage only in business-to-business (B2B) e-commerce and not in retail trading, inter alia, implying that existing restrictions on FDI in domestic trading would be applicable to ecommerce as well), but not in B2C e-commerce.

Recent representations before various high courts by industry bodies of traditional retailers seeking parity in FDI norms believe that “online marketplaces” that are majority foreign funded flout FDI norms and are essentially conducting B2C activities directly themselves due to various reasons such as delivery capability, consistency in service, economies of scale and other similar considerations without having taken prior government approval or complying with the entry conditions of minimum capital commitment of 100 million U.S. dollars or 30 per cent procurement from Indian MSMEs, etc. They simply believe this is bad for business and that FDI retail norms should be uniform across the board.

India is peculiar with its distinction between “single brand” and “multi brand” retail trade. Global economies simply see distinctions between whole sale and retail. It is then useful for us to enquire as to what is meant by retail and are e-commerce activities really just another name for retail?

The term “retail” comes from the French word “retaillier” which means to divide into smaller pieces or quantities. The Oxford Dictionary defines the term “retail” as the sale of goods to the public in small quantities. This begs the question then do our e-commerce marketplaces divide goods into smaller quantities and sell them to the end-use customer using an external delivery system or are they just a logistics company with a website that provides pre-negotiated prices of certain products?

At present the DIPP has declined to define online marketplaces whose activities do not just cover warehousing and logistics but also covers payment settlements by end-use customers on behalf of the seller. One has to tread cautiously and find the balance between removal of ambiguity and over regulation that we are often prone to. The that the e-commerce market has grown exponentially and evolved as a leading source of the much needed foreign investment shot in the arm required by our economy.

The DIPP, in its affidavit submitted before the Delhi High Court on 21 December, said that, the current FDI policy neither permits FDI in B2C e-commerce nor recognizes the marketplace model in e-commerce followed by companies like Flipkart, Snapdeal and Amazon.

The DIPP’s stand is that is a policy formulator and is not the appropriate forum for policing alleged violations of the present FDI norms.

Since FDI is a capital account transaction perhaps the RBI would be the appropriate authority to define the online marketplace? Until recently, the FDI policy did not include the definition of “manufacture” which was recently introduced via Press Note 12 of 2015, hopefully Indian start-ups will not have to wait that long.

Previously the RBI had clarified that all credit card payments in India would need to follow the 2 step authentication process which worked fine if the credit card user and the receiver were present in India. Uber, which aimed at providing its customers a private chauffeur experience and no delays caused by cash payments had to redesign its process in India to accept a payment wallet and also accept cash in a country a limited few have credit cards.

One has to tread cautiously and find the balance between removal of ambiguity and over regulation that we are often prone to.

Similarly there is much ink that has been spent on the taxation of e-commerce activities and deconstructing the existing tax issues plaguing this sector would warrant a detailed examination of the characterization of income, is it deemed income, existence of a tax treaty, permanent establishment issues, transfer pricing norms, applicability of service tax in light of the recent changes in the legislation and other indirect taxes that may vary from state to state.

To conclude a transparent regulatory environment, clarity on applicability of existing tax laws, less interference by state, adequate redressal and minimum restriction or regulation are the key takeaways from today’s launch.

(The author is Partner, Rajani Associates)

Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.
First Published on Jan 20, 2016 01:04 pm
Follow us on
Available On