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This article is more than 1 month old.

Importance of tax compliance for startups

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By keeping tax compliances on the back burner, startups may fail to see the risks to business profitability and growth.

Importance of tax compliance for startups
The Indian compliance landscape has grown over the years to become interoperable and transparent. The introduction of GST helped the government in digitising documents, providing them access to taxpayers’ transactions in real-time.
With e-invoicing, e-way bills, input tax credit restrictions, etc., the government is trying to close all gaps across the supply chain to minimise tax evasion and put an end to fraud. This means that tax compliance has become even more important, and for startups, it is vital for survival.
Focussing on growth is essential; But so is tax compliance
Startups, being companies in the initial stages of operations, often find themselves focussed on growth and find it challenging to prioritise tax compliance. Between building their marketing strategies and trying to create a brand name, there is very little time and resources left for adhering to compliances. In fact, there are many startups that may not have the resources to invest in a designated CFO or a tax team to take care of compliance.
By keeping tax compliances on the back burner, startups may fail to see the risks to business profitability and growth. Until not too long ago, businesses were unaware that tax payments were a way to save cash outflows and enhance working capital. And startups, being typically cash-rich, miss the connection between tax compliances as a means to increase their cash flows.
But now, especially with the new rules restricting input tax credit (ITC) claims to the extent invoices are uploaded by the vendors, there is a lot of scope for working capital optimization. Startups need to streamline their GST compliances and make use of the opportunity to optimise their working capital right from the beginning.
The cost of non-compliance for startups
The cost of non-compliance is higher now than before. From just being subjected to interest and penalties in cases of default, companies now need to worry that non-compliance could hit their working capital and profits, damage their reputation, and in extreme cases, cost them their GST registration.
When it comes to startups, they most often do not have an understanding of what they could be losing due to non-compliance. They need finance. And offshore investors are wary of investing in a company that is non-compliant. Especially as startups move towards their Series B and Series C funding, the pressure to remain tax compliant is all the more as investors outside India take compliance seriously. Non-compliance with any law could be detrimental.
For example, a few years ago, an American retail giant acquired one of India’s biggest e-commerce startups. As a part of the acquisition process, the acquirer undertook due diligence of the acquiree, i.e., the Indian startup, to check their compliance with various business and tax laws. Being a listed company, they could not afford their stock prices to get affected in the US. Hence, if startups, especially e-commerce companies, plan to get their businesses acquired several years down the line, they should start with stringent compliance measures from day one.
How can startups mitigate their compliance risks?
Startups can streamline their compliances, mitigate their compliance risks, and improve their working capital just by bringing in the right technology. In an era of automated return filings, reconciliations powered by artificial intelligence (AI), smart reports on tap for managerial decision making, startups really cannot ask for more to keep up their tax compliance. To enable and sustain growth, tax compliance is vital. But an aspect almost as important is cash flows.
Startups need a tech-based compliance partner to tell them how much money they are leaving on the table with every tax return filed. They need the right technology to keep their interest and penalties at a minimum. They need tax-saving measures in place to boost their working capital. They need reconciliations done and reports generated with a click of a button, as there are stakeholders always wanting information on hand. And the only way to get all of this and more is by digitising their tax compliances.
Tech-based solutions for tech-first companies
Most startups are already tech-first companies, so it’s an easier task to extend the use of technology to streamline tax compliance. Introducing technology into the fabric of a company helps it to deal effectively with the various regulatory challenges that increase with growth.
Take, for instance, an Indian online grocery startup that solved its TDS compliance challenges through the use of technology. The company was using the utility provided by the government and the data exported from its payroll to file its TDS returns each month. However, they were affected by multiple challenges along the way. They were not able to detect if the data inputs were as per TDS tax codes. They were receiving several notices for previous periods’ TDS returns, despite the data entered being accurate. The TDS software was not user-friendly and hard to navigate. They were also unable to do PAN validations in a scalable and secure manner, amongst other issues.
The online grocery startup approached a leading FinTech company for assistance on their TDS filing problems, who in a short span of time, resolved the issues they were facing.
The SaaS platform’s cloud-based solution had advanced tools to help identify the reasons for the notices being received and were able to file the required revisions in no time. They further identified incorrect PANs and name mismatches with the help of an inbuilt PAN validation feature. They then identified unconsumed challans and used them appropriately. The software allowed for an easy-to-use revision filing, along with ‘How to’ guides and dedicated support via CA experts.
The company was not just able to revise their TDS returns, but they also saved money by re-using the unconsumed challans. Their return on investment was 5x the value of the software purchased. Gaining monetary benefit and peace of mind from the tech-based solution, the startup purchased an annual license of the TDS software for all their entities.
The best technology that startups can tap for their tax compliances is the technology offered by FinTech platforms. Their modern solutions come with AI-based tools, one-click reconciliations, inbuilt data validations, automated alerts to flag discrepancies, intelligent reports, and more. Their solutions are future-ready and are priced less than established accounting firms and ERP systems, despite offering far more advanced benefits.
Hence, if startup founders wish to get that elusive funding or even get acquired a few years down the line, the answer is simple. Digitise tax compliances today.
The author, Archit Gupta, is Founder and CEO at Clear. The views expressed are personal
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