Author Archives: Aristotle Consultancy

Being A Startup Doesn’t Give You The Right To Be Unprofessional

Don't be unprofessionalIt’s very exciting as a founder when you start a company, you are full of energy and excited about the possibility of the future. Before you get to doing the fun stuff make sure you’ve got the foundation down. A lot of startups I’ve seen neglect some very basic things that will eventually cause the company to implode, whether its employees leaving because they don’t feel appreciated, or paying huge fines because they didn’t take care of basic accounting and taxes.

Basic Needs

Take care of your business’s basic needs. Doing accounting is one of those things which is so ‘uncool’ it’s boring as hell, however it’s oh so important. Getting your taxes right from day one is going to save you a lot of time and money later down the line. I used to be a part of a startup that neglected this and we ended up paying a huge fine. Get it done! DO NOT LEAVE THIS! I promise you if you don’t do this, you will fail as a business.

Another thing I see as a problem is basic employee benefits such as social insurance. These are basic benefits for employees that every business is obligated to provide by law. If you are a startup and don’t have social insurance for your employees, you are neglecting to take care of your employees basic needs.

Understand that as a founder, whether you are burning through your savings, or using investor’s money you are the beneficiary for your business. Chances are your employees are earning a salary and are not entrepreneurial and don’t care about your stock options. They want to save as much of their salary as possible and should they get sick or something happens they will want those benefits that the state provides them. As the founder of a company you may not need it because you come from a background of abundance and have private insurance, but your employees may not have the same benefits you do. Show some empathy and sort this out! There are so many startups I’ve seen and heard about that don’t provide social insurance for their employees its outrageous.

Another thing I see a lot is companies who never pay to train their employees or buy books or online courses for their team members. If you’re not doing this, well you should start. Everyone wants to grow, and by providing this as a company your employees will feel like your company is a place where they can develop their skills and grow as an individual.

Work Hours

Another issue I see crop up a lot is founders having absolutely no respect for employees time-off. Your employees are not your co-founders. You are paying them a salary for a fixed amount of hours to work in a day. Generally 6–8 hours / day depending on how the startup is organised.

Chances are your employees don’t care about stock options. If you’ve offered it to them, have you signed an agreement? Have you asked them if they want it? Your employees are only obligated to work the official work hours for you which is 8 hours / day 5 days a week, that translates to 40 hours / week. Any time beyond that you should thank them and make them feel appreciated. It doesn’t always have to be money, figure out a way to show real appreciation. Most of the time a heart-felt ‘Thank You’ or buying them dinner is enough.

Under no-circumstances should you contact your employees over the weekend to ask them to do something. If you really must ask them to do something because it’s an emergency, then ask nicely. If they can’t, respect it! Chances are if your employees are motivated and love working with you because they know that you are taking care of them, they will take care of the problem even if they’re on holiday. They need to have a life outside of work, be free to live their lives. They need to feel that they have some time-off from work, otherwise your company is going to suffer a burn-out and then your productivity will really take a nose-dive.

Family Values

Reading through this you may be mistaken to think “are employees motivated by these benefits?” No they’re not, they just need to know that should something happen the founder of company has their back. Taking care of basic needs will help your employees feel safe, because they see evidence that you took care of their basic needs. You’ve got their back.

Running a company is like starting a family. Your employees become your children. Would you ever let your children go without education, health-care and appreciation? Absolutely not! You would be classified as bad parents if you did. Taking care of your companies taxes, your employees taxes, providing training, having respect for your employees time off will make them feel safe, happy and appreciated. If you want motivated employees take care of them! They are the foundation for your business.

Source – Inc42

Draft law proposes to bring e-commerce under GST

GSTThe draft model law on goods and service tax (GST) has proposed bringing all online buying within the purview of the proposed levy. The move will end uncertainty over tax on purchases from e-commerce sites.

Introduction of GST will provide clarity on where the tax is levied, as the entire burden moves from the point of production to the point of consumption. In recent months, states such as Karnataka and Uttar Pradesh have imposed levies due to pressure from brick-and-mortar retailers but the legislation seeks to bring parity. For instance, UP recently imposed an entry tax on purchases from e-commerce sites.

In a note, consulting firm PricewaterhouseCoopers said the draft bill, released for public comment after a meeting of state finance ministers with Arun Jaitley in Kolkata on Tuesday, has proposed tax collection at source for e-commerce, which will mean that any payment made to a supplier would be subjected to the provision at a notified rate. The draft will form the basis for the final law incorporating some of the changes suggested by experts. It will help provide clarity and the rationale for introducing some of the provisions in the landmark indirect tax reform measure.

Experts said the inclusion of e-commerce under the ambit of the tax will pose a huge burden on these companies. “This will mean significant compliance burden on e-commerce companies as many of them deal with thousands of vendors. Further, this may lead to refund situation for many suppliers who operate on thin margin. In addition, e-commerce companies will need to file a statement providing details of all supplies made through this platform,” said Pratik Jain, indirect tax leader at the consulting firm.

In any case the government is proposing to cast the net wider by including several more players within GST. Instead of a threshold of Rs 1.5 crore for central excise, the draft bill has proposed a Rs 10 lakh as threshold and any unit, service provider or retailer above the floor will be required to register and will be subject to tax.

The proposed legislation also seeks to end uncertainty on software as intangibles will be considered as a “service”. Similarly, work contracts will also fall within the service segment and will ease life for the infrastructure sector.

GST, which has been in the works for a decade, is seen as one of the most important tax reform initiatives post-independence, but is stuck in Parliament due to opposition from Congress. On Tuesday, finance minister Arun Jaitley met state finance ministers to thrash out a consensus on some of the contentious issues and the government hopes to introduce the Constitution amendment bill to implement the tax in the monsoon session of Parliament.

Source – ET Retail

Indian Patent Office Issues Guidelines For Startups

IP guidelines for StartupsIn order to promote awareness and adoption of intellectual property rights of startups and protect and commercialise them, Indian Patent Office has issued some guidelines. This will guide the startups regarding the procedure to be adopted for filing/processing their applications for patents, designs, trademarks and fees to be paid to the facilitators thereof.

The step will help in encouraging entrepreneurship and to boost innovation.

As per the guidelines, a startup willing to file a patent application for an invention will have to select one facilitator from a list of 280 facilitators, who would help in preparing the request and also assess the patentability of the invention as per acts and rules.

In case, the startup is unable to select a facilitator, should contact the head office of the respective Patent Office as per jurisdiction, who shall provide three names of the facilitator and the startup will finalise the name.

The public notice further added that the fee for filing the application and other statutory fees would have to be borne by the startup. Earlier in January, the government announced to bear the cost of facilitation for filing of patents, trademarks or designs as well as relaxed public procurement norms for startups.

The application will further get passed to the Head of Office of respective patent office and will than forward it to the office of the CGPTDM (Controller General of Patents, Designs & Trade Marks).

The facilitator shall also have to monitor and perform further steps of proceedings of startups patent application, prepare the reply to any query from patent office, attend the hearings, etc. and shall file the relevant documents in patent office by following the timeline.

The process will be similar for filing and processing applications for designs and trademark, where facilitators will be chosen for list of facilitators of patents and facilitators of trademarks, respectively.

Source – Inc42.com

Startups with slashed valuation may now need to pay tax on “extra” consideration

Startup New TaxAs if the slashing of their valuations was not worrying enough, the income tax department, it appears, is planning to tax startups who have witnessed a slash in valuations.

Section 56 of the Income Tax Act confers the tax department the power to tax the excess consideration (more than the fair value) against issue of shares in the last round of funding.

Fair value is basically the actual value of the company. Recently, the valuations of many companies like Flipkart and Snapdeal were slashed due to worries over profitability, growth, and intense competition. These were factors that were not considered in earlier valuations; thus, the company was considered overvalued in earlier rounds of funding.

The income tax department is of the opinion that considering the current slashed down valuations as the fair price of the company, the differential amount of the funds raised in earlier rounds at a higher valuation are taxable.

Let’s understand this with the help of an example.

  • XYZ Limited is a startup with a share capital of 2,00,000 ordinary shares with face value of Rs 10 per share, making the total share capital Rs 20,00,000.

 

  • At the time of the first round of funding, 50 percent of the shares were issued at a price of Rs100 per share. It means 1,00,000 ordinary shares were issued at Rs100 per share and company received Rs 1,00,00,000 as initial funding. The issue price of Rs 100 per share comprises Rs 90 as share premium.

 

  • Now, at the time of second round of funding, 25 percent share were issued, but this time at a lower price of Rs 50 per share because the valuation of the company was slashed. It means 50,000 ordinary shares (2,00,000 shares x 25 percent) have been issued at Rs 50 (Rs 40 as share premium) per share and company received Rs 25,000,00 in the second round of funding.

 

  • Now as per the tax department, the current valuation of the company per share is Rs 50 per share and the extra consideration received during the first round of funding becomes taxable.

Calculation of taxable amount:

Premium received: First round: 1,00,000 shares x Rs 90 per share = Rs 90,00,000

Less: Share premium as per latest valuation: 1,00,000 shares x Rs 40 per share = Rs 40,00,000

Thus, extra consideration received = Rs 90,00,000 – Rs 40,00,000 = Rs 50,00,000

Normal Tax Rate of 30 percent, plus surcharge will be applied on Rs 50,00,000 received as extra consideration.

However, the tax department is exempting those startups who have been funded by venture capital funds registered with the Securities and Exchange Board of India (SEBI).

 Purpose of this tax

Section 56 of the Income Tax Act aims at controlling black money in the economy.

Investing in startups is one way of bringing black money in circulation where sometimes the firm may be purposefully over valued to raise more capital, and bring in more black money from promoters who may rerouting their money as angel investments. The recent frequent valuation markdowns might indicate towards a certain level of intentional or unintentional faulty assumptions made during the first round of funding, and this has brought the government’s attention to this issue.

Impact on startups

Raising initial rounds of funding is a struggle for any startup, and this tax seems to only add to the intensity of this struggle.

“Valuations are based on what is going to happen in future. It can only be guessed and no one can predict accurately,” says Neeraj Jain, Co-founder at Zopper. “Startups are struggling to raise money and it is unfair on the part of government to take away money from them.”

Though taxmen cannot be deemed completely wrong in triggering this scrutiny, however, compared to the extend it will help curb black money, this levy might prove much more detrimental to the startups.

Valuations at initial stages of business are very tricky as there is no past data to build a model on. It’s based on assumptions, opinions, and expectations. Thus, it cannot be assumed that every overvaluation is intentional. This tax will, however, embed a constant fear about valuations in the startup world.

In the initial stages, startups struggle with fund requirements at every step and the extra tax burden is going to increase the pressure further. Also, angels will get warier and apprehensive about making investments, making raising funds even more tough.

Startups are too vulnerable and the money crunch can lead to hampered operations or even shutting down shops.

Summaries

This is definitely not good news for germinating businesses. This tax is not formally yet announced, and we can still hope for amendments and exemptions.

However, if implemented, startups will be left with only two options – either be very careful with valuations at initial stages, and in worst case bear the taxes, or look for other methods of funding than equity, i.e., debt and debentures.

Source – YourStory