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11% startups/SMEs considering moving out of India: Survey

Payments from large corporates has been a big issue for SMEs and startups

Jan 31, 2020 by The Passage Team
11% startups/SMEs considering moving out of India: Survey

With funding drying up for seed and early stage startups and a slowdown in economic activity, Indian startups are currently going through Stress Test.

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. 11% startups/SMEs considering moving out of India due to regulatory issues.

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.

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.
  1. 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.
  1. 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:
  1. 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. 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
  1. 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.
The Passage Team

The Passage is committed to creating in-depth content over technology industry across Asia with a focus on emerging startups in the technology, healthcare, education, food, tech, travel & mobility segments.

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