Budget 2019 inputs from Startup, SME and Consumer Communities via LocalCircles

LocalCircles, India’s leading independent community engagement and social media platform was invited to present in the pre-budget meeting held on 11th June 2019 in North Block with the Hon’ble Finance Minister Smt. Nirmala Sitharaman. This document elaborates on the key issues that were raised in the meeting and shares a few additional ones that are important to startups, MSMEs and consumers of India.

Startup and SME Inputs

More than 34,000 startups, SMEs and entrepreneurs from different parts of India have come together in the ‘Make Doing Business Easier in India’ community on LocalCircles, and in the last few years, have brought up many issues which concern the startup ecosystem of the country. After various discussions and polls, the community came up with the following suggestions for the upcoming budget 2019:

1. 1. Faster payment processing by Government for MSMEs and Startups: Many large corporates take several months to pay vendor invoices. For startups and MSMEs, this creates a big cash flow issue since they have limited funds to play with. The Government last year issued notification number S.O 5622 (E) mandating that all companies must disclose in their half yearly filing any MSME payments that are pending for over 45 days. It is suggested that the same is made applicable to Government departments (Central and State) and PSUs and they must also be required to pay all MSME invoices within 45 days of invoice.
2. 2. Faster TDS Refunds: Many startups and SMEs have reported that refunds of the TDS take a long time. For some startups and SMEs, the refunds from returns filed in September 2018 have still not been processed. It is requested that the Government processes these TDS refunds immediately and processes TDS refunds within 45 days going forward.
3. 3. Timely processing of Input Tax Credit refunds: Most startups have higher input tax credit and lower output tax as they are scaling up and costs are higher than revenues. Some startups have reported that refunds of input tax credit are not being processed at all which has led to cash flow issues. It is requested that this process is streamlined and input tax credit refunds for startups are processed on a priority.
4. 4. Making GST payable upon payment realisation: Many startups and SMEs have reported that currently they become liable to deposit GST on behalf of their customer by the 20th of the following month. However, the customers in many cases do not pay even after 90 days. It is suggested that GST should become payable for startups and SMEs at the point of payment realisation, and not invoice generation. This also leads to cash flow issues for startups and SMEs. In the event that this is unfeasible and cannot be immediately implemented in this budget, we strongly recommend that law (notification number S.O. 5622(E) dated 2nd November, 2018) is further strengthened so that timely payment compliance improves.
5. 5. Reverse Charge Mechanism: Presently, startups are supposed to pay GST under Reverse Charge Mechanism for services procured from abroad. For startups, many of the specialised services and products in the technology domain are supplied from overseas suppliers as these services are not available in India. These startups, especially in early stages also do not have enough GST output to offset the input tax credit with. Therefore, they are faced with an additional GST cost of 18%, a cost they would not incur if their registered office was located outside India. It is suggested that all startups and if not feasible atleast startups with a turnover of less than Rs. 10 crores should be exempted from GST under the Reverse Charge Mechanism for foreign vendor payments.
6. 6. Equalisation Levy: Companies like Facebook, Twitter, LinkedIn etc. which startups use for advertising and promotions currently invoice startups from their foreign office. As a result, the startup becomes responsible to deposit an additional 6% equilisation levy to the Government on behalf of these companies. Not only is this added cost for startups but also a compliance burden. It is therefore suggested that any company with a direct presence in India and selling products and services to Indian customer must be required to invoice from their India entity.
7. 7. ESOP Taxation: This has been an issue which has been negatively impacting startups and its employees for many years now. The collective ask is that ESOPs should be taxed only at the time of realisation or sale and not at the time of exercising ESOPS. The exercise price for startup ESOPs is only notional value which tends to change and could also see a downward revision or go to zero.
8. 8. Angel Tax: Earlier this year, LocalCircles worked with CBDT and DPIIT, and the new rules provide some relief to startups under section 56 (2)viib. However, it is imperative that the systems between CBDT and DPIIT are integrated electronically such that no new notices are generated under this section whenever a startup goes through an investment event. This will minimise any manual interface between startups and income tax assessment officers.
9. 9. Model Districts for Ease of Doing Business: Via the new budget, it is recommended that we as a country select 10 model districts as shining examples of ‘ease of doing business’. It is in these districts that any company – Indian or multinational – could work through a single window system for setting up their business or service centre. Also, once a business is operational, Government processes must be set up to support ongoing operations of the business by bringing all Business - Government interfaces online with pre-defined turnaround time for various Government transactions. If such a project at this scale succeeds, it could lay a foundation to increase this program from 10 to 100 districts within the next 5 years.
10. 10. 20% mandatory MSME procurement: Per feedback from SMEs and startups, it is still highly time consuming and difficult for them to do business with the Government. While per the new rule 20% of all procurement of Government departments should be done through startups, the same is not being enforced. It is therefore requested that a mechanism is created that Government department actively seek to work with MSMEs and startups and annual audits and conducted to ascertain the following of this rule.
11. 11. Startup India Social Impact Fund: India faces several social challenges like clean air, scarcity of clean drinking water and women & child safety, emergency assistance & information access, public health etc. and startups operating in such spaces are largely not funded by traditional venture capital in India. It is therefore suggested that a Startup India Social Impact Fund is created with clear goals and timelines to fund startups working in these areas.
12. 12. Ecommerce Exports: Global ecommerce exports is a $450 billion market opportunity, where India only does around $1.25 billion ecommerce exports annually. Via ecommerce exports, India will be able to bring in new foreign exchange, create new jobs and boost Make in India in areas where it already has expertise (handicraft and handloom, Ayurveda, home furnishings, leather, apparel and sporting goods). However, to capitalise on this opportunity, India must address several cross-departmental bottlenecks relating to RBI, Customs, GST, India Post etc. and build a few dedicated ecommerce zones. For reference, China has built 30 ecommerce export zones and is building another 100 in the next 1 year.
13. 13. Cross Border Ecommerce: Late last year, LocalCircles had highlighted the misuse of India’s postal gift channels for commercial transactions by some cross-border ecommerce companies. While timely enforcement by customs has put a temporary check on this misuse, it is suggested that India promotes cross border ecommerce by streamlining processes and levying a flat IGST + customs duty at the point of consumer payment, thereby allowing pre-paid customs and IGST prepaid shipments to come into India. This will create increased transparency for consumers, foreign suppliers and help minimise evasion of custom duty and IGST.

Consumer Inputs

LocalCircles also conducted various surveys to check the mood of the consumers, what they think about in terms of income tax, GST, pollution etc. and areas which they need addressed in the upcoming budget. Following is the crux of the inputs that were received by LocalCircles through the thousands of consumers who participated:

1. 1. Continued efforts on GST Benefits reaching consumers: Per the recent LocalCircles survey, only 30% consumers have confirmed that they are receiving the benefits of the GST rate reduction done by the Government in last 18 months. It is therefore requested that the Government creates further awareness about GST rate reduction and holds brands accountable to comply and ensure that GST rate reduction benefits reach the consumer by reduction in MRPs.
2. 2. Consumer Earnings Under Stress: The latest ‘Mood of the Consumer’ survey done by LocalCircles in June 19 shows that 73% households are feeling squeezed when it comes to their earnings and spending. This number stood at 60% in Sep 2018. Any tax relief that the Government can grant via the budget which could help address this situation will be of help the Indian consumers.
3. 3. Clean Air Mission: In a LocalCircles survey, majority citizens said that the Government should look at reducing the PM2.5 levels in the cities by 50%-75% in the next 5 years. To that order we propose that the directive is put into a mission mode to tackle the issue of air pollution by launching a Clean Air Mission on the lines of Swachh Bharat Mission. We look forward to the upcoming budget for such a commitment which would help improve the air quality in the country.
4. 4. Railways: LocalCircles has continuously been submitting budget suggestions to the Ministry of Railways for the past 4 years. This year, based on a LocalCircles survey, citizens believe that improving services and amenities should be the top focus area of railways, followed by improving passenger safety and reducing accidents.