Another budget by the NDA government is in the offing and the air is again thick with expectations. Like every year before, each industry group is busy preparing wish lists that generally boil down to a single point agenda of reducing tax rates—they talk of a level playing field and how this single reform, i.e. tax rate cut, will catapult their industry to leading position in the world, generate so many jobs, add so many basis points to the GDP etc etc. At the same time, the mandarins at North and South Block, silently whisper in the ear of the Finance Ministry about the worsening position of fiscal deficit, poor tax GDP ratio and need to collect more taxes in order to provide for the poor. Oh, and also why the government needs to gear up for the 8th Pay Commission as it has come out that Indian bureaucrats are very meagerly paid in comparison to their counterparts in Singapore and USA in dollar terms. It's indeed quite a quandary for the Finance Minister to keep both sides happy.
We'd like to go solo and sing, "We don't need no tax breaks, we don't need no exemptions...hey FM! Leave us startups alone!"
However, for a change, the startup/investment sector is not going to join in the usual annual chorus. Instead, we'd like to go solo and sing, "We don't need no tax breaks, we don't need no exemptions...hey FM! Leave us startups alone!"
India seems to be on the cusp of a startup revolution... or rather it was on the cusp of a revolution. Startup euphoria started in 2006 and saw the building of iconic companies such as Flipkart, Paytm, Redbus, Citrus Pay and thousands more, with billions of US dollars getting pumped into them. That's until the government took notice. Last year we saw the launch of the big "Startup India Conclave" and the single-minded focus of the government in improving ease of business and creating a conducive environment for startups. What was the end result? The number of new startups declined by 67% while funding dropped by 50% last year. The number of tax notices issued to startups/funds in the last one to two years exceeded all the notices issued in the last decade or so. Earlier there was tax only if a company posted profit, but now startups are even taxed on investment raised (we're the only country in the world to do that). So much for the benevolent attention of the government.
Overall it seems that startups are fulfilling the same role that farmers once did for the Indian government; we are the new farmers. In the last 60 years or so, every government and every budget has had a focus on working for farmers and improving their conditions. Billions have been spent on doing that with schemes, loans, policies and what not. What is the end result? Everyone connected with farmers—be it experts, professors at agriculture universities, ministers, agencies, bankers—has flourished. Everyone that is, except farmers! Farmers have continued to suffer and battle perpetual poverty, even as the government showers all its attention and money on them. Likewise, government focus on startups has brought windfalls for all stakeholders—be it consultants, bureaucrats, bankers, event managers and all tertiary people. Everyone that is, except startups/funds. Consultants have been empanelled, lobby groups have been formed, nodal agencies have been constituted, huge budget allocations have been done, with crores being spent on ad campaigns, while startup founders and fund managers are busy justifying valuation to tax authorities and being made to feel like hawala operators!
Government focus on startups has brought a windfall for all stakeholders—be it consultants, bureaucrats, bankers, event managers. Everyone that is, except startups/funds.
The reason for such a state of affairs is simple—the government is looking at startups and doing that quite efficiently. The result is that there are now rules, then representations, then modifications, then addendums and then more notifications. Every organ of the government at the central and state levels is trying its best to add value and contribute its set of rules to the already muddied water of startups. Probably the only thing pending from the government is a levy of startup cess on all investors and startups.
This high involvement has only created a high level of uncertainty and confusion, with rules changing (and being added) every quarter. In decision theory there is an interesting term known as the "Ellsberg Paradox" which demonstrates that it's the uncertainty and not the risk which makes people activity-averse—any investor or entrepreneur can provide for risk but not for uncertainty. Unfortunately, the last few years of hyper-activity by the government—in terms of ever-changing regulations, and new and innovative forms of taxes—have created immense uncertainty in the minds of entrepreneurs and investors alike. Rather than being encouraged, people are becoming frightened of starting or investing in an enterprise.
The last few years of hyper-activity by the government—in terms of ever-changing regulations, and new and innovative forms of taxes—have created immense uncertainty for entrepreneurs and investors...
PM Modi in his address to NASSCOM in 2015 famously remarked that the success of the IT sector in India was not because of the government but in spite of it. The government had no clue about the IT sector and by the time they wised up, it had grown in size multifold and became too big to be disturbed. Likewise, startups were on a growth path until the government took notice.
Hence it is high time that the powers in the Finance Ministry took notice of the sentiments expressed by the PM. And rather than preparing to levy startup cess, listened to Pink Floyd and left us entrepreneurs and investors alone!