Ease of doing business: Setting up ecommerce shop not a click away.
New Delhi, India | Red Newswire |By ET Bureau | Nov 18 2015 03.52 AM IST.
Few sectors in India in recent months have witnessed the kind of heavy-duty action and the inevitable, accompanying, hype as ecommerce. Hardly a day goes by without a deal being announced or a startup being created. Indeed, more than 1,000 new businesses have sprouted and Rs 70,000 crore in risk money has been pumped into apps and websites. All this in just the last five years. There is talk that India finally has not one but three cities — Bengaluru, Hyderabad, Gurgaon — akin to Silicon Valley.
But scrub away this encrusted hype, one will notice that there are some stark differences between our ‘Silicon Valleys’ and the real McCoy. For starters, back in the Valley, an entrepreneur can launch a business in three hours flat without visiting an office — simply through his smartphone. A business bank account in the US is a single window to starting a company. In India, it takes at least three months, multiple visits to multiple departments — sales tax, registrar of companies and income tax, to name a few — with each seeking a similar set of documents such as proof of address, details of venture to be started, PAN, TAN etc to start a business.
“All big technology companies have started in a garage. Half the world’s startups wouldn’t have happened if ease of doing business was not there. In India, everything works in silos. Government departments don’t recognise digital economy. Things do move, but not at a pace that easily encourages startups to mushroom,” says Sandeep Aggarwal, founder, Shopclues.com and Droom.in.
Much of the time goes in meeting officials in multiple departments and all of them need entrepreneurs to submit a similar set of documents. “If in other countries (like the US) having a bank account is a single entry point, why don’t we have a single window to start a company in India? Why do multiple things? It is as if India does not have confidence in its own systems,” says Aggarwal.
Change has not been easy despite these being ageold problems, according to entrepreneurs and experts. Vijay Shekhar Sharma, founder, Paytm, says ministers understand the problems, secretaries appreciate the challenges and things are changing to ease kickstarting business. “But it’s the implementation on the ground that takes time.”
Shekhar offers an analogy to illustrate his point. He says the government’s efforts are like putting a drop of ink in a glass of water. “At the top the change is instant, but it takes lot of time to percolate. We do business on the ground and that leads to problems, even with well-meaning officials around us.”
While starting a venture takes a minimum three months, ecommerce companies find execution tough. For instance, shipping anything more than Rs 5,000 in Uttar Pradesh requires a buyer to procure a document called Form 31 from local authorities. They then run into different sales tax and octroi across states. Says Sharma, “It’s tough to ship a smartphone to buyers in UP.” Adds K Ganesh, cofounder, GrowthStory, a platform that has incubated 16 startups, “The goods and services tax (GST) could change this by having a single levy across states, but its implementation is nowhere in sight.”
The problem starts with archaic laws governing online businesses. “Ecommerce is governed by the traditional Shops and Establishments Act. Nobody had thought about a warehouse model like marketplaces have and that leaves room for ambiguities in interpretation of law and harassment and delays for etailers,” says Ganesh. (On Monday, ET reported that the government is likely to end the confusion over ecommerce companies that operate marketplaces, so that states do not impose taxes on them.)
Giving an example of the extent of problems, an entrepreneur says an FIR and arrest warrant were issued against him after he was accused of a fraud of `5,000 on his platform that connects buyers and sellers. This was in Bhopal. “I had to meet the chief minister to sort out the problem. We have transactions happening every second. To check fraud we have mechanism but we can’t be in such a bizarre situation where founder is issued an arrest warrant for a Rs 5,000 fraud,” says the entrepreneur.
While GST could ease the multiple taxation problem, there are items that can’t be sold online as they are governed by laws formulated half a century back. For instance, ecommerce companies can’t sell medicines online as it’s prohibited by the Drug Act. “A chemist can home deliver medicines, but I can’t do it. When drug distribution laws were define there we no online pharmacies,” says Ganesh.
SHUTTING JUST AS HARD
If starting is a busy is not easy, what about shutting a business? The nature of startups is such that most will fail, but shutting ship too is awfully difficult. An entrepreneur looking to shut down a failed venture has to show three years of audited finances. The business must be kept running for one year after filing the proposal to shut shop. “A startup might figure within 18 months that it is not a viable venture and would want to move on to another venture,” says Padmaja Ruparel, president, Indian Angel Network. “The government has to appreciate that not all seeds will become trees.”
If a venture wants to go public, it must first list in India before going overseas. It should also make profits for three years prior to going public. Even with these obstacles, it pays to go public. Unlisted ventures have to grapple with a long-term capital gains tax of 30% and short-term capital gain tax of 20%. For listed companies, it is 0% and 15% respectively. Instead of rewarding companies taking bigger risks, the government is punishing them, according to Ruparel.
“The consumer has changed and the government is willing to change, “says Sharma. “But laws of the country are not changing at the same pace.”