Budget 2022 | Government trigger-shy in offering tangible economic incentives to startups

Ritesh Banglani

Towards the end of her Budget speech, Finance Minister Nirmala Sitharaman spoke at length about the import duty on umbrellas and umbrella parts — for the curious and the entrepreneurial, the domestic umbrella industry is now protected with a 20 percent duty. This was indicative of the best kind of budget — boring, growth-focused, and lacking surprises.

For the startup industry, the Budget speech was notable for what it excluded rather than what it included. There was no mention of some of the industry’s key demands — direct overseas listing by private companies, reduction in red tape to avail of tax incentives, and parity between domestic and foreign investors in startups. Through the years the government has held innumerable consultations with entrepreneurs and investors, and seems to have real intent to resolve industry issues, but has ultimately been trigger-shy in offering tangible economic incentives to startups and their investors. That trend continues in this year’s budget.

Perhaps the most significant announcement for startups came in the form of direct tax rationalisation. The surcharge on long term capital gains (LTCG) tax has been capped to 15 percent, against a maximum of 37 percent earlier. This brings down the marginal tax burden on long-term equity investment in startups from 28.5 percent to 24 percent — not insubstantial or unwelcome, but far short of industry expectations.

This requires some background. A stock market investor pays a marginal tax of 11.9 percent on long-term gains. A foreign investor in startups pays a flat 10 percent tax. A domestic startup investor, however, pays 2.4 times this amount in tax (after the February 1 announcement). The industry has long demanded that tax rates between these different classes of investors be harmonised so domestic investors are not discouraged from investing in startups. The current proposal, while a good start, hardly moves the needle in that direction.

The other announcement that has generated a lot of excitement is, perversely, a new and higher tax. The Finance Bill proposes to tax, for the first time, the transfer of virtual digital assets — including all kinds of cryptocurrencies, NFTs, and other tokens. The gains will be taxed at a flat 30 percent, which translates to a marginal rate of 43 percent for the highest income bracket. No expenses are allowed to be deducted from such a gain, nor are there exemptions permitted for any reason.

The industry is cheering this tax, because this is the first instance of cryptocurrencies and crypto assets being defined under Indian law. Taxation is being viewed as the first step towards legalisation and regulation of crypto assets.

Of course, several aspects of this tax are open to interpretation. Foremost is the emphasis on the word ‘transfer’ instead of ‘sale’, which is further described as ‘a digital representation of value exchanged with or without consideration’. This could potentially mean that when one crypto asset is exchanged for another — say Tether to Etherium for staking — the exchange could attract tax without ever getting converted to fiat currency. Crypto exchanges process millions of such transactions daily, and these could result in mountains of paperwork. That said, this undeniably positive news for the Indian cryptocurrency market, and should be welcomed as such.

The Budget speech also mentioned the RBI’s intention to launch a Digital Rupee, a Central Bank Digital Currency. The industry hopes this is in addition to, and not designed to exclude, private cryptocurrencies.

There were a few declarations of intent in the Budget speech that may benefit startups. Sitharaman announced the setting up of an expert committee to examine “regulatory and other frictions” for venture capital and private equity funds. This is a continuation of the years-long dialogue with the industry, which we hope soon leads to a reduction in the regulatory and compliance burden.

The speech also mentioned the intent to “promote” thematic investment funds in areas like Climate Change, Deep Tech, Digital Economy, and AgriTech, which will deploy capital through private fund managers. It remains to be seen whether the government intends to fully fund such vehicles or merely invest seed capital with the remaining coming from private sources — the size and timing of the funds will depend on that decision. Regardless, more government capital deployed into strategic sectors within the technology industry is a welcome development.

Overall, this seems like a good Budget for startups: no new taxes or compliance burdens, a small reduction in the capital gains tax, the first step towards legalisation of crypto assets, and an intent to do a lot more soon. That, and a boom in umbrella manufacturing.

 Ritesh Banglani is Partner, Stellaris Venture Partners. Views are personal, and do not represent the stand of this publication.