Startup Sunday Season 2 Episode 31 (Post-Budget Analysis)

We always don’t get what we want, but we do move closer to the goal. Likewise the budget wasn’t the ideal for startups but will provide a better ecosystem that what we had last year. Last year, startups took a real beating with the inefficient rollout of the goods and services tax (GST), a return of the angel tax bogey and demonetisation, even though some ventures benefited immensely. While some major concerns remain unaddressed, there was some cause for cheer.

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Let’s start with what has been encouraging to the startup space.

  • One piece of concrete good news for startups was that the government raised the ceiling for the 25% corporate tax bracket to Rs 250 crore annual turnover, up from Rs 50 crore earlier. The vast majority of startups will be covered under this tax rebate. The 5% tax rebate for companies with turnover up to Rs 50 crore had benefitted 96% of tax-paying enterprises, the extension of this benefit to companies with turnover up to Rs 250 crore would benefit 99% of them
  • The allocation of Rs 8,000 crore to set up broadband services across 1.5 lakh gram panchayats under the second phase of its Bharat Net project. By March 2019, the project seeks to connect 2.5 lakh gram panchayats. The finance minister claimed that the government has already completed the first phase of this project connecting 1 lakh gram panchayats. The government also proposed to set up 5 lakh wi-fi hotspots which will provide broadband access to 5 crore rural citizens,
  • The government’s policy think-tank NITI Aayog would start a national programme to direct efforts in artificial intelligence, including research and development of its applications.
  • The finance minister also spoke of a working group in his ministry examining the policy and institutional development measures needed for creating the right environment for fintech companies to grow in India. In addition, he also said that the government would evolve a separate policy for hybrid instruments – convertible bonds, preferred stocks, equity swaps and structured notes – to attract foreign investment in startups and venture capital funds.
  • For startups, this seems like a real opportunity to develop services for a whole host of rural businesses, especially those in the agriculture sector. They can further augment government services on this platform by developing digital content in the local vernacular, besides working with major telecom players to strengthen connectivity in rural India. With the government allocating a further Rs 500 crore for the development of indigenous 5G technology, certain experts contend that startups can leverage it for their benefit, although figuring out the modalities remain a concern.
  • Another potential space where startups can make a mark is the infrastructure sector, which has received an allocation of Rs 6 lakh crore. With the proposal for installing cashless modes of payment at toll booths, and every vehicle having an inbuilt RFID tag, this is an area of real opportunity, especially for fintech companies. These ventures can participate in developing the underlying architecture for payments at these toll booths.
  • Even in the education sector, the government has sought to further digital intensity, especially with the launch of ‘DIKSHA’, a government portal dedicated to moving Indian classrooms from the “blackboard” to “digital board.”

What the budget missed out on :

1) Tax holiday
When the government announced an exemption on income tax (on their profits) and capital gains tax for the first three years from the year of incorporation, it was seen as a real boost. The reality, however, is that very few startups are able of avail of this benefit primarily because they don’t break even during this period, and thus have little to no tax liability.

2) ‘Draconian’ angel tax
In June 2016, the Government of India got rid of the draconian ‘angel tax’ that was imposed on start-ups in 2012. As per its notification, the government amended a provision of the Income Tax Act, whereby capital raised by start-ups from domestic angel investors will not be taxed as income even if the investment exceeds the fair market value of the start-up’s shares. Earlier, the rate of this tax was at a massive 30.9%.

However, only those startups that fulfil certain criteria set by the government remain exempt, and a lot is left at the discretion of income tax officials. Startups argue that there is a lack of clarity on the requirements for this certification from the government.

Startups are getting harassed by Income Tax Department for raising capital, and they are threatening to consider it as income.

3) GST-related concerns
A fundamental issue many had with the implementation of the goods and services tax is the lack of clarity in its rollout. With the startup scene spread across different sectors of the economy, each has their separate issues. One common concern is the amount of paperwork they need to file (both quarterly and monthly returns), resulting in unnecessary documentation costs. What startups are looking for is a simpler regulatory mechanism, which they can better comply with and relief on import duty of certain critical equipment. Once again, the Budget failed to assuage these concerns, besides not offering any sort of tax holiday.

4) Lack of clarity on Startups that qualify for government funding and simpler regulation.Experts argue that there is a lack of clarity in determining which startups qualify for funding from the government. Although it has recognised over 6800 startups under its Startup India initiative, only 75 are currently receiving funding, and very few remain aware of the potential benefits of the government’s initiatives. Some have complained of the long-winded process involved in applying for government funding, while others argue that promised benefits of tax exemptions and the process of nurturing entrepreneurs (incubation) are yet to bear fruit. No further clarity on this subject was forthcoming.

They also argue that the government’s framework for incentivising research and development among new entrepreneurs across different sectors has not evolved with the times.

The answer, lies in more clarity about the regulatory framework and the licensing process for a startup across different sectors, besides provisions for single window clearance. All these factors add to the ease of doing business in India.

 

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