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Why Ease Of Doing Business Is Vital For Indian Startup Ecosystem

Why Ease Of Doing Business Is Vital For Indian Startup Ecosystem

India is one of the fastest-growing startup ecosystems in the world

More than 90% of them do not grow beyond 5 years

Rationalisation, simplification and clarity on the regulatory compliances can boost the startup landscape significantly

The Indian startups have been rising mainly due to increasing aspirations of educated youth. Government initiatives like ‘Make in India’ and ‘Startup India’ are aimed at creating a conducive ecosystem for business growth and are working towards promoting ease of doing business in the country.

However, while a sapling needs more nurturing than mature trees, India’s regulatory ecosystem considers a startup at par with larger firms, with almost similar compliance burden and overheads.

Although the market valuation of Indian startups has grown significantly over the past four years, a recent study, “Entrepreneurial India” by IBM Institute for Business Value and Oxford Economics found that 90% of Indian startups fail within the first five years. One of the main reasons for failure is a complex regulatory environment, thereby affecting the ease of doing business in the country.

The startup culture is all about fostering innovation through talent. Anybody who has a vision of changing India should be set free from mundane regulation so that they can focus on their unique ideas.

To establish a legal entity in India, an entrepreneur has to go through a cumbersome process involving considerable legal work and costs (See Table below). A startup operating for one year has to obtain registrations under at least seven regulators and file a minimum of 18 returns to a maximum of 69 returns.

A young entrepreneur manages all these complexities along with business challenges. For someone who is new to the regulatory and compliance systems, costs increase as multiple professionals with the requisite domain knowledge need to be hired.

Existing Regulatory Environment Affecting Ease Of Doing Business

A brief look at the registrations, licenses and compliance requirement for a startup entity who operates out of a small office/home itself showcases the current status of ease of doing business in India.

There has to be an active effort to rationalise and simplify compliance right from the time of incorporation to the daily effort of managing regulatory compliances for startups. This will further help India to improve its ranking on world ease of doing business index, where it currently ranks 77. It is further aiming to reach the top-50 spot in World Bank’s ease of doing business report in 2019.

The compliance burden can be significantly reduced if the Ministry of Corporate Affairs recognises a separate class of enterprise as a “Startup”, with set parameters, at the time of incorporation itself. Various stages in the growth of a startup can be identified, based on funding status, employee strength, turnover/profitability status, etc and increased compliances under various regulations can get triggered with each stage.

Seven Suggestions To Ease The Regulatory Burden On Indian Startups

  1. Exemptions from Shop Act registrations as most of the Indian startups operate out of homes or shared / co-working spaces.
  2. Exemption for vendors to charge GST on the supply of goods/services to Indian startups. This would help reduce the cost of operations for Indian startups.
  3. Allow annual TDS return filing, in place of current four filings a year.
  4. Exemption from filing Professional Tax
  5. Allow single annual return for MCA, as against 4-5 a year currently
  6. Exemption from PF and ESIC for staff, to increase in-hand salary and retain talent
  7. Single window for quick closure in case of failed business ventures, as against current 2-year process involving NOCs from all regulators and creditors etc.

Easing the regulatory cholesterol can not only make the eco-system favourable to set up startups in the country, but it will also help them to scale up and grow into enterprises.

The article is co-written by Rishi Agrawal and Sandeep Agrawal, cofounders, Avantis RegTech Pvt. Ltd.