Public Policy for Entrepreneurs and Startups

Preasented By:

• Abhishek Mundra

• Atul Priyadarshi

• Ayush Pranav

• Ayush Ranjan

• Vibhore Sharma

Government Policies promoting

Entrepreneurship

Current state of Entrepreneurship in India

• Global Entrepreneurship Monitor (GEM) ranks India ninth amongst entrepreneurial countries.

• It is highest amongst 28 countries in “Necessity based entrepreneurship”, while 5th from the lowest in “opportunity based entrepreneurship”.

• Research indicates that opportunity based entrepreneurs contribute more to overall economic growth than necessity based entrepreneurs, this is an evidence to that fact that entrepreneurship in India is still far from what it could be.

Why should Government promote Entrepreneurship?

Promotes Capital Formation

Creates Large-Scale Employment Opportunities

Promotes Balanced Regional Development

Reduces Concentration of Economic Power

Increasing Gross National Product and Per Capita Income

Improvement in the Standard of Living

Promotes Country's Export Trade

Facilitates Overall Development

What can the Government do to promote Entrepreneurship?

• Enable Infrastructure.

• Enable Easy Taxation.

• Enable Great Talent.

• Enable Fund Raising.

• Enable Research.

• Enable Company Shutdowns, so that those who are sitting in the fence can get in the ring, experiment, fail and experiment more.

• Bring more clarity in taxation laws.

• The government doesn’t really need to invest in startups –there is a good number of activity happening over there. The government, however needs to enable favorable angel funding laws, attract investments for startups and SMEs.

• The government needs to enable the enablers and NOT play the role of intermediary.

Budget 2014 : The big idea is clearly start-ups

• Arun Jaitley tries to attract more venture capital funds for MSME, promote entrepreneurship with provisions in budget.

• No finance Bill in India’s history has done as much for the cause of entrepreneurship—an indication, perhaps, of the National Democratic Alliance’s (NDA) belief that its role should be to create a conducive environment and ecosystem, in this case, for enterprise, and leave the actual tasks such as creating jobs and driving economic growth, to entrepreneurs.

• The Finance Minister announced the launch of a pan India programme called ‘Digital India’ to provide broadband connectivity and other IT facilities at the village level.

• Plans to setup a new multi-skill training program called ‘Skill India’ that will emphasize on employability and entrepreneurial skills.

The specifics:

Rs. 10,000 crores startup fund for new businesses.

National accelerators & incubators for startups to be setup.

Another Rs.200 crores to establish a technology center network that will promote innovation and entrepreneurship in agri-business.

Young Leaders Programme to be set up with an investment of INR 100 crores.

Rs. 100 crores for Startup Village entrepreneurship for rural population.

And Rs. 200 crores that will go towards developing young entrepreneurs from underprivileged backgrounds.

Rs. 100 crores for setting up virtual classroom for online courses.

Rs. 500 crores to set up software services in rural areas.

What are the Indian states doing to promote entrepreneurship?

• In the 1960s, the entrepreneurial movement began in India in a small way with the establishment of NISIET (National Institute of Small Industry Extension Training) for promoting and encouraging entrepreneurship amongst the people of India. India has taken many steps since then in building up a startup ecosystem. The recent financial budget presented by the Finance Minister, Arun Jaitley appears to be very promising for young entrepreneurs with the INR 10,000 crores startup fund announced among other things. However, not all 29 states and 7 union territories are at the same level in terms of encouraging entrepreneurship on Indian soil. Some states are more advanced in terms of their policy implementation due to various historical, political, law and infrastructural conditions.

• Some of the startup friendly states are:

1. Karnataka

The government of Karnataka is aiming to make Karnataka the unequivocal IT innovation and startup capital in the world by drafting a new Startup Act, the first of its kind in the country, in the next two months. In order to strengthen the academia-industry relations, as part of the ‘Karnataka New Age Incubation Network’ the government has granted INR 5 lakh to nine colleges to fund research on projects solving local problems.

2. Kerala

A few weeks ago, the government of Kerala has decided to invest 1% of the state’s budget (approximately INR 500 crores) in the nascent startups of the state.

3. West Bengal

The state government has tied up with IIM-Calcutta for training officials to go over each district educating and assisting all prospective entrepreneurs with everything they need to start their own ventures.

4. Maharashtra

Maharashtra Centre for Entrepreneurship Development is an autonomous body under the Department of Industries, which has 8 different offices across the state. The MCED offers entrepreneurship training programs and other scheduled sessions focused on banking, agritech, food processing and others across different districts throughout the year.

5. Delhi NCR

The startups growing in this region are mostly non-tech based startups. The region is the main center of political and industrial power with good infrastructure and transport services. There are many big investor and venture funds concentrated in the region.

6.Gujarat

The state offers good infrastructure and business environment for the startup enthusiasts. Under the leadership of NarendraModi when he was the chief minister of the state, Gujarat has set up a world class Center of Excellence in Entrepreneurship & Technology with its own incubation center. The center is guided by an advisory council led by NR Narayana Murthy.

7. Telangana government wants to start an incubator for startups, is planning to make Hyderabad a WiFi city as well.

Companies Act 2013 It’s effect on startups

What is Companies act?• The Companies Act 1956 is an Act of the Parliament of India, enacted

in 1956, which enabled companies to be formed by registration, and set out the responsibilities of companies, their directors and secretaries.

• It has the guidelines that are to be followed in setting up and day to day working of the companies operating in India.

• Major changes were introduced in a new Companies Act 2013.

The Good

One Person Company• New Companies Act has introduced a concept of one-person

company. A single promoter now need not worry having another partner to incorporate a company. As per the earlier Act, it was also required to have a minimum of two directors. In case of any dispute between the directors, it would create a dead lock. One-person company comes as a rescue in such a situation.

• Helpful for single founders who would want to register the company alone and then look for co-founders.

Dormant company• Earlier it used be a pain running and maintaining a company than

incorporating one. But after incorporation, liquidation was not easy. The 2013 Act states that a company can be classified as dormant when it is formed for a future project or to hold an asset or intellectual property and has no significant accounting transaction. Also any inactive company can also apply as dormant company. So any company which does not have any financial transaction can apply for dormant company status and need not go through the hassles of maintaining, complying with various legal requirements. Later, when they see some traction occurring they can renew the company into an active company by following the required formalities.

Object of the company• As per the new legislature, a private limited company can have

charitable purpose as a primary object, which was not allowed under the earlier legislature. This will be a great boon for social entrepreneurs who could not enjoy corporate benefits earlier. However, license can be revoked contravenes any of the requirements of the section but also where the affairs of the company are conducted fraudulently or in a manner violating of the objects of the company or prejudicial to public interest. The new Act thus provides for more stringent provisions for companies incorporated with charitable objects.

Some other thingsCompanies having a paid-up capital of less than Rs.50 lakh or with a maximum turnover of Rs. 2 crore have been given some relaxations :-

• Their financial statements need not include cash flow

• Only two board meetings are mandatory, one each in half of a calendar year.

• The annual return to the Registrar of Companies (ROC) can be signed by the director of the company, thus a company secretary is not mandatory for the initial period, resulting in substantial savings.

• Allows self-approved mergers between two small companies. Leading to quick acquisitions, and fund generation.

The Problems

Penal provisions for non-compliance

• In the New Companies Act, penal provisions have been increased significantly. For regular non compliance like not filing return etc can lead to criminal prosecution.

• It is difficult to adhere to deadlines for startups with limited funding.

• So startup companies should ensure they comply with regulations to avoid future problems.

A company can’t give loan to another company

• As per the New Companies Act, any company is prohibited to lend to another company where the directors and shareholders are common. For example, Company A has good revenue and is making a profit. Founders of Company A start another company, Company B. Now Company B cannot borrow from Company A, as both companies have common shareholders. Penal provision of non-compliance is extremely high, so companies have a hard look at this.

Valuation• Any Indian startup which wishes to raise capital must get its shares

valued by an independent valuer appointed by the Ministry of Corporate Affairs.

"It's almost impossible to assess the correct valuation of startups which are in a new business segment“.

Fundraising• The new Act has also made it mandatory for startups to have a separate

current bank account for receiving any investment, with the money required to be remitted back to investors if shares are not allotted within 60 days.

The new rules will just force startups to move out of India to raise angel or venture funding. "Startups and large companies have been put in the same bracket for compliance."

Allotment of shares to any new investor now has to be followed by at least three board meetings, as opposed to just a resolution needed earlier.

"Cost and time for each investment for an entrepreneur raising funds will increase by 25%-30% as the documentation has increased

NRIs• NRIs will also find it difficult to incorporate companies in India, as at

least one director has to be a resident Indian from now on. The new rules also hold the potential to kill the virtual office concept in India

Using virtual office has been made difficult as multiple companies may not be allowed to share the same registered office address.

• Virtual offices led to huge savings for startups as they could not afford the high rents in commercial hubs.

IT Policy on Entrepreneurship

Current challenges:

• Inadequate funding of R&D

• Difficult and lengthy funding procedures

• Poor infrastructure facilities

• Risk aversion among entrepreneurs

• Inadequate protection of intellectual property rights

Reforms

• Funding: The policy announces an increase in the gross expenditure in research and development (GERD) from less than 1% to 2% of the gross domestic product over the next five years. It also states that a National Science, Technology and Innovation Foundation will be established "as a public-private partnership (PPP) initiative for investing critical levels of resources in innovative and ambitious projects" (2013)

• Strengthening the linkages between stakeholders: The policy calls for "special and innovative mechanisms for fostering academia–research–industry partnerships"

Reforms (contd.)

• Promotion of science:

• Risk taking ability: The policy emphasizes risk sharing by the government, which is slated to "significantly increase private sector investment in R&D and technology development" and "new financing mechanisms would be created for investing in enterprises without fear of failure"

• Intellectual property: establish a new regulatory framework for data access and sharing [and for the] creation and sharing of intellectual property.

Time line

• 1900 -1947 - SOWING THE SEEDS- Theleaders abhorred foreign rule and embraced the concept of "swadeshi" or self-relianceearly in the freedom struggle

• 1947-1981: SHAPING POLICY IN AN UNCERTAIN ENVIRONMENT -The Indian government set up the first Indian Institute of Technology in Kharagpur, in 1950, and this was followed by four more ETTs in other cities

• 1989-PRESENT: ATTAINING CRITICAL MASS In 1989, the Videsh Sanchar Nigam Ltd. (VSNL),India's government telecommunications company, set up a 64-kbps satellite link. The first Software Technology Parks (STPs) were established in Pune, Bangalore and Bhubaneswar in 1990.

• Y2K, the Internet Boom and the Dot Com Bust: Cutting costs, or gaining a "cost-advantage" by off-shoring software development to India became very popular.

What States Are Doing

• Karnataka plug-and-play space with internet at a reasonable rate of Rs 5-15 per square feet.

• West Bengal The state government has set up myEnterprise.wb.gov.in as the single window for all applications, information and all forms.

• Maharashtra exemptions from stamp duty on the purchase of land, partial reimbursement of equipment purchased for power and water conservation, rebate on expenditure on energy and water audit.

• Tamil Nadu subsidy given to entrepreneurs on machines and equipment's is being hiked from 15 to 25 per cent up to a ceiling of INR 30 lakh.

• Andhra Pradesh/Telangana Setup of free Wi-Fi zone with help of airtel

Technology Incubation and Development of EntrepreneursBroad Objectives

• Promote product oriented research and development

• Encourage and accelerate development of indigenous products and packages

• Bridge the gap between R&D and commercialization

• Facilitate entrepreneurial training and IPR facilitation

• Promote involvement of faculty in startup activities

• Ensure interaction between education and industry

• Alignment of education with exact market demands

• Active involvement of the faculty in the technology start-up activities

Intellectual Property

Intellectual property refers to creations of the mind: inventions; literary and artistic works; and symbols, names

and images used in commerce.

What are intellectual property rights?

Intellectual property rights (IPR) are used to protect the technology, brand name, design and creativity behind the concept. These rights are the rights given to persons over the creations of their minds. It gives the creator sole ownership of the concept, in a similar way to owning physical property like a house or car. Owners can control the use of their intellectual property to gain financial reward.

Starting up a new business is a high-risk activity there is no guarantee of return on investment. These rights helps to take some of the risk out of enterprise.

• These rights are outlined in Article 27 of the Universal Declaration of Human Rights(UDHR), which provides for the right to benefit from the protection of moral and material interests resulting from authorship of scientific, literary or artistic productions.

Why do entrepreneurs protect their ideas?

It is important for anyone to protect his or her ideas. This allows them to benefit from their creativity without their ideas being directly copied and exploited by others.for entrepreneurs, the idea is often the entire basis for the new business. Without the idea, the business would not exist. Entrepreneurs invest energy, time and money to develop business ideas. It is therefore essential that entrepreneurs safeguard this investment.

How CAN entrepreneurs protect their ideas?

There are four main categories of intellectual property rights (IPR). Each gives a different protection and is used for different purposes.

Patents

A patent is an exclusive right granted for an invention – a product or process that provides a new way of doing something, or that offers a new technical solution to a problem.

A patent can protect the invention, preventing other businesses from making, using, importing or selling similar products

A patent can last up to 20 years; if it is renewed every year.

Design

Registering a design prevents a competitor copying the physical appearance of a product or component. The appearance of a product includes lines, shape, contours, texture, colours and materials.

For example, registering designer fashions will stop others from using those designs. This helps to protect designs from being copied and appearing as cheap fakes on the high street.

A registered design lasts initially for five years, although it can be renewed for up to 25 years.

trade mark

A trade mark is a sign that can distinguish goods and services from those of other traders.

For example, goods bearing the Nike 'tick' logo demonstrate they are Nike products and meet Nike quality standards.

A sign can include a combination of words, logos and pictures. To register a trade mark, it must be:

• distinctive for a group of goods and services

• not the same as (or similar to) any earlier marks on the register for the same or similar goods and services

Trade Marks are renewed every 10 years

Copyright

Copyright is an IP right that relates to the expression of an idea, not the idea itself.

For example, anyone can write a story based on the idea of a superhero, but they cannot copy the name, the text or illustrations from other books about the same subject.

Copyright protects sound recordings, films, broadcasts, photographs and original artistic, musical, dramatic and literary works.

Unlike patents, designs and trade marks, copyright is an unregistered right. It applies as soon as something is created. There is no registration process or fee. It covers both printed and web-based materials.

Often, more than one type of IP may apply to the same creation. For example, the Harry Potter books, films and merchandise are covered by:

• copyright for the books and films

• design for some of the Harry Potter scarves and clothes

• trade marks for the Harry Potter range of toys, games, etc

There is no worldwide legal protection. IP has to be applied for in each country. In Britain, the UK Intellectual Property Office is responsible for registering intellectual property rights.

TAXATION

Ecommerce is one sector that has seen the most tumultuous extremities in Indian corporate ecosystem. The sector has shown such growth potential which has

attracted eyeballs even beyond borders. India’s ECommerce market was about $2.5 Bn in 2009, it went

up to $6.3 Bn in 2011 and to $16 Bn in 2013 and is expected to grow huge $56 Bn by 2023 that would be

6.5% of the total retail market.

IS INDIAN GRANDFATHERED TAX LAWS A ROADBLOCK FOR ECOMMERCE IN INDIA?

• Among all other issues, the ecommerce sector is facing a major set back in the form of the present taxation structure. Currently, several taxes have to be paid under the indirect taxation structure of India which involves a lot of compliances. Indirect taxes in India can be categorised as – central government taxes, state government taxes and taxes imposed by local authorities.

• To put back, pre-existing central excise duty and diverse sales taxation across the states, VAT was introduced. Numerous inadequacies though exist in the state-level VAT structures. Several indirect taxes like luxury tax, entertainment tax etc. are yet to be included in different state VAT structures in India. In addition they suffer from cascading effect of service tax. All these factors have lead to a lot of disputes as well.

CASE STUDY

• A RECENT EXAMPLE WOULD BE THE CASE OF AMAZON IN KARNATAKA

• Amazon has been the exemplary model of marketplace ecommerce in India. It basically provides a platform to the potential buyers and sellers to interact. It does not buy the products from the suppliers itself. Rather it houses the products from the suppliers and ships them to the buyers, in exchange of earnings in the form of commission. Hence, very logically, it does not charge or pay VAT, which is a state-level tax levied on buying and selling of products. Once the customer pays for the product, Amazon sends the money across to the merchant after deducting its commission. It only has to pay service tax to the government, while the merchant has to pay the Value Added Tax (VAT).

The tax authorities have alleged that Amazon India has sold products directly to its customers. They do not seem to validate

the market place model ecommerce. The Enforcement Directorate (ED) is investigating the matter, and in the meantime the tax authorities have cancelled the licenses of several third-party merchants and stopped them from selling their products

via the ecommerce site. Some of these merchants also have tie-ups with other ecommerce platforms like Flipkart and Snapdeal, and have been ordered to stop supplying products in the state.

The tax authorities’ issue with Amazon is regarding its “fulfilment centres.” These are essentially warehouses, where merchants send their products to once an order

has been placed. The company then packs the products and ships them to the customer. Amazon calls

these kind of orders as “fulfilled by Amazon,” which accounts for nearly three-fourths of the total number

of orders.

• Amazon India is trying to resolve the issue with tax authorities. But if they fail to reach a consensus, the company could be forced to shut its warehouse in Bangalore, which could be a major blow to Indian industry.

• The current indirect taxation structure is neither consumer friendly and has a lot of institutional loopholes. A person doing business online has to pay both service tax and vat leading to complex issues. For example- If we sell groceries online, we will be liable to pay vat. Further, if we make the delivery of the groceries to the customers we will charge a delivery fee which leads to providing a service. Thus, we are liable to pay service tax also. So, this not only leads to high compliance costs and consumption of time and effort but also leads to difficulty which may lead to non-compliance. Also, we have to file returns under two heads.

IS GST THE SOLUTION?

• To give consumers more clarity about the taxes to be paid on goods and services and to help the firms produce more efficiently, government has introduced a single goods and service tax( GST). The whole idea is to strengthen and simplify the indirect taxation structure in India and make exports effective. It aims at “one tax nation”.

• Goods and service tax (GST) is nothing but a value added tax to be levied on goods and services(except for certain exempted goods and services) at both central and state level. Unlike multiple taxes like CENVAT, service tax etcGST is a single tax to be levied on goods and services. The GST is a long pending tax which India is awaiting to iron out the loopholes in the tax system. GST has already been implemented in 150 countries.

GST ideates trimming down the trouble of “tax on tax”. As a single tax will come into place, it will lead to

reduction in accounting complexities for businesses. A simple tax structure will bring great compliance which

will increase the tax payers and in turn tax revenues for the government.

A recent report by CRISIL states that GST is the best way to achieve fiscal consolidation. Since there is no

scope to increase government expenditure, it is better to increase tax revenues to improve fiscal health. GST

will build a corruption-free tax administration. It will be levied only at the destination point and not at various

points in between. India would gain $15 Bn by implementing GST as it will boost sales, provide

employment and lead to growth.

Hence, in all, GST is indeed a very welcome move. If sources are to be believed, the Government wishes to

initiate this one tax regime from 01st April, 2016 onwards. This will not only pave the way for a better developed and structured ecommerce environment but also accelerate India’s growth to international

standards.

Conclusion• Startups are the future growth engines of our country and Govt

should do all it can to foster the growth of entrepreneurship culture in India.

• Already FB,Google and Yahoo have acquired startups based in India and the likes of Flipkart,Inmobi,MuSigma show us that world class companies can have origins in India also. It just needs a little push in the right direction.

• The recent Govt. initiatives like the $1.6B fund,”Make in India campaign” and the new companies law are a step in right direction. Just a little more needs to be done to bring the archaic Indian laws upto date with 21st gen technology.