LocalCircles writes to FM raising TDS, GST & ESOPs concerns on behalf of startups

A community and governance focussed communication platform LocalCircles has approached the Finance Minister Nirmala Sitharaman to bring to light the issues startups face around taxes and customs.

Sachin Taparia, Chairman and CEO of LocalCircles raised concerns around income tax refunds and customs duty via a letter that said that even when several measures have been taken by the government to help startups and SMEs in the budget this year, there is still scope of resolution of important issues.

As far as tax issues are concerned, there are several aspects of it that the startup community wants to see a change. The first and foremost being the delay in TDS refunds. Several companies that filed their TDS returns in September last year still haven’t received the refunds.

Further, a major issue that the companies are facing is regarding snail-paced process of ITC refunds leading to their cash flow issues.This problem is of grave concern because startups generally operate on tight cash flow, due to several factors like the offering of discounts and tight investment timeline among several others. 

If these tax refunds are processed within 45 days, the locked-up cash will then be free for the company’s use in the working capital cycle, allowing them to attain greater operational efficiency. Right now, to resolve the cash flow issue, a company has to resort to working capital loans throughout the year. Faster tax refunds might not take away the need for these loans entirely but will definitely help in reducing the burden of debt.

The letter also mentions the plight of employees who have to pay tax on ESOPs at the time of exercising their options. Looking for progressive taxation, they have requested the government for ESOPs to be taxed only at the stage of realization or sale.

Talking about cross-border transactions, startups request that there should be an exemption for companies with turnover less than Rs 10 crore from paying GST charged under Reverse Charge Mechanism for technology services procured from abroad. They argue that these specialized services are not available in India and startups do not have enough ITC to offset the output GST.  

Additionally, they seek to streamline the process of custom clearance and suggested a flat IGST + customs duty at 42.05% at the point of consumer payment and permit the influx of goods with IGST and customs pre-paid.

Highlighting enforcement lapses from the government, the letter talks about how hard it is for startups and new companies to do business with the government.

The letter brings to light the problems around enforcement of the notification that detailed how 25% of government departments’ procurement should come from MSMEs and startups. This has not been enforced properly yet, and hence is becoming a dormant source of income. The demand here is to create a mechanism that would entail government departments working with MSMEs and startups to conduct annual audits to keep a check on rule enforcement.

The startup industry as a whole looks forward to form better synergies with the government for an ideal growth in startups as well as the economy.

Update: The post and the headline have been updated after procurement of a copy of the letter sent by Taparia to Sitharaman.