At a time when a virtual exodus of new-age, technology-based start-ups has been reported from India to countries like Singapore and the UK due to operational constraints here, the government has kicked-off work on creating a conducive and “wholesome ecosystem” for startups to flourish. The department of industrial policy and promotion (DIPP) is framing a policy for defining start-ups, giving them an enabling environment for setting up businesses, removing irritants in tax treatment and incentivising them on issues such as intellectual property rights.
A senior government official told The Indian Express that the aim of the policy, which is likely to be unveiled in January, is to improve capital access, encourage innovation and urge states to act as incubators for these “innovative start-ups”. A revenue department official said that the relief from anti-abuse provisions with regards to capital gains tax, exempting royalty earnings from the commercialisation of IPRs from taxation, including more expenses in the scientific research category for deduction are among a few measures being considered for promoting start-ups.
The issue gained momentum following Prime Minister Narendra Modi’s Independence Day speech where he called for “Start-up India, Stand up India” to encourage innovation and increase employment opportunities for youths. In pursuance of the slogan, the DIPP along with Reserve Bank of India, ministry of corporate affairs and the finance ministry is working on the policy. Start-ups, however, say that the policy must differentiate between the conventional new businesses and the IT-based/IP-based businesses as the issues the two face vary.
Sharad Sharma, the co-founder and governing council member of iSPIRT, a non-profit industry think tank, said, “First issue is that definition of start-ups needs to be clear. There are two types of start-ups – conventional start-ups and innovative companies. While the conventional start-ups want an end of inspector raj, the VC-funded, new age start-ups want access to capital. There are 36 irritants which need to be removed.”
Given the difficulties faced by the innovative start-ups, iSPIRT has reported a mass exodus of technology start-ups from India. According to its estimate, in 2015, three of four new technology start-ups that focus on the global market and plan to raise seed or venture capital, will be domiciled outside India. Among technology companies that raised Series A investments last year, 54 per cent have already moved out of the country.
Abhishek Sinha, Co-Founder and CEO, Eko India Financial Services, said that companies are increasingly changing their domicile from India to the US and Singapore because start-ups need capital to grow and it is difficult to procure funding from banks for young companies which don’t have collateral.
“All they have is intellectual property. They don’t have tangible assets for collateral as is the case with conventional business. MUDRA banks may finance the conventional start-ups as they have tangible assets, the same may not be possible for IP-based start-ups,” he added.
Exodus of start-ups and challenges
Singapore, the UK and the US have emerged as the preferred location for the technology-based young firms given the hand-holding provided by these nations. The reasons, industry watchers say, are many. “If you register in Singapore or the US, you get benefits when you raise money along with tax benefits,” Sinha said, indicating the role incentives pay in encouraging the development of intellectual property (IP). Singapore offers a host of benefits for start-ups including simpler compliance, easier access to investors, tax incentives for start-ups and tax credits for investors, low corporate tax, zero capital gain tax, grants for research and development, and angel investments through Spring Singapore, an agency under the ministry of trade and industry responsible for helping enterprises grow..
Similarly, the UK government has also been investing in building a start-up ecosystem over the past seven years, Rajeev Banduni, CEO of GrowthEnabler, a technology platform for entrepreneurs seeking advice, said. The UK has launched tax schemes to drive alternative investment from angel investors and high-networth investors. It gives 30-50 per cent rebate on total capital investment in start-ups under seed enterprise investment scheme (SEIS) along with grants given for driving technological innovation in areas of energy, robotics and security. There are schemes like Grant for Business Development and Finance for Investment which provide grants to entrepreneurs for acquiring capital assets if they have ventures in employment-generating sectors.
According to Bishakha Bhattacharya, senior director – government relations and public policy, Nasscom, the problem begins at the stage of incorporation itself.
“There should be some revenue threshold for start-ups, definition should be clear. There is confusion over direct and indirect taxes, companies act poses many challenges,” she said. According to Nasscom, restricted resources, low asset base, lack of vibrancy in domestic market, difficulty in exiting, exposure of start-ups to rent seeking government employees, tax on angel investment and restriction of ESOPS are some of the major issues which need to be resolved.
The Companies Act also poses several challenges. Sinha of Eko India said that under the new Companies Act, a founder of a company is not allowed to take personal loans as also the shareholder who gets dividend and has a significant shareholding in the company. “At early stages, start-ups need really small amount, say Rs 4-5 lakh. They can’t take personal loans due to these conditions,” he added.
Similarly, issue of convertible notes is not allowed for start-ups as it violates Foreign Exchange Management Act (Fema) provisions. However, tax treatment leads the regulatory challenges facing the industry. “Start-ups face what is called angel tax. Under section 56, the difference between the fair valuation and the actual investment made by the angel investor is taxed in the hands of companies. Many start-ups are having this peculiar problem of high valuations these days notwithstanding the investment made. So start-ups get burdened with the angel tax. If they are funded by registered venture capital funds, NRIs, or finance from abroad, this section does not apply to them. However, most of the angel investors are not registered,” Amit Maheshwari, managing partner of Ashok Maheshwary & Associates, said.
Pointing out to another such issue, he said that as per the Income Tax Act, carry forward of losses is not allowed if the shareholding reduces below 51 per cent. “With the ever-changing funding, shareholding patterns change and therefore start-ups are not allowed to carry forward losses. This impacts them,” he said.
The policy is aiming at exposing engineering students to entrepreneurship in such a way that these future entrepreneurs have major in engineering and minor in entrepreneurship, Sharma said. States like Kerala have already taken lead in promoting entrepreneurship and start-ups among students. A Start-up Village in Kochi aims to launch 1,000 start-ups over the next 10 years, provides tax exemptions, consultancy, angel funds, IP strategy and technical support to students who want to establish start-ups. Gujarat Technical University has introduced a student start-up policy to create a support system for student entrepreneurs.
Ravi Gururaj, a member of the Nasscom executive council, and a serial entrepreneur who has co-founded several start-ups, said, “We have to create an enabling environment to nurture start-ups, provide them more capital and help them with protection of their IP. Further, we also need to provide an environment where investors are willing to come and invest in these start-ups. Biggest challenge is how to encourage companies who have moved offices in the US and Singapore to come back to India.”
Market regulator Sebi has already released new listing norms for start-ups, making it easier for them to raise funds on a separate platform of domestic stock exchanges. It has relaxed the disclosure requirements, delisting and takeover norms for entities engaged in IT, data analytics, IP, bio-technology or nano-technology.
Like the US-India and Technology Endowment Fund for the promotion of innovation and entrepreneurship through the application of science and technology and Ficci Millenium Alliance have also been started. “However, they are too small for the growing appetite of start-ups,” Sinha said adding that it is the policy that the entrepreneurs are looking forward to as it will decide the direction of the industry.