Budget 2023: Focus on emerging sectors praiseworthy but startups need a helping hand

There are positive efforts from the government despite the global macro landscape.

Budget 2023-24 has come amid the overall outlook of the Indian economy appearing to be very positive. It has remained robust as compared to other major economies and is expected to grow at 7 per cent in the current year. Per capita income has increased to Rs 1.97 lakh.

However, the current account deficit is expected to widen this year as global commodity prices remain elevated. Experts, including those inside the government, have called for consolidating the fiscal deficit and ensuring that the current account deficit is brought within the red line of 2.5-3 per cent of GDP. Overall there are positive efforts from the government despite the global macro landscape.

Catch all the LIVE updates on Budget 2023

The increase in capital outlay towards infrastructure investment by 33 per cent to Rs 10 lakh crore for 2023-24, which is 3.3 per cent of the GDP, will be a great boost to the economy and also create more jobs. This record allocation coupled with encouraging taxpayers to opt for the new tax regime with effectively lower taxes that will increase consumption, given the additional money in hand that will be spent by taxpayers, is likely to benefit both B2B and B2C startups.

Moreover, as a direct measure for enhancing ease of doing business, more than 39,000 compliances have been reduced and over 3,400 legal provisions decriminalised.

Emerging Sector Focus

Further, Finance Minister Nirmala Sitharaman in the budget highlighted the government’s efforts to accelerate growth of key emerging sectors:

Agritech: The government continues its focus on the Agriculture sector with the announcement of the Agriculture Accelerator Fund, which will hugely benefit the Agritech ecosystem and encourage young entrepreneurs in rural areas to start-up. The fund will aim at bringing innovative and affordable solutions for challenges faced by farmers.

It will also bring in modern technologies to transform agricultural practices, increase productivity and profitability. Also, the increase in agricultural credit target to Rs 20 lakh crore is positive news to allied sectors including animal husbandry, dairy, and fisheries.

Green Economy: Green growth is among one of the top priorities of the budget and reflects positive efforts from the government to achieve India’s sustainable development goals. The budget provides for Rs 35,000 crore capital investment towards energy transition and net zero objective and energy security.

Further, the recently launched national green hydrogen mission with an outlay of Rs 19,700 crore will facilitate the transition of the economy to low carbon intensity and reduce dependency on fossil fuel imports. The target is to reach an annual production of 5 million metric tonnes by 2030. The Budget also displays a positive approach towards decreasing overall life cycle cost of electric vehicles by waiving off the customs duty on import of capital goods and machinery required for manufacturing of Lithium-ion cells.

Artificial Intelligence: Apart from the above sectors, the government will focus on boosting Artificial Intelligence (AI) based innovation in India in India with the creation of three centres of excellence. The centres will be established in top Indian institutions to ensure AI solutions relevant for India.

Addressing Startups’ Wishlist

The budget however failed to appeal to Indian entrepreneurs with the FM’s proposal of angel tax applying to investments from non-Residents. This is likely to have far-reaching implications for the Indian startup ecosystem as most of the funds are raised from overseas investors. Even the exemption from angel tax ends up placing onerous restrictions on startups such as the inability to make salary advances, engage in stock M&A, create a subsidiary, or contribute to an ESOP trust as well.

Many startups have given up this exemption due to the onerous conditions, with many seeking to move overseas to avoid such hassles. The other key fiscal announcements for startups were the extension of the date of incorporation to qualify for IMB (Inter-Ministerial Board) registration for tax benefits from March 31, 2023, to March 31, 2024, and the increase in carry forward of losses due to change in shareholding from seven years of incorporation to ten years.

In the startup ecosystem, one key highlight in the budget for investors was delegating powers under the SEZ Act to the International Financial Services Centres Authority (IFSCA). The single window approval system for RBI, SEBI, IRDAI, SEZ, GST registration will reduce redundancies of multiple approvals and reduce friction in setting up as an Indian manager in GIFT IFSC. Further permitting acquisition financing and enabling arbitration, and ancillary services in IFSCA will avoid dual regulation under SEZ Act.

The much-anticipated rationalisation of Long Term Capital Gains (LTCG) tax for venture capital (VC) and private equity (PE) would have been a huge boost for investments amid the current funding challenges caused by global influences. The current LTCG tax rate is more adverse in equity than for listed shares. Bringing parity in LTCG tax will inspire more investors to come into the industry.  While some of the asks of VC and PE have not been met in this budget, the issues raised under the high-level panel headed by former SEBI chairman M Damodaran will, hopefully, be looked at and implemented even beyond the budget cycle to help bring back the momentum in the startup ecosystem.

Prashanth Prakash is Co-Founder and Partner, Accel India. Views are personal and do not represent the stand of this publication.