ISSUES IN THE INDIAN STARTUP ECOSYSTEM
For young Indian entrepreneurs, Startup India was the most exciting policy initiative by the Modi government. It promised a conducive environment for new ventures, including well thought out tax benefits that were consistent with global benchmarks, funding and advisory resources, and reduced red tape. However, as is so often the case, despite the PM’s best intentions, the initiative has been a failure due to implementation issues – in a survey of 33,000 startups, over 80% say they have received no benefit from Startup India, and over 50% say that the single biggest challenge to business remains corruption / bureaucratic inefficiency.
To understand why this is so, first let’s examine Startup India’s actual impact on the ground. Since its launch in January 2016, only 88 startups have qualified for tax benefits. That’s it – 88 – which in a country of 1.3 billion, is irrelevant. The reason for this state of affairs is the deeply flawed process that’s been put in place (under section 80-IAC) to assess which startups are ‘worthy’ of tax benefits. Each startup is scrutinized by an Inter-Ministerial Board (IMB) to see if the startup is ‘innovative’ – i.e. if it is unique or a world first.
But if the objective of the Startup India initiative is to give a boost to new ventures, generate employment, and promote the creation of Indian intellectual property, then what’s the point of setting up the IMB to be a major stumbling block, instead of allowing the market to decide winners and losers? Consider this – per the IMB’s logic, the following trailblazing startups would have been denied benefits if they were being launched in India today – Google was not the first search engine, Facebook was not the first social network, and Apple was not the first company to make computers or mobile phones. So bizarrely, per the IMB’s definition of ‘innovation’, these companies would not be considered ‘innovative’, and hence would not be ‘worthy’ of tax benefits.
While thousands of eligible startups are rejected benefits, some dubious startups are deemed to be eligible – for example, among the 88 that did receive tax benefits, there is a big truck-mounted garbage vacuum cleaner (useful, but not innovative) and tiles made from plastic waste (again, these have been around for decades – not a new invention). And once the IMB makes a decision about the ‘worthiness’ of a startup, said the startup is not allowed to be heard in person, and there is no appeal mechanism.
The other option for startups to get tax benefits is to get a patent. However, there are a couple of major issues here as well. First, it takes several years to register a patent in India, and if royalty profits accrue before then, the tax benefits will be denied. Second, in India, there are no patents on “mathematical methods, business methods, computer programmes per se and algorithms from the realm of patentable subject matter”. This means that software, including apps, which Indian entrepreneurs excel at, are ineligible for patents in India.