India: These Three Things Pose Hazards To Indian Startups

Last Updated: 12 February 2019
Article by Kaustubh Behere

Long a magnet for growing global businesses, especially in software, India now enjoys a reputation as the third-largest tech startup hub in the world.

Between 2012 and 2017, eight unicorns were recorded in India, inspiring a whole new generation of founders.Now encouraged and supported by the government-backed initiative Startup India, scaling businesses are flocking not just to Mumbai and Delhi, but also cities such as Hyderabad, Chennai and Pune. Bengaluru (Bangalore) is home to an impressive 26% of all tech startups in India.

The Indian Prime Minister, Narendra Modi, has a vision that India will become a country of job creators instead of job seekers and the startup culture is helping make that dream a reality. Yet Indian startups are not as mature as other businesses in dealing with the mechanics of regulation and compliance. In our conversations with startup founders and investors, three big themes emerge: payroll, tax and accounting prove a challenge time and again.

Getting financials in order

One of the most important things a startup should do - after having a killer idea, of course - is to get its financial house in order. Founders will need cash injections to move from seed to sale, and at every step of the way they will need strong and clear financial projections and business plans to present to potential investors.

Any delays in reporting the latest financial figures to current investors or, worse, inaccurate figures being reported because you don't have the right talent in-house can cause ripple effects throughout the business. Investor dissatisfaction can impact trust, and potentially mean that next round of funding may get jeopardised because your reputation has taken a hit.

Keeping up with taxes and regulatory filings

India's government may well be making moves to simplify its tax system, but for small businesses the tax system is still incredibly complicated. While there are tax breaks and exemptions offered to startups, there are still compliance requirements to meet, and ignorance will not be accepted as an excuse for non-compliance.

Regulation is an ever-changing beast, but all entities operating in India are liable to corporate taxes. Even the newest startup should ensure it deducts withholding taxes, files its periodic GST returns, complies with statutory filings and obtains the right licences for operating, or risk significant fines for non-compliance.

The mechanics of payroll

Running a regular compliant payroll is basic business 101, but in the startup world it's often an admin task that is easily overlooked - especially if you're bootstrapping, or if those in charge aren't taking regular pay themselves.

The truth is, if you have any regular employees, you must issue them payslips that are compliant with local regulation, as well as the Annual Salary Statement (or Form 16 in India), and you must do both regularly, compliantly and on time. If you fail in this duty, you risk money and reputation. Employee dissatisfaction won't just result in needing to re-hire the position; those dissatisfied employees may talk about their experience with you as an employer, which could impact your talent acquisition down the line. Likewise, there are tax penalties to pay if an employer defaults on any payroll obligations.

Help is available

All of these challenges can be overcome with the right help and guidance. Procuring support from experts in accounting, tax and payroll – those aspects that are critical to business, but non-core to startup founders - can help keep the back office running smoothly without the need to hire in-house. This can save much-needed cash that you can put back into the business - and can keep you compliant so the regulators stay off your back.

Startups by their nature want to grow as quickly as possible, but that growth must come alongside good back office processes that can scale as fast as the business does. TMF Group India's Scale Hub provides support to many local startups from its six offices across the country, providing everything from day-to-day accounting, reporting, tax filing and payroll support to virtual CFOs to compliance health checks to ensure your business is ready for investors. As you scale up or down, TMF Group can take care of your tax, accounting, regulatory and payroll needs – after all, we specialise in those areas that are non-core to startup founders. Get in touch to discuss how we can support your growth in India - and beyond.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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