Let’s talk about red tape, cash flow, say Indian startup founders

Goyal called out companies for focusing on quick-commerce services like food and grocery delivery, which cater to affluent customers and create low-skill employment opportunities. Instead of “making fancy ice cream and cookies”, Goyal suggested that Indian startups emulate China’s emphasis on high-end technologies such as AI, robotics and semiconductors.

Four days after making his initial statements, Goyal addressed the criticism his comments drew at the Rising Bharat Summit in New Delhi. He reiterated that his intention was to push for innovation rather than focus on convenience tech apps like food delivery.

ThePrint reached out to the Department for Promotion of Industry and Internal Trade (DPIIT), which runs the Startup India initiative, for comment via email and telephone. No response was received till the time of publication.

It was the lesser-known founders—the ones not splashed across Forbes 30 Under 30 covers —who have voiced the most frustration on the government’s view. In a Reddit post that quickly went viral, Jahagirdar shared how his semiconductor startup had been repeatedly stymied by bureaucratic red tape, preventing it from competing at a global level.

“Every time there is a government department that I need to interact with, either I need to go and meet someone for things to move, or I have to face delays,” Jahagirdar told ThePrint, adding that full working days get wasted when dealing with compliance-related issues.

Since 2016, over 1.5 lakh startup recognition certificates have been issued by DPIIT, Ministry of Commerce and Industry. Benefits of recognition include exemption from paying income tax for three consecutive financial years out of the first ten and an online process for self-certifying compliance with various labour and environmental laws.

While these initiatives have generally been well received—particularly the shift to fully digital compliance and tax filing systems—many founders argue that building a successful company in India is not a cakewalk as regulatory burden often becomes a drag.

For them, the government’s regulations are a maze of red tape, shifting goalposts, and inconsistent enforcement that disproportionately affects early-stage and mid-tier startups.
Infra and bureaucracy

Murtaza Amin, 33, returned to his hometown of Burhanpur, Madhya Pradesh, in 2016 to start BizProspex.com, a Knowledge Process Outsourcing (KPO) firm that now employs 85 local people. In the middle of an international client call a few weeks ago, the power ran out—a regular occurrence in his town.

“People told me to get a generator, but what can I do when even the internet service provider has no power?” said Amin, who had also put up a post on X after Goyal’s comments. “There is zero support from the government over here.”

Amin was previously working in Mumbai but moved to Burhanpur because he wanted to generate meaningful employment in an area dominated by farming and power looms. According to him, the government needs to focus on reverse migration and provide adequate opportunities for people in smaller towns.

Startups aren’t just being built in Bengaluru and Gurugram. Founders in smaller cities, tier-2 and tier-3 towns are increasingly taking the plunge, but they often find that the ground reality hasn’t caught up with the government’s startup vision.

Since Amin’s tweet went viral, he has received calls from several bureaucrats and ministers offering support. A minister from the state government of Kerala also floated the idea of Amin shifting his business to South India.

“I went backpacking around China for one month in 2017, speaking to founders there. They are successful because they can create jobs in their villages too,” said Amin, in reference to Goyal’s comparisons with China.

Burhanpur, 350 km from Madhya Pradesh’s capital, Bhopal, has no Provident Fund (PF) or central GST office. This forces him to travel over 60 km away to Khandwa, where he deals with government officials face to face.

“Earlier, every business had to travel to Indore, 180 km away, for PF-related work. Now it is Khandwa,” said Amin, frustrated about the time and resources wasted in dealing with compliance. “It’s not like I need to go there regularly, but let someone visit Burhanpur maybe once or twice a month and deal with the 300+ businesses that are here.”

Even tier 1 cities like Mumbai have infrastructure problems. An entrepreneur in the oral wellness space, who did not wish to be named, recalled the challenges he faced with warehousing of his products in Bhiwandi, a major trade centre located 20 km northeast of the financial capital.

“The infrastructure to get in and out of there is terrible,” he said, adding that trucks are stuck in traffic for over ten hours at a time. Several FMCG companies store their products at warehouses in Bhiwandi on account of the availability of space and lower rental costs. But roads are cratered and narrow, power outages are common, internet connectivity is unreliable, and waterlogging frequently halts operations for days.

“We have missed our delivery to Amazon warehouses countless times,” he said, adding that this drives up costs for new businesses. “Every year, like clockwork, it gets worse during the monsoon season.”

But for many first-time entrepreneurs like him, the very first hurdle begins at the point of GST registration. When he started his company during the Covid-19 pandemic, his small team of four was operating from their respective homes.

“We had to get an address at a commercial building, so we used a third party for the privilege of using their address,” he said, noting that GST registration requires a physical office space. But even after he had all the prerequisites required for obtaining the certificate, he alleged that visiting the department in person and paying an additional fee was required. But his troubles didn’t end there.

Since his products were manufactured outside the country, they were often held up for inspection by the Central Board of Indirect Taxes and Customs (CBIC). He had to declare the purchase price to CBIC, who would also see the MRP (maximum retail price) mentioned on the product label. According to him, CBIC officials would attempt to dictate what his MRP should be, which falls outside their purview.

“They would feel it’s their duty to tell us what the MRP should be, because they know the cost,” he said, clarifying that a reduced MRP would not be sustainable for him since he already heavily discounted his products on Amazon. Inventory would be held up until an arrangement was reached with the CBIC officials.

At least four founders noted that widespread petty corruption persists in government departments that involve in-person interactions. Online and system-based processes like income tax filings, provident fund submissions and GST returns function smoothly, but the moment manual intervention is required, inefficiency and bribery tend to creep in.

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The China model

When Goyal made comparisons with China, founders on social media were quick to point out that this very inefficiency was holding the Indian ecosystem back. However, for two business operators, China isn’t the startup utopia it’s purported to be.

“What stood out for me was the infrastructure that China had in place,” said Utkrishta Kumar, a former e-commerce founder who was impressed with the fulfilment centre capabilities and highways across Shenzhen, Shanghai and Guangzhou. “From 2015-2017, I also saw how the digital payments ecosystem had developed in China. But UPI has done a one-up on that.”

But as a foreigner, Kumar had difficulty navigating the ‘protective economy’ of China, which had rules that favoured local businesses. According to him, processes such as hiring local people on his company’s payroll, sending funds to Chinese banks and paying local vendors were complicated and bureaucratic.

Gunjan Bagla, who runs a company that promotes trade between the United States and India, said that for venture-funded startups, comparisons should never be made with China in the first place, as they are subject to a completely different regime. Bagla’s inspiration lies somewhere else.

“We should be looking at United States and Israel,” said the entrepreneur, adding that startups thrive when there are fewer constraints. “In the US, entrepreneurs can establish a new company quickly and there are not a lot of limitations on what a company can do. Their equivalent of the MCA (Ministry of Corporate Affairs) does not place many constraints if a startup needs to change its business model.”

Bagla highlighted that the flow of capital is crucial for early-stage startups and fostering innovation. To him, the government of India has made it difficult for foreign funding to enter and leave the country.

“Money needs to flow freely in and out,” he said, before underscoring that there are numerous people and companies in the United States who are ready to invest in India. “But not many will do it if they can’t see their money getting out of India easily upon exiting a successful startup.”

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The compliance burden

Startup compliance in India varies significantly depending on a company’s structure, employee count, industry, and even the state it operates in. Jahagirdar’s chartered accountant sends a detailed compliance calendar every month for his semiconductor design business. At some point, Jahagirdar couldn’t keep up with the new compliances that cropped up every year.

“One fine day, a government department will say you are in violation of this compliance, and we are imposing a penalty on you,” said Jahagirdar, adding that the department will also charge an interest rate on the penalty for the number of years the compliance was missed.

TaxGuru, a tax news website that publishes a list of monthly compliance requirements, listed over 40 filings for March 2025. Not all filings are relevant to companies. But the sheer volume of regulatory requirements has led to a surge in specialised accounting and consulting firms that help entrepreneurs navigate the complex legal landscape.

“There is a gap in the knowledge between entrepreneurs and government processes,” said Shreya Bajaj, 33, founder of Metis, a university application management platform. “You end up hiring a specialised firm whose sole job is to take care of your compliance. But sometimes even they lack complete knowledge since guidelines keep changing.”

Bajaj added that even online form submissions eat into precious time, particularly when government portals crash. To meet compliance deadlines, startups often need an employee to repeatedly check and retry submissions every few hours. Hiring external consultants only piles on additional costs, straining early-stage company budgets further.

For Archit Vijoy, 36, an ex-venture capitalist, a host of compliance issues came up in a due diligence on one of his portfolio companies. This dragged out the funding round by an additional four weeks.

“Everyone needs a labour consultant. When a company grows from 10 to 25 employees, a whole new set of compliance is required,” said Vijoy, adding that if companies are found in violation of labour laws – even unknowingly so – it could even reduce the overall valuation.
As an investor, Vijoy has also observed how compliance burdens slow down fundraising.

Each funding round requires a valuation report from a SEBI-certified merchant banker, a step he views as a mere formality, making the exercise an unnecessary cost and delay for startups.

Capital raising from outside India comes with its own set of challenges. The Reserve Bank of India (RBI) sets down rules for capital flowing in and out of the country, but processes are managed by commercial banks.

“The knowledge is isolated in the hands of a few people within the bank. It highly depends on the branch you visit, the people you talk to,” said Vijoy, adding that the RBI requires a lot of paperwork even for a single, individual investor to send funds from outside the country.

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Cash flow

Sunaina Basu, 32, co-founder of digital marketing firm Rafiki Marketing, has exhausted every avenue to recover overdue payments from a large client. After being provided with social media services in 2021, the client went radio silent, despite signing a contract with Basu’s company.

“We tried every mode of communication with them, but received no response,” said Basu, adding that there are no rules in place to protect small businesses like hers. “There’s just no liability or accountability from the client’s side.”

Delayed client payments to startups are silent cash-flow killers for India’s burgeoning startup ecosystem. While much attention is given to funding winters and valuation markdowns, many founders complained about the chronic issue of unpaid invoices.

But the government has provisions in place for this very scenario. The MSMED (Micro, Small and Medium Enterprises Development) Act 2006 mandates that payments to MSMEs be made within 45 days, offering them legal protection against delayed payments and helping safeguard their cash flow.

Platforms like the MSME Samadhaan Portal, launched in 2017, allow registered MSMEs to charge compound interest on overdue payments by filing a complaint on the portal. A facilitation council reviews the application and subsequently either rejects it or converts it into a case.

Over 88,000 cases have been filed since the portal was launched, with over Rs. 26,000 crore due in payments to MSMEs. While progress is being made on the portal toward improving the payment ecosystem, entrepreneurs report sluggish resolution timelines and limited enforcement power.

The problem cuts across sectors. Service providers, SaaS (Software as a Service) companies, and vendors routinely face payment delays of 90 to 180 days from corporate clients, despite agreed 30-day terms.

“We’ve had to change our business model because of this,” said Jaideep Advani, co-founder of RatePing, which provides software solutions for the hospitality industry. “Unlike global SaaS firms that operate on seamless subscription models by taking credit cards on file, we’re forced to collect annual payments upfront. This immediately puts us at a competitive disadvantage.”

This payment culture creates a ripple effect: startups allocate precious resources to recovery efforts instead of innovation, settle for unfavourable payment terms to secure deals, or face existential threats when a major client defaults.

India’s tax administration system, often criticised as “tax terrorism” by entrepreneurs, creates its own set of cash flow burdens through disputed demands and a lengthy appeal process. It has been observed in the past that Assessing Officers (AO) often insist on partial deposits of the disputed amount when companies seek a stay on the demand.  Whether these demands are genuine or not, entrepreneurs point to the significant amount of time and resources that go towards appeals.

Angel tax, introduced in 2012, taxed funds raised by startups if share premiums exceeded the ‘fair market value’. Aimed at curbing money laundering, it had an inadvertent effect on genuine startups, which were slapped with arbitrary tax demands. Although abolished in 2023, cases continue haunting entrepreneurs as the change wasn’t made retrospective.
“I’ve reached a point where I cannot follow up with all of their [government] antics,” said Jahagirdar, frustrated with the government-related burdens he deals with in an already competitive business landscape. “One day, they will find some reason to shut me down. When that happens, we will shut down.”

On the back of the outcry from Indian founders on social media, Goyal launched a startup helpline. And while founders like Amin appreciate the initiative, the irony of the situation isn’t lost on him.

“We need to have a system where people don’t need to go viral after complaining about basic electricity.”

(Edited by Anurag Chaubey)