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14 Important Points That We Are Overlooking About Startup India

Posted on January 18, 2016 in Business and Economy, Lists

By Mahesh Peri

India’s Prime Minister Narendra Modi gestures as he addresses a gathering during a conference of start-up businesses in New Delhi, India, January 16, 2016. Indian Prime Minister Modi launched a number of initiatives on Saturday to support the country's start-ups, including a 100 billion rupee ($1.5 billion) fund and a string of tax breaks for both the companies and their investors. REUTERS/Adnan Abidi - RTX22ONI
PM Modi at the Startup India event. Source: REUTERS/Adnan Abidi

So, the Big Bang reforms to nurture and kick-start the start-up ecosystem are done. I am a firm believer that even one problem solved is one problem less to deal with. I am very happy that the Prime Minister has tried to put together and address all issues of start-ups at one go. He also created a buzz where the government departments and banks would be more inclined, supportive and empathise with Start Ups. And the Prime Minister rightly talks of lesser government involvement to help enterprises grow faster.

Many of the issues that were dealt with are about ‘ease of doing business’s compliances, licenses, patents and IPRs. We have to make them easy and transparent, any which way; with, without and in spite of start-ups. I was eagerly awaiting the Prime Minister to make announcements on the substantive ones–Service Tax, M&As, Labor Laws, Income tax, Capital gains. He spoke more about mentorships, incubation centres, hubs, research centres, tests and events, all of which the government should have a limited role in. And I do think we could have done much more for start-ups and the risk-taking entrepreneurs behind them.

The big one everyone is talking about is the tax holiday for 3 years. Unless I am very wrong, it is a meaningless concession. In a country where not more than 2% startups survive, not even 1% make profit in the first 3 years. And as far as inspector raj goes, no inspector comes for inspection till they know you are earning a lot.

Here are my comments on the complete list of announcements:

1. Compliance regime based on self-certification.

This is for ease of doing business and must be done for all businesses and not just start-ups. From idea to kick starting operations anyways takes 6 to 18 months.

2. Startup India hub.

Government-controlled and government-operated. It contradicts Modi’s call for lesser government. They could have given those funds to organizations such as TIE, NASSCOM etc. to create those hubs and run them.

3. Simplifying the startup process.

Greater ease of doing business is needed not just for start-ups but all businesses.

4. Patent protection.

It is an announcement of intent and not a policy initiative. Will have to wait and see how corruption-mired government offices make this happen. Besides, Patent and IPR procedure must be made transparent, not just for startups but for everyone.

5. Legal support.

Government intervention. Creates another layer. Why make a complicated process and give legal support?

6. 80% rebate on patent applications.

Nothing substantive. The cost of filing an IPR are between Rs. 1,600 and Rs. 12,000. Saving of Rs. 1,300 to Rs. 10,000.

7. Relaxed norms of public procurement.

Again an announcement of intent, not a policy initiative. This has nothing to do with startups. The vice-like grip and the nexus that exists in government procurement should anyways be broken.

8. Faster Exits.

This is where the government could have made a bolder move. We should enable the profitable ones to merge with the loss-making enterprises. Very recently, We were trying to buy a company which had genuine synergies with our business. It had been in existence for 8 years and was losing money with 45 people on its rolls. When evaluating, the merger would have made sense, if the tax losses were also utilised. The price we arrived at was much more than the gains because of tax losses. But the uncertainty of allowing the M&A by tax authorities killed the deal. We should make M&A simpler, easier, and gainful even in taxation. We could have saved 45 jobs, a company and still made the entrepreneur earn something for his pain and effort. Alas, it was not to be.

9. Funds of funds of Rs.10,000 crore.

This is a government scheme. You could have run it through banks as many already have such schemes.

10. Capital Gains Tax.

This is a big move although we should await the fine print in the budget provisions. The capital gains tax currently favours investments in listed entities. Investing in startups carries higher risk and higher tax. This is a ridiculous situation when you are trying to encourage innovation and startups. If they indeed change capital gains tax and bring it on par with the existing capital gains tax, it will be a big move that can drive funding towards startups.

11. Tax exemption.

This is high in optics but doesn’t mean much. It is like giving sun-shades to the blind. In an ecosystem where not even 1% of startups survive after 5 years, not even 1% of that 1% earn a profit in the first 3 years. Tax holiday for whom? And what is it about starting after 1st April 2016?

12. Fair Market Value formula.

It was a source of harassment. An irritant has been removed.

13. Startup fests.

The government should keep away. All you need to do is remove the service tax on startup events and luxury tax on venues and you will see these taking off.

14. Launch of Atal Innovation Mission, incubators, research parks, bio-clusters etc.

Alas, the government at it again. Did I hear someone talk of lesser government involvement?