Indian startups & SMEs hope Budget 2020 will help resolve ESOP taxation, address delayed payments
- • Majority startups & SMEs say large corporates and Govt customers pay them late
- • Want ESOPs to be taxed basis sale date rather than exercise date
- • 11% startups/SMEs considering moving out of India due to regulatory issues
January 29, 2020, New Delhi: India has one of the largest startup ecosystems in the world which has directly or indirectly generated millions of jobs in the last few years. With the exception of angel tax resolution for the majority, the last 12 months have not been ideal for the Indian startup ecosystem. With funding drying up for seed and early stage startups and a slowdown in economic activity, Indian startups are currently going through Stress Test.
On 1st February, Finance Minister Nirmala Sitharaman will present the much-awaited Budget 2020 and thousands of startups, SMEs and entrepreneurs will be keeping a close eye on the announcements made. LocalCircles conducted a survey in its progressive community of 35,000+ startups, MSMEs and entrepreneurs, and asked them what they wanted from the upcoming Budget 2020. The survey received more than 18,000 responses. The survey results point at some of the pertinent issues that the startups community hopes will be addressed in the upcoming budget.
Payments from large corporates has been a big issue for SMEs and startups as it creates a cash flow issue for them. Many Government departments and big corporates take months to clear the invoices. Only 12% said that their large corporate customers are clearing payments within the contractual timeframe while 5% said payments are late by up to 30 days. 13% said clearing of payments takes up to 31-60 days while 33% said it takes up to 61-90 days. 12% said it takes 3 to 6 months for the payments to be cleared while 13% said it takes them more than 6 months. A small 12% said they do not do business with large corporates.
58% Startups or SMEs say that large corporate customers pay them late by over 61 days
When it came to Government customers, 11% said payments are cleared within the contractual payment period, 6% said it takes up to 30 days, 5% said it takes 31-60 days and 6% said it takes between 2 to 3 months for the payments to be cleared. 17% said it take between 3 and 6 months for payment clearance while 22% said payments are late by over 6 months. 33% said they don’t do business with the Government.
45% Startups or SMEs say that Government customers pay them late by over 61 days
Since working capital is critical to startups and MSMEs, such payment delays create a big cash flow issue. Since GST becomes payable upon generation of invoice and the invoice stays unpaid for months, it only worsens the cash flow. Businesses also reported that many Government departments and large corporates are delaying the acknowledgement and booking of invoices in their system by several months and then at a later date ask suppliers to send updated invoices.
The SME and startup community want Budget 2020 to bring in a mechanism which drives large corporates and Government departments to timely book and pay their invoices.
Issues like ESOP taxation have been bothering the startups and their employees for many years. The collective ask from the startups is that ESOPs should be taxed only at the time of realisation or sale and not at the time of exercise as they are currently, as the valuation of startups tend to change and go up or down in a short period of time. It is critical that the Startup Indian Mission should take up such issues and resolve them quickly.
Some other areas where startups and SMEs are looking for relief are:
- 1. Doing Business with Government: Startups and MSMEs are reporting that it is still time consuming and difficult for them to do business with the Government. Though there is a rule in place that requires Government departments and PSUs to conduct 20% of their total procurement through MSMEs and startups, the same is not being enforced. They request that a mechanism is created through which compliance of various Government Departments and PSUs to the above rule can be tracked and corrective measures taken. This will provide a good demand boost to the MSME and startup sector.
- 2. Closing a Company in India: Currently if trying to close a company an entrepreneur has to struggle with many offices like FCRA, Income Tax, EPF, ROC, GST etc. The small business community demands that this process is streamlined and exiting a business is made easier in India.
- 3. Significant Economic Presence & Equalisation Levy: Several social media and search advertising platforms which startups and MSMEs use for advertising and promotions currently invoice Indian businesses from an overseas entity. This requires Indian businesses to not only pay the full invoice value to them, but in addition deposit an equalisation levy on their behalf of approximately 6%. As a result, the startups and MSMEs not only face increased expenses but also compliance cost. They suggest that:
- • A foreign company with any direct presence in India must be required to invoice its customers in India from their Indian entity.
- • If a global corporation has 1M citizens/users of India registered with them or has 100 paying customers (businesses or citizens) or annual revenues of over INR 10 crores from customers in India, this should classify as they having a Significant Economic Presence and they must be required to invoice all Indian customers from their India entity. Such a move will not only enable a fair playing field as far as competition goes for their Indian counterparts but also lead to increase in direct tax collection for the Government of India.
- 4. Reverse Charge Mechanism: Currently, startups are required to pay GST under Reverse Charge Mechanism for services procured from abroad. For startups, many of the specialised services and products in the technology domain are supplied from overseas suppliers. Early stage startups with little or no revenue are at a disadvantage by being in India as they must pay 18% GST under reverse charge and are unable to take input tax credit for such payments. After considering inputs received from various startups from across India, it is suggested that Startups which have a turnover of less than Rs. 10 crores should be exempted from GST under the Reverse Charge Mechanism for foreign vendor payment
- 5. GST Registration by States: Many startups and MSMEs, especially the ones that sell their products & services on ecommerce platforms have reported that they need to apply for GST registration in all the states separately where they intend to keep stock or invoice from, making things complex for them and increasing their compliance cost. It is suggested that a process be created where a single GST registration works in all states.
Startup India, DPIIT has claimed that it has worked on several initiatives including angel tax resolution. The following question asked if their business had benefited in any way as a result of the Startup India scheme. 50% said ‘no’ while only 20% said ‘yes’. 30% were unsure.
Only 20% startups/SMEs claim to have benefitted from Startup India Mission
Indian startups have been very vocal about the taxation rules in the country and how countries like Singapore have a very startup-friendly tax regime. In the next poll, 11% startups/SMEs said they are very seriously considering moving their startup/SME business abroad to USA/UK/Singapore/other countries from a tax regime purpose. 20% said they have done preliminary evaluation but have not done detailed evaluation. 58% said they are okay with the current tax policies in India.
11% startups/SMEs say they are seriously evaluating moving out of India; another 20% going through preliminary evaluation
Startups and SMEs are optimistic that the issues listed above will be given the due consideration in the upcoming budget, which would enable them to play an important part in the growth of the country.