In January 2016, Prime Minister Narendra Modi launched one of the most ambitious initiatives of his government – Startup India program. The program had a vision of promoting startups through ease of doing business, funding support, and a lot more. Three years down the line, as the government is set to present the last budget of its five-year term, the startup ecosystem is hoping for the abolition of Angel Tax, easing of FDI norms, among other sops.
Anil Joshi, managing partner of Unicorn India Ventures believes that a lot has been done for startups in the past four and a half years, especially with regard to funding. He believes that through Startup India, entrepreneurship is being fostered at school and college levels, govt funded incubators are registering unique and new business ideas and even on the funding front, there’s been a surge from global investors.
However, there are still some major challenges that remain. From an investor point of view, Anil hopes that this budget will see a framework emerge whereby a new set of investors are incentivised to invest in new startups or even regional startups get launched in tier 2 and tier 3 cities.
Angel Tax
But the main issue, Anil says, is angel tax. “Though the govt is already working on a solution and holding talks with the stakeholders, an early solution will not only boost angel investments in India but also help build a robust pipeline for growth and late stage investments,” he adds.
Several other startups echo the same.
Pradeep Dadha, founder and CEO of Netmeds says that the removal or relaxation of Angel Tax to encourage angel investments in Indian startups will provide the much-needed push to the startup ecosystem in India.
Aprameya Radhakrishna and Mayank Bidawataka, co-founders of Vokal say that Angel tax has been a problem for both investors and startups. “For most angels, investing is a way of paying it forward. However, you don’t want the hassle of going through some scrutiny just for investing a small amount in a startup. As a startup, we don’t expect the government to tax us for having raised angel investment. Startups are employment generators. Startup investments need to be incentivised,” they say.
Sudep Singh, CEO of GoWork says that Angel Tax keeps them from trying their hands at innovation at a consistent pace when they are faced with the heat of clearing this outstanding amount from the funds.
Rajan Navani, Vice Chairman and Managing Director, JetSynthesys believes that if it is not addressed, angel tax can cause a complete collapse of the initial financial support needed for startups to start, thereby making the entire Startup India initiative redundant.
“The one key expectation of startups from the budget is complete clarity and consistency on angel tax which has caused unprecedented levels of discomfort both for startups and angel investors… Global models in countries like UK and others give tax exemptions to angel investors and even reimburse 70% of their investment if the invested startup fails to create a powerful incentive for risk-taking for new and innovative businesses. Let alone an incentive, angel tax taxes the startup on the share premium, not only discouraging angel investors but more so completely paralysing the startup at it is forced to pay taxes without even starting. All other expectations and incentives have taken a back seat in light of this large issue facing the entire startup ecosystem in our country,” adds Navani, who is also Chairman of the Confederation of Indian Industry (CII) National Council on Future Businesses.
Tax incentives
Apart from angel tax, several startups are looking for certain other tax benefits.
Pradeep of Netmeds hopes for an extended tax break to help startups stabilise during its early years.
From a manufacturing startup point of view, Tarun Mehta, co-founder and CEO of Ather Energy says, “We would like the government to do away with the inverted GST structure under which we collect 12% on selling our vehicles and pay 18% GST on raw materials and expenses. Also, the lack of clarity on the refund process adds more complications to this inverted tax structure.”
Raj Neravati of Hug Innovations says that apart from easy access to funds allocated by the central government for startups, the government should put some tax exemptions around Import Duty and GST for small and medium businesses to survive.
“In order to enrich the Indian market, the rate of corporate tax, which is currently at 33 per cent, should be reduced significantly. Lower rates of corporate taxes are one of the major factors that attract businesses to overseas markets,” Sudep of GoWork says.
From an investor point of view, Anil says that investors are placing a bet, which is locked away for 5-10 years and it is a risky asset class. However, when their investment is realised in the timeframe, they have to pay taxes on the same while this is not the case with bonds or mutual funds or even investing in share markets. “They have been given many tax breaks. We would like similar incentives being given to investors investing in startups so that they can be exempted from short term and long term gain taxes. It is acknowledged by the government that investors are taking big risks by investing in startups, who are in turn generating jobs. So, it would be great to see STT (securities transaction tax) and LTCG (long-term capital gains tax) related relaxations on startup investments,” he says.
FDI
Another bone of contention between startups and the government has been the FDI policy.
Sudep of Go work wants the government to consider easing FDI norms for raising funds from private equity players who can strengthen the inflow for our commercial real estate verticals like office spaces, malls, hospitals and hotels.
Speaking about the growing e-pharma industry, Pradeep says that with the impending change in the new FDI policy in e-commerce sector, he expects FDI relaxation in the e-pharma sector as well.
Requesting sops for blue collar employees, Pravin Agarwala, Co founder & CEO of BetterPlace says, “This will help the blue collar employees to gain better skills, career prospects as well as earning capabilities. It will also help them get access to financial services, etc. that are linked with the duration of employment.”