Just how vulnerable Indian startups?

Ever since the arrest of the CEO of startup Stayzilla, the startup eco-system (or echo-chamber) has been abuzz with speculation, innuendo and flooded with advice on what you as a startup should or should not do.

For an example of “advice” see this in YourStory. My key takeaway from this article is: “Be compliant, keep your nose clean, ensure you get sane and good legal and financial advice and be compliant” if you are a startup.

All this is sane and even sage advice. But the threat is largely seen from a corrupt and nitpicking bureaucracy. Not from other companies, individuals.

What the article should have stated upfront was the real issue- the core issue – is our lack of transparent and responsive and fair legal framework. So, laws only work for the powerful, rich and connected. And since a startup is anything but rich, powerful or connected- at least to start with, it is very very vulnerable.

Did Yogi or Stayzilla fall foul of the government? No. He had a commercial dispute with a supplier. Now he is behind bars, in the silicon valley of India and the online campaign being run by all the startups put together is only circulating among their own. Here’s the story of Yogi and Stayzilla.

All those tweeting or FB-sharing with hashtag #ReleaseYogiNow ask yourself, is this the first time you have witnessed law enforcement over-reach? Or, mis-carriage or justice? Or cases dragging on for decades?

If you are a small guy and you bill your client and he does not pay- do you have a protection? If he claims non-delivery or deficient delivery, can you fight him legally?

If your case comes up for hearing in some far away state capital or worse, in some mofussil court, can you afford the cost of the battle- the time and the money?

While my sympathies are with Yogi and his family, his story is that of any of us- those who are neither rich nor powerful and who need to focus on work- but can’t because they are distracted by all sorts of things.

Compliance is laughable- compliance to what? It is a jungle out there. And, exactly how vulnerable are Indian startups? Just as vulnerable as any average Indian trying to run a business.

How our taxation system kills risk taking

It is not taxes but tax compliance that we fear

If you are doing business in India, then you would know this. The taxation system sucks big time.

The moment you raise a bill, you become liable to pay service tax. If the client on whom you have raised the bill, did not pay- even never- that service tax paid on a deemed income is paid to government. It will not come back.

Not just that, you are liable for income tax as well. So, let us say you raised a bill for Rs 100/-. The total invoice amount is Rs 115 (counting Rs 14 as ST and 0.5% each of SBC and KKC.)

If your client paid up and promptly, he would deduct, 10% as Tax Deducted at source (TDS) and send you Rs 103.5 (90% of Rs 115)

Of which, you would deposit Rs 15 with the service tax department. So, you would have with you Rs 88.5.

You would file returns for service tax, every 6 months. For TDS (yes, you deduct as well, from your vendors and employees), every quarter. And, by the way, you would deposit the tax every month.

For a small company, that’s an awful lot of paperwork. If Mr Jaitley is looking to help the entrepreneurs, this is where he should start. Our taxation system needs reform.


What if the client does not pay?

Let’s take the extreme case of a client who simply does not pay. Ever.

You are liable to deposit the service tax on the above bill. So, instead of having Rs 88.5 in your pocket, you have a hole of Rs 15. Not just that. The government has recongnised that you had an income on which you are supposed to have paid income tax. Since no tax was deposited by your client on your behalf, you make good.

This really, really hurts.

Mr Jaitley, why make us pay service tax or income tax when we earned nothing?

The biggest weapon in the hands of the customer

When a client sits on a bill and worse, refuses to pay, he knows you are very very vulnerable. What can you do? Sue him? In India? With so many court cases dragging on for years?

The client knows he has you precisely where he wants you. By raising a bill, you are in his debt rather than the other way round!

The suggestion

My suggestion is simple. Make me pay service tax on payment realisation rather than immediately on raising the bill. So, if the client does not pay, I can write off the bad debt and move on.