Importance of tax compliance for startups
The Indian compliance landscape has grown over the years to be interoperable and transparent. The introduction of the GST helped the government digitize documents, giving them access to taxpayer transactions in real time.
With electronic invoicing, electronic invoices, input tax credit restrictions, etc., the government is trying to fill all the gaps along the supply chain to minimize tax evasion and end the fraud. This means that tax compliance has become even more important, and for startups, it is vital for survival.
Focusing on growth is essential; But tax compliance too
Startups, being businesses in the early stages of their operations, often find themselves focused on growth and struggling to prioritize tax compliance. Between building their marketing strategies and attempting to create a brand name, there is very little time and resources left to adhere to compliances. In fact, there are plenty of startups that may not have the resources to invest in a designated CFO or tax team to take care of compliance.
By keeping tax compliance on the back burner, startups may not see the risks to business profitability and growth. Until not too long ago, businesses did not realize that tax payments were a way to save cash outflows and improve working capital. And startups, being generally cash rich, don’t see the link between tax compliance as a way to increase their cash flow.
But now, especially with the new rules restricting input tax credit (ITC) claims as invoices are uploaded by vendors, there are plenty of opportunities for working capital optimization. Startups need to streamline their GST compliance and take the opportunity to optimize their working capital early on.
The cost of non-compliance for startups
The cost of non-compliance is higher today than before. From simply being subject to interest and penalties on default, companies must now fear that non-compliance could affect their working capital and profits, damage their reputation and, in extreme cases, cost them. their GST registration.
When it comes to startups, they often don’t understand what they could lose in the event of non-compliance. They need funding. And foreign investors are reluctant to invest in a non-compliant company. Especially as startups move towards their Series B and Series C funding, the pressure to stay in tax compliance is even greater as investors outside of India take compliance seriously. Failure to comply with any law could be damaging.
For example, a few years ago an American retail giant acquired one of India’s largest e-commerce startups. As part of the acquisition process, the acquirer performed due diligence on the acquired company, i.e. the Indian startup, in order to verify its compliance with the various commercial and tax laws. Being a listed company, they couldn’t afford to have their stock price affected in the United States. Therefore, if startups, especially e-commerce businesses, plan to acquire their businesses several years down the road, they should start with strict compliance measures from day one.
How can startups mitigate their compliance risks?
Startups can streamline their compliance, mitigate compliance risk, and improve working capital just by bringing in the right technology. In the age of automated reporting, artificial intelligence (AI) powered reconciliations, smart reporting at your fingertips for managerial decision-making, startups really can’t ask for more to maintain tax compliance. To enable and support growth, tax compliance is vital. But almost as important an aspect is that of cash flow.
Startups need a tech-based compliance partner to tell them how much money they’re leaving on the table with every tax return filed. They need the right technology to keep their interest and penalties to a minimum. They need tax saving measures to increase their working capital. They need one-click-generated reconciliations and reports because there are stakeholders who always want information at their fingertips. And the only way to get all of this and more is to scan their tax compliance.
Technology-driven solutions for tech-driven businesses
Most startups are already tech-driven companies, so it’s easier to expand the use of technology to streamline tax compliance. Introducing technology into the fabric of a business helps it effectively deal with the various regulatory challenges that increase with growth.
Take, for example, an Indian online grocery start-up that solved its TDS compliance issues through the use of technology. The company used the government-provided utility and exported payroll data to file its TDS returns each month. However, they were affected by multiple challenges along the way. They were unable to detect whether the data entered complied with TDS tax codes. They received multiple notifications for TDS statements from previous periods, despite the accuracy of the data entered. The TDS software was not user friendly and difficult to navigate. They were also unable to perform PAN validations in a scalable and secure manner, among other issues.
The online grocery start-up approached a leading FinTech company for help with its TDS filing issues, which in no time fixed the issues it was facing.
The cloud-based solution of the SaaS platform had advanced tools to help identify the reasons for receiving notices and was able to file the required revisions in no time. Additionally, they identified incorrect PANs and name inconsistencies using a built-in PAN validation function. They then identified the uneaten challans and used them appropriately. The software enabled easy-to-use revision archiving, as well as “how-to” guides and dedicated support from CA experts.
The company was not only able to revise its TDS statements, but it also saved money by reusing unused challans. Their return on investment was 5 times greater than the value of the software purchased. With a financial benefit and peace of mind from the technology-based solution, the startup purchased an annual license of the TDS software for all of its entities.
The best technology that startups can use for their tax compliance is the technology offered by FinTech platforms. Their modern solutions come with AI-powered tools, one-click reconciliations, built-in data validations, automated alerts to report discrepancies, smart reporting, and more. Their solutions are future-ready and cost less than established accounting firms and ERP systems, although they offer much more advanced benefits.
Therefore, if startup founders want to get that elusive funding or even be acquired a few years down the road, the answer is simple. Digitize tax compliance today.
The author, Archit Gupta, is founder and CEO of Clear. Opinions expressed are personal