At the dawn of the new decade, the 2020 Budget was expected to be one of the most influential ones for the Indian startup ecosystem, especially in view of the slowing economy and not-so-strong consumer sentiment globally and in India.
From a largely myriad affair consisting of multiple support schemes under various ministries for SMEs (small and medium-sized enterprises), the government has come a long way, with the launch of Startup India in 2016 that promised to pack a punch. A recap of what we have achieved in the past few years:
- India has 30 technology unicorns (valued at over $1 billion). A good 21 of them came up in 2018 and 2019.
- More than 65 percent of today’s incubators or accelerator programmes were added in the last five years. Fifty-seven percent are active outside tier 1 cities.
- It means both direct and indirect mass employment outside the government. Over 1.5 million people are engaged only by the unicorns.
- 10+ born-in-India startups have now a global footprint.
- There is a strong local and international investor interest in the ecosystem over the years. In 2019, annual funding in Indian startups hit an all-time high of $14.5 billion.
The government has launched 50+ startup focused schemes, which along with favourable macro indicators, have created a vibrant startup culture in India. In anticipation of the Budget, the expectations of the startup community centred around the following:
- A ‘fair corporate tax regime’ in which startups are incentivised for risk-taking and value creation.
- A ‘friendly’ mechanism for ESOP (employee stock options) taxation which attracts the best and brightest to work for Indian startups.
- Simplification of the GST (goods and services tax) from the current 18 percent and abolition of the equalisation levy.
- Easier working capital for startups by reducing TDS (tax deducted at source) applicable.
- Patient and accessible R&D (research and development) funds, which incentivise original technology innovation.
- Tangible enablers like IndiaStack, on which India’s fintech (financial technology) startups are riding, to create digital infrastructure around edutech, healthtech and agritech.
- Legal and regulatory clarity on aggregator platforms. This has become critical in light of proliferation of aggregators and marketplaces in everything, from pharmacies to bikes to apparel.
- Policy frameworks to incentivise startups that are organising cash-dominated unorganised markets by bringing both supply and demand online
- An improved tax structure for people employed in the gig economy, given the increasing prevalence of short-term contracts and freelance work. A gig economy is marked by temporary and flexible jobs
- Finally, measures that allow young startups to serve the government against the multiple financial and regulatory requirements currently
Budget 2020: A positive nudge when we needed a push
Despite lack of a strong policy stimulus to boost sentiment, the finance minister’s speech on the provision of funding to early-stage startups and a tax holiday for enterprises with an annual turnover of up to Rs 100 crore, up from Rs 25 crore, for three consecutive assessment years is welcome. The total time period during which the latter can be exercised has also gone up to 10 years, from 7 years earlier. The first is aimed at countering the lack of liquidity in non-conventional but promising startups that may not attract private investors while the second will discourage the infantilisation by SMEs for tax avoidance.
Many professionals have left cushy jobs to join a startup or start one themselves, making it imperative for the much-needed clarity on ESOP taxation. This is especially important in the wake of recent turmoil in some unicorns.
India, in line with global benchmarks, now allows deferred payment of tax on the ESOP exercise. Employees of startups who are exercising their ESOPs will now have to pay tax only once later.
Building on the steps taken in the previous years, the FM announced a slew of initiatives around launching a digital platform for application and capture of IPRs (intellectual property rights), establishment of Knowledge Translation clusters and Technology clusters with small-scale manufacturing facilities, which will provide a sandbox environment for new companies to validate ideas and test products.
All these initiatives will go a long way in making the new-age Indian startup entrepreneur confident of a future in which it is possible to run an enterprise based out of India that can compete with the best in the world.
Overall, the 2020 Budget takes a positive step forward in the right direction, but we have a significant distance to cover to truly enable our startups to contribute to India’s $5 trillion economy goal by 2025.Aryaman Tandon is Director, Praxis Global Alliance. Views are personal.