The speedy receipt of input tax credit from GST payments, and easing the crunch around working capital are among the list of items startups expect before the budget.
Sachin Taparia, founder, LocalCircles, an independent community social media platform, said that a crunch around working capital is one of the huge issues for startups as they have difficulty in attracting loans. Low margins, coupled with GST refunds pending from the government further compound the problem.
Siddarth Pai, founder, 3one4 Capital, an early stage investment firm, agrees. As these startups are unable to attract credit from banks and NBFCs, working capital is a huge issue for the firms. The lack of working capital means that these companies cannot expand businesses.
The implementation of the GST has enabled startups to sell their products and services to large enterprises across India. Though the tax reform provides much ease in terms of opportunities, it is also causing cash flow issues for these firms.
Startups have high input tax credit and low output tax. Any delay in refunding the input tax credit will cause a crunch in securing working capital. According to Taparia, this is a still an issue and is yet to be solved for startups.
In addition, startups are liable to deposit GST on behalf of customers by the 20th of the following month. However most of the customers do not pay even after 90 days. Reverse charge mechanism is another issue. Currently startups, primarily in the technology space, procure products from overseas suppliers since such services is not available in India. These startups are liable for 18 percent GST under the reverse charge mechanism.
All these aspects are resulting in a cash flow issue for startups, who already have limited access to funds in the first place.
To ease the working capital crunch, both Taparia and Pai met the Finance Minister Sitharaman and submitted few recommendations prior to her maiden budget on July 5.
Apart from timely processing of input tax credit, these recommendations include making GST payable for startups at the point of payment realisation and not invoice generation.
With regards to reverse charge mechanism, the recommendations point out that while it might not be possible to exempt all startups from this, those with a turnover of less than Rs 10 crore should be exempted from reverse charge mechanism for foreign vendor payments.
Pai said that the government should sanction the Rs 20,000 crore seed fund this year which will help galvanise equity investments into Indian startups and also allow working capital loans.
According to the paper submitted by iSPIRIT, the creation of a collateral free credit scheme, as stated in the 2019 manifesto, will greatly help accelerate entrepreneurial ambitions which were hampered by the lack of access to credit.
Other issues that startups expect to be addressed include more clarity on angel tax and the taxation of Employee Stock Ownership Plans (ESOPs) at the time of sale rather than at the time of exercising these plans.
IT Industry body NASSCOM in its report said that long term capital gains from the sale of shares of unlisted companies be exempt from taxation. It also added that short term capital gains should be taxed at 15 percent instead of the current income tax slab of the individual.
