Continuing with its trend to support start-ups and recognise them as a major driver of the economy, the government announced a slew of positive announcements for the sector in the Union budget.
One of the key initiatives was to extend the period of incorporation for start-ups from three to four years till March 2023 for them to avail of tax benefits. The move, made in view of the pandemic, is likely to help young start-ups in meeting their working capital requirements, especially during the initial years of their operations. “Extending the tax incentive period for one more year for start-ups will further encourage the thriving start-up ecosystem in our country,” said Paroma Chatterjee, CEO, Revolut India, an entity of the global financial superapp Revolut.
Another key announcement is the capping of the surcharge on long-term capital gains tax at 15 per cent for all listed and unlisted companies. The move that is expected to benefit venture capital investors and start-up address a long-standing demand of new-age companies, which wanted share sales of unlisted firms to be taxed at par with those of listed ones. However, only the surcharge levied on unlisted share sales has been reduced from 37.5 per cent to 15 per cent. The tax rate remains unchanged at 20 per cent. This will cover employee stock option sales and all transactions by privately-funded start-ups, reducing their tax burden by almost 16 per cent.
Start-up Leaders Back Govt Focus
The move has been welcomed by several start-up founders. “The capping of the surcharge on the long-term capital gains payable on financial assets, at 15 per cent is good news for investors in equity shares of start-ups. In 2021, we saw a lot of activity from family offices and retail investors in the Indian market. This move will further boost the confidence of this set of investors in the public and private sector,” said Vivek Gupta, co-founder, Licious, India’s first D2C company to turn a unicorn last year.
The announcement about the battery swapping policy and setting up of more charging stations for electric vehicles is also being seen as a booster for start-ups in the segment. The finance minister also announced that Kisan drones will be used to drive a wave of technology in the agriculture and farming sector. These drones will be used for crop assessments, land records and spraying of insecticides. “The budget has placed agritech in the right limelight, with the government reposing faith on the role of new-age players to transform the country’s agriculture sector. The intent to inculcate a strong element of digitisation in the form of Kisan drones for crop assessment in the agri-value chain will leapfrog India’s place in the global agriculture landscape,” said Prasanna Rao, MD and co-founder of Arya.ag, an agribusiness value-chain integrator.
Understanding Start-Ups
The government will also form an expert panel to encourage venture capital and private equity investments, following a record-breaking 2021 for private equity and venture capital investments. Through this panel, the government will examine "appropriate measures" to scale up investments, indicating more policies that could help investors which are pouring foreign capital into Indian companies. The move, so far, has received mixed reactions from the stakeholders.
While some have welcomed the move, few others are waiting it out to react. “It is a massive move and it cannot be done any other way. The industry has been asking for certain reforms and initiatives because the tax systems that we have, are keeping in mind the business formation that existed in the 1960s. Of course, there have been several changes through the liberalisation in the mid-80s and the early 90s, but nothing has been created to fundamentally deal with regulators keeping in mind the new-age economy. The move will allow the group to actually go through the bottom of the industry requirements and create a grounds-up, first-principles based taxation regime,” said Ashish Fafadia, partner at Blume Ventures.
Lightbox’s Sid Talwar believes that the government is trying to understand what is happening in the financing part of start-ups through the panel. “It is a bit early to comment on what will be the impact of such a panel on the ecosystem because we do not know what the government’s focus will be through it. I think it is trying to understand what is happening in the investment part of the segment considering the influx of investments in the past one year.” In 2021, companies raised $77 billion of venture capital and private equity, more than 60 per cent compared to 2020, according to an EY report.
Taxation Troubles
While welcoming the move, Ankur Pahwa, e-commerce and consumer internet leader, transactions diligence partner, EY India, said that what is actually needed was a quicker resolution to long-standing issues of the industry, such as very high tax rates for short-term assets (as compared to domestic investors), clarity on the taxability of “carry” structures, enabling taxability of ESOP to liquidity events for all start-ups and aligning the holding period for long-term asset classification to 12 months. “In the constant deliberation on onshore versus offshore capitalised structures and of topical relevance to our fast-growing start-up ecosystem, it would have been critical to have announcements enabling direct offshore listing by our Indian start-ups,” he said.
The focus on fintech and digitisation also was well received by the industry. “The proposed Central Bank Digital Currency will help in transforming money as we know it. It will lead to efficient and cheaper management of currency and drive a change in consumer behaviour to give a huge boost to the economy. Apart from this, opening 75 digital banking units in 75 districts is a positive step towards giving millions access to digital banking services,” said Revolut’s Chatterjee. Bringing all of the country’s 1.5 lakh post offices under the core banking system is being seen as experts as a step towards improved financial inclusion. “I am also hopeful that the co-investment model, facilitated through NABARD to finance start-ups for agriculture and rural enterprise will unlock more opportunities there,” said Gupta of Licious.
