Saturday Sep 21, 2024
Saturday Sep 21, 2024
Friday, 13 October 2023 00:10 - - {{hitsCtrl.values.hits}}
Startup incubator “Hatch”, partnered with Draper Startup House to open Colombo’s first Co-Living Space to drive collaboration between digital nomad entrepreneurs and local startups this year, a great initiative to propel Sri Lankan startups
We are once again at crossroads; looking to the future and hoping that we make the right decisions to better Sri Lankan lives. We are wondering which magic wand to wave to make life better. As much as the gumption of entrepreneurs is what directs our future with regard to business opportunity, the policies of Governments and the direction given by political leaders in making use of it, have also played a great role in the success of ventures.
Benchmarking
Take for example the Accelerated Mahaweli Development Program under the leadership of President Jayawardena or the Apparel Industry expansion of President Premadasa, the impetus given to the IT industry under the patronage of President Kumaratunga and even the massive infrastructure development under President Mahinda Rajapaksa. All of these projects, while generating revenue for the country, also went towards establishing livelihood programs for the people. One could say they are legacies left by those respective leaders.
Today we need to ask the question, ‘What next?’ The answer is simple: Startups.
Sadly, this is an area Sri Lanka is lagging behind, unlike our closest neighbour India or even Bangladesh. India has more than 99,000 startups, making it the third-largest startup ecosystem in the world, and 108 ‘unicorns,’ valued at US$ 340.80 billion as of March 31, 2023. 21 new unicorns emerged in 2022, commanding a total value of US$26.99 billion. Bangladesh, which is considered a late starter in the global race for unicorns, has already established 2 unicorns and expects 5 to launch in the next 2 years. Their startup ecosystem, while nowhere close to India, is showing growth with over 2,000 startups in the tech industry, which according to the Bangladeshi Government has helped generate 15 lakhs of jobs.
India’s mammoth growth figures need not deter Sri Lanka too much, because in terms of size, we are nowhere close. But we can aspire to become like India and not consider gaining that level of success as an unattainable dream because the very idea of most startups, especially in the digital arena, takes crossing borders effortlessly and capturing markets outside their territories into account.
Startups Potential
India, under the leadership of Prime Minister Narendra Modi, launched the Startup India Programme in 2016. In the past few years, the Indian Government has focused on deploying the country’s ICT infrastructure by providing policy support for enhanced e-governance. Investments, and technology innovation through research and higher education to support entrepreneurship and spur economic growth are key areas they have concentrated on.
The way India looks at its startup ecosystem is clearly different from the environment for startups in Sri Lanka. From a policy perspective, entrepreneurs have found our Government agencies wanting in terms of legislation and support necessary for creating the right environment for investment. It is a given that the future of our businesses lie in startups which can grow into stable companies and aspire to become unicorns, a direction in which India is moving ahead in leaps and bounds. The country which has produced around 91 unicorns within the last 5 years, is positioned as the third-largest hub for startup unicorns, with its highest number emerging during 2021. Ironically it was also the same time India was fighting its largest COVID-19 wave.
Coming back to Sri Lanka, a question that begs asking is why we do not have even a single unicorn or even an acknowledged soonicorn to date? In today’s terms, yes, we do not have the necessary economies of scale. Nonetheless, we can have a proper policy for domiciled and non-domiciled digital operators. That would give our local digital industry the necessary push to grow confidently and exponentially by crossing sovereign borders and gaining access to bigger markets, the same way global companies are accessing ours.
The Tax question - who pays?
With the IMF edict to collect more taxes, the startup industry amongst others have come under the hammer for the removal of tax exemptions, which would be a considerable setback for this relatively young industry. But that is not the only problem faced by local startups and entrepreneurs. What’s far worse is the lack of a level playing field for them to operate in, which is where the Government should and must play a significant role.
The stunning growth in India’s startup culture is strongly connected to the initiatives taken by that country’s Government. From 2009 to now India has launched more than 12 initiatives to create a conducive environment for their emerging businesses and startups. When the Startup India program was launched in January 2016, the Government announced a Fund of Funds for Startups (FFS) at the Small Industries Development Bank of India (SIDBI) with a corpus of INR 100 billion to be allocated to alternative investment funds (AIFs). The Government has also set up various other initiatives that tie into supporting startups and entrepreneurship. For example, a look at their industry-academic-Government linkages in patents shows that India is emerging as a patent hub, especially with newer Government initiatives such as the Startup Hub at their Ministry of Electronics and Information Technology (MeitY), which helps strengthen 51 incubation hubs through fast-track patent clearances.
Sri Lanka needs to follow suit. A visionary Government would ensure a consistent and coherent fiscal policy that supports startups; bring in educational reforms to foster skilled labour that’s required by startups in fields such as software engineering, agricultural/logistical technology etc. Another vital factor is a conducive diplomatic policy which allows for collaboration between large, well established tech hubs such as China, India and USA. For example globalisation has boosted the spread of technology across borders, in that it allows countries to gain easier access to foreign knowledge. It also enhances international competition, allowing the rise of emerging market companies, which incentivises local startups to innovate.
These kind of policies are a crying need in the current scenario where the IMF agreement will bring many setbacks to digital startup companies with long term repercussions for the industry, such as:
Despite startups being vital, they can only develop up to a point in Sri Lanka because of the absence of proper laws to create a protective net for startups, especially in the case of technology related gig operators. In order for entrepreneurs to build startup companies on the digital platform, incentives such as tax holidays are necessary. Developing global brands call for thinking beyond just the local market.
Stability and a commitment to policy
The International Finance Corporation (IFC) Disruptive Technology Investments South Asia Lead Ruchira Shukla said last year that a distinct commitment to supporting tech start-ups is necessary in order to create the ecosystem for stakeholders to come together to make it happen. “Stakeholders include entrepreneurs, investors, regulators, offline businesses that need to partner with digital businesses, large domestic corporates, even Sri Lankans living overseas, who are willing to bring insights and capital back to the country. Sri Lanka has the key ingredients, but stability and a commitment to policy that supports digital businesses is a must for the whole thing to come together, especially considering the country’s volatile past.” (Daily FT - 26.01.2023)
To date there are only a few Sri Lankan companies that have crossed terrestrial borders in this highly porous digital world to create markets for their goods and services in other geographic locations.
Digital colonisation - the wild west law
Unfortunately for us, companies that originate from large developed countries who were known to be the proponents of fair-play, have become the very ones to break the rules of engagement in our part of the world. These companies operate under the radar, taking advantage of Sri Lanka’s loose legal framework. They are decimating our domestic market to the extent where our own entrepreneurs who yet have hope of developing the country are in danger of becoming disheartened enough to migrate their business elsewhere.
Startups are not only about growing companies and making money. It is also about new ideas on how to manage various segments of a country’s economy. For example, India has digitalised agriculture by integrating cutting-edge digital technology into their farm production system, including artificial intelligence (AI), robotics, uncrewed aviation systems, sensors, and communication networks. AI currently helps farmers increase yield by assisting them to choose better crops, hybrid seeds, and resource-efficient farming techniques. It is also utilised to improve farming productivity and accuracy to assist farmers in creating seasonal forecasting models. (investindia.gov.in)
How can Sri Lanka follow suit?
Sri Lanka does not have to reinvent the wheel. In matters of digital taxation, we can align with Indian policy and take a cue from them because they are benchmarking across the world. This would protect us from the displeasure of western countries who are insisting on painting us into a corner where rules and regulations are concerned. India started the process a little before the pandemic, and they have been working on several versions of digital taxation in terms of taxing global entities.
In going through a constant process of figuring out what is most effective, India levied withholding tax on earnings of non-residents and also introduced an equalisation levy to tax income transfers by digital companies like Amazon, Flipkart and Google, which may not have a complete physical presence in the country. (Business Standard 02.07.2021)
Bangladesh is another neighbour who has made it a mandatory requirement for any business operating in the country to be registered with their Board of Revenue. Accordingly, Tech Giant Google has obtained their Business Identification Number (BIN) from the Board and now pays a 15% VAT on any revenue they derive, and has to submit returns on their total turnover at the end of each year. Also after much effort, Bangladesh got Facebook to appoint an agent in the country in 2020, all of this ensuring that these foreign players pay their dues for operating in Bangladesh, securing it’s tax income.
Need for a solution soon
Despite the rapid growth digital services have achieved globally, local startups face difficulty competing with non-domiciled companies that operate in Sri Lanka. This is due to several reasons, key amongst them being the lack of a level playing field when it comes to fiscal obligations. Collecting taxes from non-domiciled companies has to be done on the same rules that are applied to local digital companies to ensure local players are not placed at a disadvantage as opposed to their multinational counterparts.
To address this issue, common rules in taxation that ensure a level playing field need to be established. The absence of such regulation allows non-domiciled companies to evade taxes, putting local businesses at risk. The lack of monitoring and regulation in the digital economy also hinders Sri Lanka's ability to harness its market potential.
Equal opportunity will enable local startups to compete with global giants. While global consensus on taxation is complicated and time-consuming, immediate action is required to safeguard Sri Lanka's fragile markets. Local authorities need to bring foreign digital companies operating shop fronts in Sri Lanka within the tax net as ensuring their compliance is crucial. Startups have the potential to fuel Sri Lanka's economy, but the challenges they face in the absence of a regulatory framework and a level playing field threaten their very existence. Sri Lanka can follow India's lead in implementing digital taxation policies, to avoid external pressure and create a fair business environment.
In this light, policymakers need to reconsider the proposed VAT on Sri Lankan software services. A collaborative approach that involves the industry stakeholders in devising a tax framework that’s equitable, encourages growth, and safeguards long-term economic prospects is the need of the hour.
Startups have a tremendous potential to grow the economy exponentially, and much will be lost if we don’t figure this out.
(The author is a Startup entrepreneur, Founder CEO of PickMe and a Past President of the Digital Chapter of FITIS, is a driving force in technopreneurship in Sri Lanka. He was instrumental in the launch of several local e-commerce companies. Under his leadership PickMe’s technology driven platform has changed the transport and food delivery industry in the country, becoming the leading local enterprise of its kind with a sizable market share. His vision is to expand PickMe’s services across the world and to drive the company in the direction of becoming the country’s first Soonicorn.)
