ANALYSING THE RATIONALE IN WAKE OF STARTUPS IN INDIA RELOCATING OUTSIDE

INTRODUCTION

In recent times there has been a spur in the development of numerous startups in India. According to a Economic Survey report[1], there are 41,061 government recognized startups in India with a workforce of 4,70,000 employees. The number may sound enormous to the readers, but in comparison to the population of India, this is minuscule. In this article, we will discuss the reasons behind failure of startups in India, why these startups are relocating outside India and we will also compare the laws and regulations regarding startups in India vis-a-vis the other leading countries. 95% of the total Indian startups are in the form of small enterprises, which in turn employ around 80% of the workforce in the respective field.

WHY MAJORITY OF STARTUPS IN INDIA FAIL

While the founders somehow managed to raise $3 million, however it required extensive capital, which was beyond the ambit of Yumist, as a result due to drying up of fundings, it had to shut down eventually.

Another famous ahead-of-time startup was “Stayzilla”[2]. It was founded by Yogendra Vasupal, Rupal Yogendra, and Sachit Singhi, who managed a huge funding of $33.5 million at that time. Stayzilla was a modern concept, and it faced severe backlashes because the consumers were not able to comprehend the high technological standards. The startup was somehow surviving on the funds, but from 2017 onwards, due to increased competition, Stayzilla ran out of funds and eventually faced a closure.

These cases teach us that the startups in India ought to use their funds judicially and they must be consistent in raising funds.

DEARTH OF INNOVATION: A recent report[3] concluded that 77% of venture capitalists opine that have paucity of innovation and unique ideas. An Institute of Business stud[4]y found out that 91% of the Startups in India fail in the first five years due to deficiency of innovation. It is believed that startups in India is the third biggest startup system, but there is absence of enormous startups like Google, Facebook etc. This is because the startups in India believe in copying the global startups; let alone researching and creating a startup on their own. Although we have successful startups in India like Swiggy and Ola, the road to prosperity is very long.

HASTY LAWS AND REGULATIONS: Starting a startup in India is not everyone’s cup of tea. One has to undergo enormous documentation, an unending waiting period, have to incur hidden costs (in form of donations etc). Other major problems to start a startup in India includes Licensing and permit issues (FSSAI License, GST registration, Udhyog Aadhar registration, import and export code, registrations services etc). Entrepreneurs also need to take into consideration the Zonal laws related to Infrastructure as the lands are differentiated as agricultural/ hospital/ school/ domestic property. In case of opting to operate from their respective residence, one has to take permission from the local municipal authority, landlord and the town planning authority. These procedures prove to be time consuming, costly and lengthy to start a startup in India leaving the entrepreneurs no choice rather than stepping back.

WHY STARTUPS ARE LEAVING INDIA?

RED TAPISM: Many startups in India that have left in the recent years have reported instances of Red Tapism, Poor Infrastructure, Bureaucracy alongside other major challenges. To incorporate a firm a minimum time period of six months is required and to procure loans from government banks, a minimum of eight months are needed for approval. In the present pandemic scenario[5], funding of over 33% of startups in India are put at a halt, 22% of the startups in India have funds which might last 3 to 6 months only, owing to the last moment cancellation of transfer of funds from the banks, 12% of these startups in India have opted for a shutdown. While trying to fix the infamous “Angel Tax”, the government unknowingly affixed significantly more red tape in the arena of startups. The startups in India that have  integrated before 2016 can avail exemption from Angel Tax, but they ought to be recognized by the Department of Industrial Policy and Promotion (DIPP) in order to get the exemption, as provided under Section 56 (2) (vii b) of the Income Tax Act.

COMPLEX REGULATORY ENVIRONMENT:  While the government of India is thriving hard to ease business related laws, India still ranks 63 out of 190 countries[6], which reflects that they is still a long way to go to make the 3rd largest business ecosystem one of the best place for establishing a business. Despite improving laws and regulations related to startups in India and business, opening and closing of a business or startup in India is still considered as an expensive affair. For setting up an E-pharmacy, the owner has to pay a colossal registration fees amounting up to 50,000 Rupees. Adding to these problems, some draconian rules prohibit advertisement of drugs and medicines, which results in low earnings therefore crippling the emerging startups. Furthermore, the startups in India, whether big or small, are required to verify and re-register every 3 years, which reflects the implementation of a one-size fits all approach.

EASE OF REGISTRATION: Startups in India which have relocated in other countries like Singapore, United State, United Kingdom and Canada reported about the ease of registration process in these countries. It takes a maximum of 2.5 days to register a startup in Singapore as compared to a minimum of 2 weeks in India. Below are the top 5 [7]countries for initiating a startups:

1. New Zealand
2. Singapore
3. Denmark
4. South Korea
5. Hong Kong

It is to be noted that while the process of opening a startup in India is difficult, shutting it down is hundred times more difficult. The level of politics and costs involved in the shutting procedure is the root cause of startups remaining comatose without logging off legally.

LOWER CORRUPTION COUPLED WITH BETTER INFRASTRUCTURE: Startups friendly countries such as Denmark, Switzerland and Singapore secured the top 5 positions in Corruption Perception Index whereas India stood on the 86th spot. The startup friendly countries support innovation and ideas, while providing world class infrastructure to pamper new budding startups. Fundamental services including electricity are crucial for all types of startups and businesses, but the new players are dependent heavily on the local infrastructure. Women entrepreneurship representation in the industrial sector (fabricated metal products, computers and motor vehicles) comprises only 2% of the total ownership in the above sector whereas it is around 30% in educational and sanitation industries. Introduction of better infrastructure will also result in higher female to male ratio which will eventually result in enhancement of women entrepreneurship.

TAX-FRIENDLY SCHEMES: One of the major reasons behind Indian Startups relocating outside India is the Tax regime. Startups in India have to pay around 30% of their incomes as tax, whereas in countries like Singapore, newly-established businesses are exempted from paying tax till the first three years. When they start to earn more than $200,000, a tax of 8.5% has to be incurred by the startups. Indian Startups have to bear 18% GST reverse invoice on alien (foreign) services including hosting, pay per use services, database retrieval, etc. Additionally, the startups have to file quarterly the Tax Deducted at Source (TDS), which could be converted to an annual compliance, to avoid consumption of valuable time of the owners.

BEST COUNTRIES FOR RELOCATING A STARTUP

NEW ZEALAND

The country has influenced the business index ranking consecutively for the fourth time. The New Zealand government is serious and enthusiastic to promote entrepreneurship and startups. The country provides good infrastructure funding alongside providing grants for startups, minimal cost legal guidance to run their startups and mentoring for nearly no costs. New Zealand has also developed and maintained strong relations with Asia-Pacific nations.

Cross border trading, decoding insolvency, receiving loans, procuring contracts, defending small startups, providing electricity, getting along with building permits and registering land, New Zealand has done the best in each field.

SINGAPORE

In spite of being a small country with a relatively small population, Singapore is still considered as one of the best places for initiation of a startup. The country provides a 17% tax rate on the corporate tax. It has the most peaceful political climate in the South East Asia region, providing entrepreneurs with a sense of stoutness and solace. Singapore provides high-quality health service, world-class education system, entertainment opportunities, all in all proving to be a perfect place for upbringing your family. The country maintains the highest achievable labour force rating in lieu of efficiency.

DENMARK

Denmark aims to provide best business conditions with transparency and flexibility. It is a free market capitalist democracy with strong social security safety for its citizens. The country is considered as one of the best places to do business as it provides one of the biggest conglomerates in the field of biotech and life science focusing on sturdy public-private association.

Denmark has implemented the true form of freedom of press, which makes it crystal clear that there exists a positive and transparent guild in which commerce can be ushered smoothly.

SOUTH KOREA

South Korea or the Republic of Korea is an Asian country which adopted a capitalist system alongside the United States in the mid-20th century, when the rest of the countries were heading towards communism. South Korea is considered as a powerhouse when creativity and innovation is taken into account. Numerous firms which developed in the country are called MNCs.

Foriegn startups trading in the country are taxed on revenue earned from domestic sources only. The economy is stable alongside paving the way for international investment. If an entrepreneur is confused in choosing the best country for establishing a startup, South Korea is where their search will end.

HONG KONG

Hong Kong is the home of top startup conferences of Asia including FinTech and Rise, which provides a strong base for startups in the country. The government and the private players have come together to flourish the joint venture of developing the country’s startup ecosystem focusing on areas including logistics, e-commerce, innovation and technology etc.

The country is aiming to become the best location for establishment of business and startups , thereby the government recently provided funds of over HK$ 1 billion to build and support the startup community. The economy of Hong Kong keeps on growing and getting better thereby proving to be one of the best countries for establishing a startup.

CONCLUSION

With the growing population, there is a surge in demand, new innovations, efficient products etc. To fulfil these criterias, and to achieve the status of a developed nation, the Indian government needs to focus more and enhance the implementation alongside the research policy, to ensure inclusive development of the risk taker entrepreneurs, the consumers who spend their hard earned money which will ultimately help in increment of the country’s GDP. Several steps including revamping of startup taxation related laws, introduction of tax waiver for new players, fastening the registration process and limiting the number of documentations required may help in bringing drastic changes to the present business conducting conditions. Following the above provided points may help in propagating Atma Nirbhar Bharat as well as the Digital India program.

REFERENCE

[1] What Economic Survey 2020-21 says about India’s startup ecosystem, Accessed on 20 June 2021, https://economictimes.indiatimes.com/tech/startups/what-economic-survey-2020-21-says-about-indias-startup-ecosystem/articleshow/80586774.cms

[2] Stayzilla, accessed on 21 June 2021, https://www.failory.com/cemetery/stayzilla

[3] 77% of Venture Capitalists in IBM “Entrepreneurial India” Study Believe that Indian Startups Lack Innovation, accessed on 22 June 2021, https://www.businessinsider.in/77-of-venture-capitalists-in-ibm-entrepreneurial-india-study-believe-that-indian-startups-lack-innovation/articleshow/58927276.cms

[4] 90% Of Indian Startups Will Fail Because Of Lack Of Innovation, Study Says, accessed on 22 June 2021, https://www.forbes.com/sites/suparnadutt/2017/05/18/startups-in-india-fail-due-lack-of-innovation-according-to-a-new-ibm-study/?sh=24634c1d657b

[5] Funding for 33% Indian startups put on hold, 12% cite shutdown, accessed on 22 June 2021, https://www.livemint.com/companies/start-ups/funding-for-33-startups-put-on-hold-12-cite-shutdown-ficci-ian-survey-11593953683045.html

[6] Ease of Doing Business 2020: India ascended 17 notches, ranked at 63rd position by The World Bank, accessed on 23 June 2021, https://www.jagranjosh.com/general-knowledge/ease-of-doing-business-1608733969-1

[7] 12 Best Countries to Start a Business in 2020, Most Startup friendly countries, accessed on 23 June, https://advanton.com/best-countries-to-start-business/#Best_Countries_for_Starting_Business_in_2019_according_to_the_World_Bank