Key Demands For The Startup Sector
The startup sector has seen tremendous growth during 2021 in India, despite the challenges and economic impact of the Covid-19 pandemic. India has now become the third largest ecosystem for startups, with over 80+unicorn startups (companies with US$ 1 billion or more valuation). Out of this, more than half were added to the list in 2021 and it is expected that more than 50 startups will further turn into unicorns during 2022. The sector also witnessed public frenzy over the IPOs with the majority of the startup IPOs leading to huge success.
The Indian economy has been struggling through the pandemic and to get back on track, the government’s agenda has been to create conducive business for growth of the startups. Recently the Hon’ble Prime Minister of India, Narendra Modi, had an interaction with over 150 startups wherein he has declared January 16 as “National Startup Day” and called startups as the “new backbone of India”. In the past as well, the government had several interactions with the startups to understand the concerns and the needs of this sector.
To ease the burden on startups and promote this sector, in the past budgets, the government has introduced several policies and favourable reforms such as deferring ESOP taxation by five years, exemption from angel taxation in respect of DPIIT-registered startups, income-tax holiday benefits of eligible startups, provision for incorporation of One Person Company etc.
However, in terms of tax incentives for this sector, India is still far behind as compared to jurisdictions like China and USA. For instance, China has a reduced Corporate Income Tax rate of 15 per cent on certain eligible technology enterprises and a super deduction on eligible research and deduction expenditure incurred by startups. Hence, it is expected that the upcoming Union Budget (to be presented by the Hon’ble Finance Minister of India on February 1, 2022) will be startup-friendly and more incentives will be provided to uplift the sector.
The demands of this sector from the upcoming budget inter-alia include reduced and simplified compliances (there are stringent and cumbersome compliances under multiple laws and simplified compliance is necessary from an ease of doing business perspective), reduction in corporate tax rate to 15 per cent (to bring it in parity to manufacturing companies), introduction of tax incentives for hiring additional employees and accelerated deduction for research and technical development expenditure incurred by technology startups, single point ESOP taxation at the time of actual sale (critical to attract and retain the founding team intact), removal of requirement of DPIIT-registration for availing angel tax exemption, increase in annual turnover threshold for recognition as an eligible startup, reduction in capital gains tax rate on sale of unlisted shares (to bring it in parity with capital gains tax rate on sale of listed shares), business loss to be allowed to be carried forward beyond eight years (since the incubation period is longer in the startup sector and by the time they turn profitable, they face risk of losses being time barred), reduced withholding tax rate on payments to startups (leading to increased liquidity and improved working capital management), reduced GST tax rates on input goods and services, easing measures around RBI licensing (specifically for startups in fintech space). Moreover, the startup industry has also been pushing the government to introduce guidelines in respect of direct overseas listing by Indian companies and the government has been deliberating on this. While it is less likely that this will be introduced in the upcoming budget, however, an expeditious action on this needs to be undertaken by the government to restrict the migration of Indian startups to other jurisdictions such as Singapore and USA by way of flipping.
Additionally, the sector faces funding challenges especially at the time of early-stage research and development. To address the same, government should introduce reforms and funding support in the budget for making cheaper finances available to this sector. Further, domestic funding in Indian startups may also be promoted to address this issue by reducing long term capital gains tax rate in the hands of Indian residents on sale of unlisted shares to 10 per cent (to bring it on par with tax rate applicable on foreign investors).
The expectations of this sector from the previous budget were not met and the startup industry continues to look for the government’s support in meeting its demands in the upcoming budget. With the right policies and incentives, this sector has the potential to fuel the growth of the economy by generating employment, stimulating public spending and attracting foreign investments. Given the current economic impact, the government may be in a tight spot to consider all the demands and it is likely that a balanced approach may be taken by the government which will promote the startups sector as well as boost the Indian economy.
