By: Sharanya G. Ranga and Neil Lopez
2016 witnessed a stark contrast from India’s startup glory years of 2014 and 2015. With drastic valuation dropdowns, cash crunches, shutdowns and employee layoffs, startups across the country have been weathering difficult storms to stay afloat. The “Start-Up India, Stand Up India” action plan announced a year back was expected to boost the third largest startup ecosystem in the world. Disappointingly, the ensuing period has been chequered with more misses than hits with barely 500 startups registered under the plan and only 8 startups bagging approval for tax benefits. With the budget looming closer, what can the Government do to get the buzz back?
Tax sops and simplified tax framework
As is the case with any sunrise industry (like the IT & ITES industry in the late 90s), there is a growing clamour for tax sops to nurture the startup ecosystem as we move to a mature phase of startup growth. This includes, among others, the extension of the tax holiday for startups to 5 or 7 years from the present 3 year period, reduction in corporate tax rate for startups and exemptions from direct and indirect taxes. Similar to the conflicting interpretations on the tax treatment of software, startups especially in the e-commerce/tech space have been bearing the brunt of various indirect taxes imposed at the centre and state level. The rollout of the Goods and Services Tax later this year is expected to simplify the tax compliance framework for such businesses as all indirect taxes will be subsumed under a unified tax regime.
“Acceptance is to an offer what a lighted match is to a train of gunpowder” so goes the popular line taught to law students in contract law. In the startup world, the lighted match may well refer to the funding that can, more often than not, catapult the startup to success. With the proliferation of angel investors over the last couple of years, it is high time the Government recognised angel investors as a separate class and provide them with a conducive tax regime for such high risk and early stage investments. Reducing the long term capital gains period to 1 year besides a rate reduction will go a long way in making such investments an attractive option.
The Government of India had proposed an ambitious Rs. 10,000 crore ‘fund of funds’ for startup funding early last year. This was to be routed through Small Industries Development Bank of India (SIDBI) and registered venture capital funds. With venture capital drying up for the better part of 2016, the scheme has turned out to be a damp squib caught in policy quagmire and needs a reinvention of sorts to meet its stated aim of how this corpus “could potentially be the nucleus for catalysing Rs 60,000 crore of equity investment and twice as much debt investment.”
Given the unprecedented technological disruption and the constant innovations across sectors – be it travel, retail, food, hospitality, health, financial services, etc., we are well on our way to a digital economy. The tax and regulatory framework has to be progressive, clear and predictable, tailored to cater to (besides fostering) the increasing digitalisation of most aspects of our lives. Incentives such as service tax exemptions, minimising transaction costs for online payments, to promote digital payment mechanisms should be proactively put in place. This will ensure to bridge the rural-urban divide from a financial inclusion perspective as well. The recent example of mobile wallets changing the dynamics of the payments ecosystem is a case in point.
Infrastructure development and startup ecosystem
Mere tax sops are at best a cosmetic fix considering the bureaucratic labyrinth to wade through while setting up, operating and growing a business in India. Stories abound of our home-grown startups shifting base to foreign jurisdictions to seek growth capital and better infrastructure and a simpler set of laws. There has to be a renewed focus on better digital infrastructure, high speed internet connectivity and awareness campaigns for ensuring the benefits of the digital era trickle down to the common man.
Over the last year, there has been considerable growth of the startup ecosystem at large – incubators, accelerators, angel networks, venture capitalists, financial and legal advisors as well as industry-academia partnerships through startup fests and other collaborative platforms. Several states such as Kerala, Karnataka, Telangana, Rajasthan and West Bengal have introduced schemes and public-private partnerships to foster the startup culture.
While the present Government has focused on the ease of doing business and met with limited success, a lot more needs to be done in creating the environment that ‘un-obstacles’ the regulatory hurdles to entrepreneurship across the country. There have been policy relaxations for startups on various fronts right from foreign direct investment, external commercial borrowings, employee stock options, exemptions from labour law to the recent relaxation on issuance of convertible notes. However, the issue for concern is the definition of the term ‘startup’ and the ensuing long process to get registered as a startup to avail these benefits. In a country with over 4000 startups, it is nothing short of a self-goal if not even 25% startups get registered. The Budget may consider laying down the roadmap to correct this anomaly besides expanding the policy relaxations to a less burdensome corporate secretarial and exchange control compliance regime for startups.
This article was first published in http://bwdisrupt.businessworld.in/article/Budget-2017-Startup-India-s-Wishlist/31-01-2017-112185/