Today, India is arguably one of the hottest markets for startups in the world. In 2021 alone, nearly 46 startups from India achieved the prestigious Unicorn label by improving their valuation to over USD 1 billion. Besides, 2021 also saw a record USD 42 billion in funding raised by Indian startups, which was over 3 times the money raised in the past year. Access to talent across the country, quality of technology infrastructure, and a large spike in the consumption of digital services worldwide have created a lucrative proposition for startups catering to nearly every sector. Governments at the center and state level are also encouraging startups to set up shop and expand their business without worrying about legal complications.
However, there is one area where startups may overlook their strategies with the impression that those could be handled at the last minute with favorable government support. We are talking about compliance with the tax laws of the country. A combination of economic, geopolitical, and employment-based tax sops may be available for startups in different locations across the country. But all these concessions are governed by strict policy frameworks that define the conditions or criteria to be strictly followed by the startup to avail the favorable tax regime.
So, the question that comes to every startup leader’s mind now will be – what happens if tax compliance doesn’t meet the required standards?
Let us examine a few of the major challenges that startups will face if they do not have a strategic and comprehensive approach to taxation within their operations:

External funding scrutiny

We have already seen how 2021 was a record year for Indian startups when it came to drawing funds from investors. In the Indian startup ecosystem, a large portion of the funds raised is from external foreign investors. They may be foreign multinational companies, venture capitalist firms, reputed global banking or financial institutions, trust or corporate fund management firms, or even billionaire entrepreneurs themselves. Irrespective of external funding sources, one of the key attributes needed for the inflow of funds from outside the country into a business is the approval of the central bank or RBI. Failure to have a comprehensive taxation and compliance framework within a startup can set off alarms with the financial regulator and they have the authority to block funds from being deposited till mandatory compliance is achieved. Moreover, reasonable explanations for failure to comply until now will need to be given and it should be convincing.

Penalties and fines

Failing to have a strategic taxation framework within different business units can result in unpredictable and heavy fines being imposed on a startup by the tax authorities. The exemptions and relaxations that were provided to the startup require them to operate with a certain code of conduct with regards to their financial sourcing, employment targets, salary structure, benefit programs, etc. When audited by government bodies, any irregularities or discrepancies in the taxation framework will result in further intense scrutiny and can ultimately land the startup in deep trouble. They could even lose their registration credentials if the lapses are significantly higher than the threshold authorities set for compliance breach tolerance.

Merger and acquisition hurdles

It is quite common for startups to acquire other companies or merge with them over time to consolidate market position or to venture into new business segments with relative ease. However, without having a strategic tax compliance framework on board, there will be severe complexities when merging with the new entity. If either of the two firms does not have a standard taxation framework, it could result in a lot of tedious and labor-intensive re-engineering of tax credentials and further scrutiny and approvals will be required by authorities to ensure that the merger or acquisition goes through.

Efficiency hurdles

Without a standard taxation framework in place, it will be nearly impossible for a startup to drive efficiency in its financial operations. Most startups rely on a diverse range of digital solutions to handle their end-to-end financial planning and execution. With a broken taxation framework, such solutions may prove to be ineffective in automating financial processes and ultimately fail to prove their ROI.

It is true that startups need extra support with policy and regulatory relaxations from government authorities. But that is in no way an excuse for failing to create a strategic taxation framework within the startup from its inception. This framework will serve as a key pillar of compliance and sustainable growth of the business and hence requires more than just an average tax advisory service.

Startups need access to technology-driven and automation-enabled taxation frameworks supported by a skilled advisory to ensure end-to-end compliance. Get in touch with us to experience a truly global advisory on best practices for taxation frameworks and guidance on selecting the right technology to power your startup’s taxation needs.