‘Dual taxation, bane of start-ups’

The entrepreneurial eco-system in the country received its first thumping endorsement from the Modi Government, which announced a proposal to set up a ₹10,000-crore start-up fund. However, despite the support from the Government, there are several barriers to the growth of the start-up ecosystem in the country, say industry bodies such as Nasscom, Indian Angel Network (IAN) and National Entrepreneurship Network (NEN).

Stating the need for a unified and equitable tax across all States, Ravi Gururaj, Chair, Nasscom Product Council, said: “There are multiple Central and State Government taxes such as service tax (12.36 per cent) and VAT (4 per cent) that are levied on software products, creating a problem of dual taxation for start-ups. In addition, TDS deduction of 10 per cent on software product payments has also got to be made by the buyer, which is recovered by the product vendor typically 4-6 months after IT returns are filed.”

Taxation issues The ambiguous definition of a product vs a service needs to be ironed out by the Government, said Kishore Mandyam, founder CEO of PK4 Software Technologies. “While I have a CRM/Inventory management software product, I sell it to my customers as a service, where they pay on a subscription model based on the usage. In such a situation, both VAT, which is paid for a product and service tax is levied on us, creating a problem of dual taxation. This needs to be resolved by the tax authorities, failing which, start-ups stand to lose out,” he said. Saurabh Srivastava, co-founder of IAN, said the ₹10,000-crore start-up fund won’t be of much use unless the Government addresses the issue of Section 56 or ‘Angel Tax,’ which slaps 33 per cent tax on investments made by angel investors to start-ups. “Typically, venture capitalists get interested in funding start-ups only after it reaches a particular stage of maturity. If angel investors are discouraged from investing in start-ups because of angel tax then VCs will have no companies to invest in. The Government should consider giving tax credits to angel investors for their investments, like it is done in the UK,” he said.

Market access Access to markets, particularly to PSU/government buyers, is a big problem for start-ups. “Creating a procurement quota for start-ups can have a huge impact. For instance, Huawei could not have risen in China if the Chinese government had not been its customer. While a banking software can easily be sold to HDFC or Axis Bank, it is near impossible to get SBI or LIC to buy from start-ups,” said K Srikrishna, Executive Director, NEN.

He said the Government must make it easy for start-ups to register a company in one day, like in Singapore. Similarly, allowing start-ups to shut down fast instead of being zombies would boost start-up eco-system.

Industry is hopeful that the Government’s proposed Central Board of Direct Taxes/ Central Board of Excise & Customs interaction committee will take up these issues and work to resolve them.

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