India has a very robust startup ecosystem. Today, there are around 19,400 startups, employing 3,50,000 people and worth $75 billion in value. In the next 10 years, this ecosystem will produce around 1,00,000 startups employing 3.5 million people and worth $500 billion in value. Startups will solve many of India’s challenges over the next several decades as they had been demonstrated by the IT industry, which solved several challenges (technology and others) of the western world over the past 20 years.
The startup industry had two sets of demands:(i) Ease of doing business so as to make the climate better for running a startup. Startups need changes in the areas of company law, foreign exchange regulations and labour regulations.
(ii) Provision of tax incentives and tax amendments Some of the above have been announced in the budget. For startups, exemption of profits for the first three years out of five has been proposed (this is subject to MAT). This is a great gesture but it may not be enough as not many startups will not make profits in the first five years. The government has proposed a 10 per cent rate of tax on income from worldwide exploitation of patents developed and registered in India by a resident. This is a commendable measure and this could prevent a re-domicile outside India of startups because of high taxes on IP.
The Budget has also proposed a tax break for capital gains for investing up to Rs 50 lakh in funds (which are registered with the Sebi) investing in startups. Further a Rs 600-crore contribution to India Aspiration Fund has been proposed. The government has also committed to amending the Company Law for compliance related to startups. Moreover, the period for getting benefit of long-term capital gain in case of unlisted companies has been proposed to be reduced from three to two years. The government has allocated Rs 1,100 crore for Startup and Standup India programmes. The Finance Minister has also stated that provisions will be made to enable startups to incorporate their companies in a day. Today, it takes around 30 days to incorporate a company. These are positive measures for the startup community.
Much more was expected like doing away with fair market value for angel investing as had been done for incubators. A tax deduction for investment in startups under Section 80C was sought. Clear guidelines were needed to ensure no double taxation of software products under Service Tax and VAT. Sale of products were subject to withholding tax at multiple levels causing distortion in channel sales, while B2C purchases had no just withholding. Startups wanted a reduction in withholding tax for the revenue they get as they have cash flow problems as too much of their revenue is stuck in refunds. Startups also wanted service taxes to be paid on receipt instead of on accrual. There was a requirement for Alternative Investment Fund category 3 funds to be given pass-through status as was done for AIF category 1 and category 2 and a concerted move to increase flow of funds from Indian Capital.
Overall the Budget has been positive for startups. But it leaves more work to been done in the next year. The government and the regulators are committed to providing a positive and enabling climate for the startups to develop, thrive and contribute to the Indian economy and thus commitment is a great ray of hope for the future.
The author is chairman, Aarin Capital Partners
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