Even as the Modi government is gearing up to announce a comprehensive ‘Start-up India' policy later this week, Shutapa Paul of Forbes India caught up with Kunal Bahl, co-founder and CEO of Snapdeal to understand what he expects from such a policy.
His expectations range from improving the ease of doing business, closing down businesses that do not perform to the expectation easily and tweaking tax laws which, as they stand today, work against the interest of the startups. Excerpts:
Finally a policy for startups, do you think it's coming at the right time or a little too late?
The world over, startups are changing the economic landscapes in the countries they work in - creating immense employment and generating cascading entrepreneurship. India has a rich tradition of entrepreneurship and contemporary startups are nothing but a modern day version of this rich legacy.
Yet, the global flow of funds, quick evolution of technology and fast pace of innovation makes this is a very competitive field. Given these internal dynamics, startups have very limited time and resources to navigate a complex regulatory environment. India, despite its continuing reforms over the last two decades, has a lot of catching up to do vis-a-vis other countries.
Hence, a startup policy that recognises the needs of the startup sector and helps them with simple, minimal and supportive regulation, all packaged in one policy is a great move. Over the last one year, the government has undertaken various initiatives in furtherance of its aim to liberalise the business regime in India. I am sure that the government’s startup policy will further this momentum
What would you like to see in the policy?
The following issues are specifically useful for the startup sector:
1. Single window clearance facilities tailored to ensure simplicity in compliance. This coupled with a unique Business ID number which may be used across applications, as proposed by a Parliamentary panel on Ease of Doing Business, will significantly reduce administrative burden for young businesses.
2. Tax laws need to be updated taking cognisance of new business models ushered in by the startup boom. For example, section 79 of the Income-Tax Act restricts closely held companies from carrying forward and setting off losses in case, shareholding varies by 51% or more in the year. However, with dynamic infusion of funds in modern startups, the shareholding patterns change often. Therefore the rigours of this section should ideally be restricted only to cases where the change in shareholding is done to avoid or reduce tax liability through a restructuring exercise.
3. Startups iterate various business models and ideas and work with the concept of "fail-fast" i.e. if something is not working, it is better to quickly exit and move to on to a more promising opportunity. The ability of entrepreneurs to be agile and move labour and capital swiftly to more promising ideas is important for startups to succeed. The startup policy needs to provide for easy exits. The Insolvency and Bankruptcy Bill, 2015, introduced in the just concluded Parliament session is a step in the right direction.
4. In India, any employee of the company who is also a promoter cannot be granted ESOPs by the company. This rule dis-incentivises those promoters who are full time employees of the company. Grant of ESOPs to promoter-employees is a well-recognised practice worldwide. This restriction in India causes many startups to relocate from India to other countries.
Should startups be given sops, tax breaks etc. as a way of encouraging them?
Yes. Currently, as per the provisions of Section 72 of the IT Act, business loss can be ‘carried forward’ and set-off for a period of 8 years and certain restrictions prescribed u/s 79 of the IT Act. Given the capital intensive nature of the industry and huge gestation period typically experienced by many startups companies, the time-limit of 8 years may not be sufficient for absorption of the losses as and when the enterprise starts reporting positive income. This should be increased to 10-12 years to allow for beneficial decision making.
Also, startups hire and retain high quality talent by giving them ESOPs as there is limited cash flow in the initial stages of business. Taxing employees on the notional valuation of ESOPs at the time of vesting makes them non-lucrative because there is no certainty around liquidity. With increasing number of startups relying on ESOPs to incentivise employees, the taxation policy needs to be made more employee friendly.
Ease of doing business features high on your list?
The startup policy should essentially look at ease of doing business for start ups specifically. It should aim to address their specific business conditions ushered in due to new funding patterns and business models. Startup policy should be a sub-set of overall 'ease of doing business' in the country. It is not an 'either-or' question.
While it is hearty to see tech startups doing well, perhaps some attention is warranted towards non-tech startups too?
Technology is disrupting all sectors of economy worldwide, not just in India. There is a lot happening in retail, healthcare, education, finance, entertainment, etc. These industries, for the first time are being opened up to people who had no access earlier and therefore the excitement and media attention. However, the government is very cognisant of the need to propel manufacturing in the country also. With the Make in India focus of the government, there is enough and more support for non tech startups too.