Some estimate that 60-70% of the new technology startups in India are registering the entities in Singapore or the US. Even some of the older ones have shifted their registered offices to one of these countries. Flipkart and Mobikon, for instance, are now registered in Singapore, and Dhruva and Freshdesk in the US.
This trend means that a significant amount of the value created by these startups will accrue not to India, but to the country of registration. Some jobs that ought to have been created here, now go there. Taxes that ought to have been paid here, are now paid there.
Many who are concerned about the issue say finance minister Arun Jaitley should address it in the budget that he will present on July 10.
There are multiple reasons why startups prefer Singapore or the US. But by far the biggest is access to capital. Startups require angel, venture and private equity capital at different stages in their growth path, and it’s much easier to raise such money when the entity is registered in one of these countries rather than in India.
“If an investor in an entity wants to exit, there’s no clarity on how the government chooses to value the investors’ gains and how those gains will be taxed,” says Sharad Sharma, co-founder of software product association iSpirt. So foreign funders are wary of bringing capital into India to fund startups.
There are no such problems in Singapore or the US. Singapore even has government schemes to assist early stage startups. Under its National Framework for Innovation and Enterprise, the government co-invests up to 85% (capped at S$500,000) in Singapore-based startup companies incubated by technology incubators. It invests up to S$10 million on a 1:1 matching basis, to seed venture capital funds that invest in Singapore-based early stage high-tech companies.
“A lot of our brightest and most promising startups tend to now be guided by their investors to set up overseas,” says Ravi Gururaj, head of IT industry body Nasscom’s software products initiative.
iSpirt has recommended to the government the establishment of a Singapore-like fund of Rs 5,000 crore that it should use to invest along with other VCs. So, if a VC does a due diligence and decides to fund a startup, the government could come with matching resources from its own fund.
Shekhar Kirani, partner in venture capital firm Accel Partners, says Singapore also has an efficient tax structure and startups find it easy to incorporate a company and exit a business without hassles in that country. “US investors are comfortable shopping for Singapore-headquartered startups,”
In its first three years, a startup in Singapore pays no tax on its first S$100,000 of annual profits and pays only 8.5% tax on the next S$200,000 of profits. For income above S$300,000, corporate tax is a flat 17%. In India, the tax rate is 34%.
In Singapore, and states like Delaware in the US, it takes just a day to register a company. In India, it could take weeks to months. Exiting a failed venture is equally cumbersome in India, and given that 90% of startups fail, delays in winding up only makes it more difficult for an entrepreneur to move on to the next venture.
Jack Markell, governor of Delaware told TOI last year that the state has no sales tax or value-added tax and has very reasonable income tax. “If you need your paperwork in two hours, you will get it in two hours…we work in double shifts till midnight if required,” he said.
Provide conducive space for growth
“We have to benchmark ourselves with other countries, because many of them are explicitly focusing on Indian entrepreneurs and trying to attract them to their countries. The very nature of the tech sector is such that it is location independent; you can set up in any place and operate from another place. Such companies cannot be held back by regulatory pressure, they can only be attracted by regulatory invitation.”
– R Chandrashekhar, president, Nasscom
(With inputs from Anshul Dhamija)
