India’s startup community is up in arms against the Narendra Modi government.
Over the past weekend, angry entrepreneurs and venture capitalists trended #ShutdownIndia on Twitter. They were looking to show how far removed reality is from the promise of the prime minister’s highly publicised Startup India initiative aimed at boosting entrepreneurship in the country.
Their concerns stem from a series of incidents over the past few weeks involving the slapping of tax notices on startups and freezing of their bank accounts. The most bizarre of these included the inexplicable withdrawal of companies’ funds by tax authorities.
The entrepreneurs believe these actions are tied to the contentious angel tax, though the government has squarely denied this.
The angel tax is triggered when a company raises equity funding in excess of its “fair valuation.” The premium is treated as income, attracting over 30% tax.
More than 70% respondents in a recent LocalCircles survey said they had received at least one angel tax notice, while almost 30% said they had received three or more. In many cases, the startups have been slapped with hefty penalties for late payment, which sometimes cumulatively exceeds the entire amount raised by the firm.
On February 6, the issue took a drastic turn.
The income tax department withdrew Rs 33 lakh from the bank accounts of Noida-based TravelKhana, which delivers food to train passengers. “On February 5, as we logged into our bank account, we saw that money was extracted…So we rushed to the bank and there we got to know that there were four people who had come to the bank and they had extracted all the money through demand drafts,” Pushpinder Singh, founder of TravelKhana, told news channel ETNow. “They had ceased all the accounts in two banks –State Bank of India and ICICI Bank. We had three bank accounts in ICICI, and all the money from all the accounts was taken. The accounts were showing a liaison of minus Rs 2 crore on them.”
A similar story unfolded at Babygogo, a five-year-old startup that helps parents connect with paediatricians and other parents:
On February 9, the Central Board of Direct Taxes said the recoveries from TravelKhana were not made on account of angel tax but due to unexplained cash credit. However, the company refuted this claim, saying, “There was no cash transaction as investment with us. Each transaction came through the bank transfers or equivalent.”
TravelKhana and Babygogo are now struggling to stay afloat. “Some of our employees are really low-paid. We just had an incident where one of our employees had a death in his family. These are people who are impacted, some 70 of them,” said Singh of TravelKhana.
These two incidents have left entrepreneurs and investors baffled. Some fear these firms’ plight will discourage entrepreneurship.
Thousands of posts on social media, using the hashtags #ShutdownIndia, #TaxTerrorism, and #ShiftOutIndia, called for moving startups out of India to friendlier destinations like Singapore.
The damage
For several decades, India has only been known as a destination for cheap tech labour. In the 1990s, the country saw a massive boom in its IT outsourcing industry and went on to become the “back office of the world.” However, in recent years, techies in the country have taken a cue from Silicon Valley and launched innovative businesses.
Today, India has over 7,000 startups. In 2018, Indian tech startups raised a total of $4.2 billion, more than twice the amount raised in the previous year.
This boom, though, has happened despite the government.
Young Indian firms have had to deal with laws that predate the advent of the internet. So some of the largest startups have been forced to register in more business-friendly countries like Singapore and the US, even though their entire teams operate from India, their primary revenue source.
Following its election in 2014, the Modi government’s fresh attention to startups kindled hopes that things could get easier. But that didn’t happen.
“Bureaucrats and politics still stick to their ancient beliefs of ‘guilty until proven innocent,’” said Pankaj Jain, an advisor to startups and funds and a former member of accelerator 500 Startups. “It’s unfortunate that Startup India and Make in India haven’t become a reality...it’s not something startups or investors can pin their hopes on.”
Over to the government.
The hope
On February 4, Ramesh Abhishek, secretary at the Department for Promotion of Industry and Internal Trade, told a clutch of entrepreneurs that his team would come up with solutions for the problem within a week. Among other things, the government is likely to raise the ceiling of exemption from paid-up share capital of up to Rs 10 crore now to Rs 25 crore.
“We are hopeful that DPIIT [Department for Promotion of Industry and Internal Trade] and Central Board of Direct Taxes will soon bring these changes along with extending the validity of a startup from seven years to 10 years,” Sachin Taparia, founder of by social engagement platform LocalCircles and part of the team that met Abhishek last week, told Quartz.
This article first appeared on Quartz.
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