{"id":6189,"date":"2019-07-26T11:00:48","date_gmt":"2019-07-26T05:30:48","guid":{"rendered":"https:\/\/gtm360.com\/blog\/?p=6189"},"modified":"2022-03-08T14:40:19","modified_gmt":"2022-03-08T09:10:19","slug":"valuation-tax-if-tech-startups-can-disrupt-so-can-taxman","status":"publish","type":"post","link":"https:\/\/gtm360.com\/blog\/2019\/07\/26\/valuation-tax-if-tech-startups-can-disrupt-so-can-taxman\/","title":{"rendered":"Valuation Tax \u2013 If Tech Startups Can Disrupt, So Can Taxman"},"content":{"rendered":"

In his op-ed entitled\u00a0 Tech What One Deserves<\/strong><\/a>\u00a0in The Economic Times<\/em> dated 17 July 2019, author Swaminathan S Anklesaria Aiyar (@swaminomics) supports the move by governments of various countries to change the basis of corporate tax for tech startups from profits to sales.<\/p>\n

According to @swaminomics, France has already taken the lead by levying a 3% tax on revenues of 30 digital companies with French revenues exceeding EUR 25 million.<\/p>\n

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Let’s examine the logic behind this move.<\/p>\n

The basic tenets of income tax are\u00a0place burden proportionate to the ability to pay<\/em> and\u00a0redistribute wealth to bring about more equitable development<\/em>. In plain English, it means tax the rich.<\/p>\n

Traditionally, profit has been the measure of a company’s richness, so it has been the valid basis for assessing corporate tax.<\/p>\n

Profit continued to be an acceptable measure in the early stages of the digital economy when a startup\u00a0took modest amount of money in its seed rounds to build a product, more money in its Series A round from VCs to achieve product-market fit<\/em> and some more money in its Series B round to scale its operations. Startups achieved breakeven by later rounds of private funding and showed profits when they went public (Three consecutive years of profts is a prerequisite for getting listed on the Indian stock exchanges).<\/p>\n

But profit is now “so 20th century”. As Kevin Roose observes in New York Times<\/em> article The Entire Economy Is MoviePass Now. Enjoy It While You Can<\/strong><\/a>:<\/p>\n

The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road.<\/p><\/blockquote>\n

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Many tech companies have adopted the “new way” and “somewhere down the road” has gone way past Series A.<\/p>\n

Fewer and fewer of them are profitable even when they go public<\/em>. According to Fortune<\/em><\/strong><\/a>, the percentage of tech companies that were profitable at IPO has dropped from 91% in 1980 to just 16% in 2018 (in USA).<\/p>\n

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Source: FORTUNE<\/figcaption><\/figure>\n

In other words, 84% of tech companies made losses at the IPO stage last year.<\/p>\n

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When a vast majority of tech companies make losses so late in their lifecycles, it means that the digital economy has disrupted the notion of profit.<\/p>\n

It’s only fair for the taxman to respond by disrupting the notion of using profit as the yardstick for computing corporate tax.<\/p>\n

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Dropbox, Spotify, Snap, SurveyMonkey, Tesla … these are not the only startup-turned-public companies that enjoy skyhigh valuations despite making whopping losses. 83% of IPOs in 2018 were for loss-making companies. https:\/\/t.co\/FWAE9InArz<\/a><\/p>\n

— Ketharaman Swaminathan (@s_ketharaman) March 5, 2019<\/a><\/p><\/blockquote>\n