Wish List Of The Startup Ecosystem For The Union Budget-2021

The COVID ravaged the financial year 2020-21 has been challenging for the whole world and has been especially brutal for the Indian economy. Indian Startups were also not spared. The Indian government has been supportive of the businesses to help them tide through the tough times via relief packages. The startup ecosystem has responded well, and in such daunting times also, India added 12 more start-ups to its unicorn kitty. We are likely to hit a half-century of unicorns by the end of this year.  

Macro-Economic Situation and Start-up Scenario

As per the National Statistical Office (NSO) estimations, COVID-19 impact for the period of April to June 2020, on the Indian Gross Domestic Product (GDP) was dramatic. The GDP reduced sharply by 23.9 percent, while for the same period in 2019, we had a growth of 5.2 percent. For the full year 2020-21, the Indian economy is likely to shrink by 7.7 percent.  

For the Indian start-up ecosystem, the COVID-cut was deeper. As per NASSCOM, around 40 percent of the tech-startups had to halt their operations during the last year. The number of new start-ups reduced during the year to 1600+ compared to 2500+ during 2019-20. The statistics for dormant start-up (start-ups that are no longer in business, but are yet to wind up) grew to around 3 percent. The situation did improve in the second half of the year, with seed-stage funding recovering to 90 percent of its 2019 level. Given this context, the startup world is looking at the union budget with hope and expectations. 

Top 5 Start-up Expectations from the Budget

Angel Tax Exemptions to continue:

As per the finance act, 2012, section 56(2)(viib) in the IT act states that any investment that values above its fair market value attracts taxes. It is considered as Income from other sources, and the tax levied on it is known as the Angel tax. A 30 percent tax used to be imposed on start-ups, but in 2019, with some regulation fulfilments, an exemption was given. For the upcoming budget, start-ups are expecting the scrapping of Inter-Ministerial Board clearance (a set up by the Department for Promotion of Industry and Internal Trade- DPIIT), which will allow more start-ups to get the exemption from the Angel tax payment. 

GST on Electric vehicles

In the union budget 2019, the Indian government reduced the Goods and Service Tax (GST) on electric vehicles to 5 percent from 12 percent. This was a great initiative for going green. But it is not enough as consumers are getting better tax rates, but the manufacturers have to procure the raw materials for OEM EV at 18 to 28 percent GST. In addition to that the delays in GST credit act as a very right working capital availability. Thus, many EV tech start-ups will look for improvement in these taxation requirements.

Fundraising and investment relaxations for startups

There are two parts to investment relaxation expectations for start-ups. The first is through Initial Public Offering (IPO). The government has very recently signaled that they may allow direct foreign listings, though more details are yet to be released. It will help start-ups with better funding flow given the liberalized and comrade policy requirements. 

The second expectation is for the permission to let the larger institutions like LIC invest in Alternative Investment Instruments (in which start-up falls). It will definitely prove a turning point for start-ups in the near future. 

Increasing the Long Term Capital Gain Tax exemption for startups

A parliamentary panel in September 2020 recommended abolishing all LTCG tax for start-ups for the next two years, which is done through collective investment vehicles (CIVs) such as angel funds, AIFs, and investment LLPs, considering the pandemic situation and relief requirements.  At present, Rs 50 lakh is the amount that if invested in a specified long-term asset for 3 years, can be exempted from the long-term capital gains tax. If the budget considers increasing this threshold, it would benefit the start-ups with ease of investment.

Continued push for Digital Payment Start-ups

India is seeing a digital payments revolution, but there is a cost to it. MDR or Merchant Discount Rate is the cost of transactions that are paid by merchants to issuers. Before 2019, it was almost zero for transactions ranging below Rs 2000. In 2019, the government launched zero MDR for UPI and RuPay because of which any business having a turnover of more than Rs 50 crore has to offer low-cost digital payment options, and zero MDR was imposed which burdens businesses at present. Better terms or even a subsidy can be expected for MDR in this budget. Also, to boost the digital payments, the Business Correspondents (BC) sector that is a part of the online payment realm expects that in the coming union budget the GST tax slab of 27 percent that falls on the industry should be reconsidered and IMPS and AEPS transactions should be exempted from GST. 

The Bottom line

The Indian startup ecosystem has been leading from the front in creating employment, helping SME’s grow, and building the future of the country.  At present, India ranks 23rd among the 202 nations for the start-up ecosystem. The government is trying its best to help start-ups recover and thrive in the post COVID era. Earlier this month, Prime Minister Narendra Modi announced a startup India seed fund of Rs. 1000 Crore for seed investments. These are positive signs for the startup ecosystem. Expecting continued support in the upcoming paperless budget from Finance Minister Nirmala Sitharaman, the startup ecosystem will look for enablers through tax reliefs and long-term sustainability. 

Amit Kumar.

Guest Author The Author is the CEO of OLX autos in India. He was earlier Managing Director of Kaymu (Merged with Jumia, Listed on NYSE). He likes to write about Leadership, Startups, and Economics.