Why Budget 2022 works for startups

Anand Lunia

Budget 2022 was presented in Parliament on February 1 and it was pretty good, right? The decision to reduce surcharge on LTCG itself feels like a big victory. The government is trying to create multiple ecosystems — in defence, agriculture, and finance, which is a big thing. The LTCG move (where surcharge has been cut from 37 percent to 15 percent) means that a big shift in mentality has happened. At the same time, virtual digital assets are being taxed at 30 percent. So it is not treating LTCG from startup investing as speculative gains.

A lot of people were expecting clarity on Indian startups being allowed to list abroad. That’s where I disagree. I don’t think startups listing on Indian bourses is a bad idea, because if they list abroad, Indian investors have no way of making money from them.

Investors sometimes push companies to list abroad, also assuming that the Indian stock markets are not deep enough. This has been conclusively proven wrong last year. If investors in the United States want to come, institutional investors are already in India. I don’t see why US domestic investors have to invest in Indian companies at the cost of Indian investors.

Some investors also say that US investors can handle loss-making companies better, but that logic can be argued either way. So, while foreign listing was a demand for some industry players, the government realised it is not required.

Broadly, what is expected from the Budget is the removal of friction in various sectors. To be fair, removing friction is not to be done at budget level alone. Throughout the year, various ministries need work towards it, and held accountable for it. But further issues do need to be addressed, like the fact that ESOPs are taxed twice (at allotment, and sale). Similarly startups need to jump through a lot of hoops, and be evaluated for a tax break. As a venture capitalist, I fund startups, and would not invest in dubious companies to avoid taxes. In this light, there should be an automatic criteria for the government to give tax breaks. Yet, none of my portfolio companies gets it because of bureaucratic red tape.

The panel for PE/VC funds should also be quite helpful, because if you want investors to invest in India and pay taxes here, incentives have to align. Differentiating management fees and carry, and whether carry should be taxed as business income or capital gains (currently treated as business income) needs to be discussed. In some cases where the fund manager does not contribute capital to the fund, it can be seen as income. It would be good if everything is converted to the LTCG regime, but it needs to be discussed, otherwise fund managers would set up entities in Mauritius or Singapore or elsewhere.

Lastly, a tax on virtual digital assets and a digital currency being introduced shows a mindset shift, and lends legitimacy to this space. So far our company has not invested in crypto or Web 3 startups because we weren’t able to trust the founders we met. Now that it is mainstream with greater transparency, the quality of crypto entrepreneurs will improve.

Overall it is a Budget that lifts the spirit, and even if the net LTCG rate has come down only from 28 percent to 23 percent, it is a step in the right direction. Once the government finds out that investors are moving to Singapore because of poor tax laws, they will take it further down.

Anand Lunia is general partner, India Quotient. Views are personal, and do not represent the stand of this publication.