RBI’s hurls a giant boulder at Indian startups! Know how

Startups do not like the RBI's 2013 circular as it requires them to file software-export forms for every transaction. It has further proved to be a nightmare for companies that are now required to submit the form, in four copies, for every transaction.

Earlier, the softex forms were needed only for invoices exceeding $25,000. Only few startups had a significant level of transactions of that amount but when the RBI removed the floor, every software export transaction was targeted, reported the Economic Times.

The procedure to file a form is lengthy and tiresome. A company has to fill in the details of the invoice, along with the contract or statement of work. The form is available on the Reserve Bank of India (RBI) website and can be downloaded from there. Four copies have to be made from it -- one for the Software Technology Parks of India which will certify the transaction, one for RBI, one for the startup's bank that receives the payment and one for the startup.

But in some cases the form, in its current form, can't be filled, as in the case of a startup selling an application on a Google or Apple Store, which has no contracts or invoices.

For startups that want to comply with the rule in its current form, the process is painstaking and adds costs.

Ravi Gururaj, chairman of the Nasscom Product Council, told ET: "This is very frustrating. We have made representations to the RBI to explain to them that this is very onerous for a startup and we want them to restore the threshold because there are micro-transactions that are getting caught. We have asked them if the forms can be aggregated, so it can be filed once a month, or once a quarter. We are waiting for their decision."

Gururaj further said that they were working with several startups and product companies that were facing problems in trying to comply.

"We have about 400 invoices a month that range in size from $2000-$30,000. I have to create 1600 forms, and each has to be signed. We are also starting a business when you can use our software for $10 a month, and we want thousands of customers. I will have to hire people just to finish these forms and then I will have to buy a truck to deliver them," Abhishek, a founder at a startup that develops applications for customers outside India, said.

A second startup founder said that while he knows about the circular, his bank doesn't.
"They only ask for Softex forms for invoices over $25,000. So, currently, it isn't a problem. But we know we are non-compliant. The problem is that in the current state, we don't know how to even become compliant with it becoming a big problem," Atul, who runs a small IT outsourcing firm, said.

Startups are now caught in a Catch-22 situation. They could either comply with the notification, inflating their costs, or they could postpone complying and face flags in the due diligence process when they try to raise funds.

Experts on Softex forms say that even larger companies are just beginning to comply with the circular that was sent about two years ago.

"We have clients that are just beginning to comply. But in defence of the central bank, they have tried to make the process easier by shifting it online. And they have been understanding and lenient when they see non-compliance. But saying you are ignorant of the rule is not an excuse," Divya Gupta, Director of Tax at consultancy KPMG, said.

Gupta added that as yet there was not adequate knowledge about the rule change.

(Image: Reuters)