Budget 2021 | With a few reforms, Nirmala Sitharaman leaves startup ecosystem asking for more

Representative image (PC- MoneyControl.Com)

Startups, their employees and investors, including venture capital and private equity funds, had a lot of expectations from the Union Budget 2021, while some measures were announced, there was a lot left to be desired as Finance Minister Nirmala Sitharaman focused on healthcare and infrastructure spending in the wake of the coronavirus pandemic. 

Though there were no announcements which put the industry into a frenzy—like a proposed ban on cryptocurrencies two years ago and the angel tax issue—a lot of areas where founders and investors expected reform did not happen, while the areas the government did address seem to be incremental.

The three major changes were a relaxation in rules for One Person Companies, extension of tax holiday by one year, and exemption of long- term capital gains (LTCG) for one more year till March 2022. 

“The lack of focus towards the Indian Start-up ecosystem in the Budget 2021-22 is highly disappointing. While the government continues to tom-tom about the tax holiday for the startup community, the fact remains is that this will not benefit a majority of startups. Most startups run deficits in their initial years, and no tax benefits are useful for them,” said Anirudh Damani, managing partner at Artha Venture Fund, an early-stage investor.

“Ideally, the government could have introduced tax incentives to encourage individuals and corporates to invest in startups or VC funds. The flow of private capital would increase the amount of money available for investment and encourage corporates to invest in downstream startups that benefit their core businesses.  While the move to include NRIs in the OPC scheme is noteworthy, there is a lot left to be desired in the budget,” he added. Moneycontrol wrote earlier that the OPC scheme helps NRIs but startups benefit less

To be fair, startups always have a large list of demands from the budget but some core issues were expected to be clarified. For instance, many Indian startups are planning to list abroad, but the laws are unclear. Indian startup IPOs have been a key talking point in the last few months, and this is the closest many companies have come in years of unabated growth and staying private to going public. 

“A lot of issues could have been addressed by the budget for startups, but one is left hoping for next time. There were expectations to get clarifications regarding overseas listing, given this is something the whole industry is concerned about,” said Indruj Rai, partner at law firm Khaitan & Co. 

Other expectations from the Budget included bringing the tax on  LTCG on the sale of shares in private companies at par with listed companies, broadening the scope of tax on ESOPs being exempted and further clarity around ETFs becoming tax-deductible under Section 80-C.

In addition to more reforms, people also wanted more long term and broad- based reforms. For instance, the LTCG on investment in startups, for which the government has extended exemption for one more year, applies to a very specific category. It is applicable only if a person sells property, and uses that income to invest in a startup classified by the government. Most angel investors and institutions do not sell real estate to invest in startups, people said. 

“The measures introduced this time are essential but it is hoped a lot was done and on a long-term basis,” Rai said.