With these Budget measures and a slew of changes from the other regulators, Indian startups can finally take their place on the world stage and become global powerhouses
On the date of the election results, the Sensex was north of 40,000, the Nifty had breached 12,000 as the NDA crossed 300 seats. As of today, the Sensex is at 39,839 and the Nifty at 11,970 and is expected to stay range-bound, barring a force majeure event.
But the swing everyone is expecting with baited breath will be on July 5, the date of the first budget of the NDA 2.0 government.
From being part of the “Fragile Five” in 2014, India has emerged as the bulwark of global financial growth, overtaking even China in terms of GDP growth. Amid the global gloom, what with trade wars and depressed growth, India has captured the world’s imagination by announcing that it shall become a $5 trillion economy by 2024.
The Indian government has spent the last few years creating the economic infrastructure to capitalise on such an opportunity: it has cleaned up the NPA build-up in our banking system, created an effective bankruptcy framework to give more power to the lenders, made it easier to do business and created a national tax framework to ensure the ease in the movement of goods and services.
With this, the accumulated augean stables of economic detritus can be cleaned out, and fresh capital to meet credit needs can maintain this momentum.
One of the engines to drive this momentum is going to be startups and the increasing trend of digitisation. India has seen the rise of over 40,000 startups who have created more than $130 billion of value from January 2014 to September 2018. With around 35 unicorns (billion-dollar startups), India is the third largest startup ecosystem in the world in terms of value and numbers, right behind China and the US.
These startups help create new markets, export revenue and jobs, which are crucial elements of growth for any economy.
The Startup India initiative created the regulatory framework to help galvanise this amount of entrepreneurial activity in the country through initiatives to incorporate within a day, quick winding up, reduced compliance for capital raises and borrowing, amongst others.
But India is more ambitious.
The honourable President stated during the inaugural address to Parliament that India needs at least 100,000 startups by 2025, and the government needs to build upon the first Startup India plan.
We need Startup India 2.0
Amongst other initiatives from other departments and regulators, Indian startups will need the following Budget changes to launch this ambitious plan:
-Rationalised rates to increase competitiveness.
-Tax incentives to attract investment.
-Lowering the compliance burden.
-Enhancing credit and capital to Indian startups.
Rationalised rates to increase competitiveness.
1)Tax ESOPS on sale, not exercise
India’s current tax structure on ESOPs is geared towards listed as opposed to unlisted shares, as it taxes them on exercise on the difference between the latest round price and the strike price and again on the difference between the sale price and the investor price.
To make ESOPs an effective tool of compensation and retention, they should be taxed only at the point of sale or taxed on the difference between the book value and the strike price upon exercise.
2) Lower the TDS rate on payments to Startups and MSMEs to 2 precent from 10 precent
Most MSMEs and startups are reeling under a working capital runch, with TDS delays contributing to the same
Since they’re also loss-making, the TDS rate on them should be lowered to 2 precent u/s 194J
3) Lower the tax rate on LLPs to 25 precent
The 2016 budget saw the tax rate on companies lowered to 25 precent, but several MSMEs and startups are incorporated as LLPs. Thus this change should be extended to them as well
Tax incentives to attract investment
1)Lower the Long-Term Capital Gains rate on the shares of startups to 10 precent.
Shares of startups are more illiquid and risky than listed shares, yet they suffer twice the tax rate as listed securities.
To incentivise participation in the Indian startup story, this should be bought down to 10 precent.
2)Tax incentives for investing in Startups
Currently, section 54GB of the Income Tax Act is more red tape than a red carpet as a tax incentive to invest in startups. It restricts the type of gains, type of securities, application of funds, exits, etc
To correct it, they should allow any capital gains upto Rs 1 crore per annum invested into securities of a startup and used for business purposes to be part of Section 54GB
3)Tax Incentives for investing in AIFs
Section 54EE allows for a 50l deduction for investments into “specified funds”, but none have been specified so far
Since its lapsing in 2019, it should be extended to 2023 and include all SEBI registered CAT I and II AIFs under its ambit.
Lowering the compliance burden
1)Bring relief from Angel tax once and for all
The Feb 19th, 2019 DPIIT circular numbered G.S.R. 127(E) bought relief from the Angel Tax (section 56(2)(viib)) to all startups except those who had orders passed against them. The notification places restrictions on the exemptions by disallowing advances, capital contributions and investments by startups. This will hamper their flexibility to create subsidiaries and joint ventures (JVs), contribute to stock option schemes and make advances to vendors in the ordinary course of business.
It is essential that those left out of the circular are given relief and the above changes amended. The circular’s other restrictions can be extended to any downstream investment of the startup to bring comfort to the authorities.
2)Lowering the compliance time for startups and MSMEs to 1 hour a month:
Startups currently spend over 20 hours a month on various compliances with MCA, CBDT, GSTN, RBI, ESI, PF, etc
To increase the ease of doing business, they should reduce the duplication of information and bring this down to an hour a month.
Enhancing credit and capital to Indian startups
Creation of the Rs 20,000 Crore Startup Seed Fund:
The Rs 20,0000 Crore Startup Seed Fund as stated in the election manifesto should be sanctioned and created this year to help galvanise equity investments into Indian startups and also allow for working capital loans.
2)Creation of Collateral Free Credit scheme:
The creation of the collateral free credit scheme as stated in the 2019 Manifesto will greatly help accelerate entrepreneurial ambitions which were hampered by the lack of access to credit. For DPIIT registered startups, this amount should be extended to Rs 5 crore.
3)Scheme for working capital loans against GST Invoices:
The Goods and Services tax (GST) has created a single nationwide market for the free flow of goods and services across the country. With this, startups and MSMEs have begun selling to large enterprises and government. However, startups and MSMEs suffer from severe lack of credit and working capital loans.
The Startup India mission has bought this to the forefront and with this new government, India needs to build on this momentum and nurture these companies so that they can hold their own against other global players. Companies like Oyo have made great strides in China while Ola has opened up in London and Australia, showing that Indian startups, like our tech giants, create world-class products and services that can cater to the next 6 billion coming onto the digital economy.
With these Budget measures and a slew of changes from the other regulators, Indian startups can finally take their place on the world stage and become global powerhouses.
The author is a founding partner of 3one4Capital, an early stage venture capital firm.