Union Budget 2021: What relief start-ups expect from the budget

BusinessToday.In

Jan 31, 2021,
Updated Jan 31, 2021 2:55 PM IST

Indian startups faced unprecedented challenges and uncertainties during the last year. The major impediment for the sector came in the form of funds drying up, with around 40 per cent of the startups ceasing operations in May 2020, as per a Nasscom report. The startups and MSME sector are seeking relief from the government in the Union Budget 2021 that will help them boost their working capital, draw, and retain the best talent. The stakeholders are also eyeing the much-anticipated regulatory changes in incentivising the domestic and foreign investments, easing the compliance burden on startups, among other measures. Here's a look at what the industry expects from the upcoming budget.

The key demands of startups center around overarching themes of tax relief and facilitating more engagement between fintech startups and banks, as well as other financial institutions to support the sector via organised lending. The controversial Section 56(2)(viib) of the Income Tax Act, also termed as the Angel Tax, was a major obstacle for fintech startups and encompassed sectors. The government has already provided a respite of 30% Angel Tax to startups registered with DPIIT (Department for Promotion of Industry and Internal Trade).

Early-stage startups, which secure services from foreign providers pay 18% GST under the reverse-charge system. However, they do not get the chance to claim input tax credits since they have little or no revenues. Such businesses are seeking exemption from having to pay GST under this mechanism up to a specific revenue limit.

Startups are expecting from the government to incentivise startup funding and focus on relaxing policies to motivate angel investors to invest more. The government needs to press major fund allocation, lower GST (Goods and Services Tax), which have constricted the scope of operations for startups, which now expect widening the ambit for tax exemptions.

Compliance requirements exhaust a lot of time and effort, as they involve a lot of paperwork. The government needs to recognise and lessen the burden on startups, besides reducing the time of tax compliance to a more optimum level.

The startups still largely depend on foreign investments for their funding needs. The industry wants the government to focus on incentives and policies that encourage Indian investors to support home-grown businesses, which include reconsidering an enhanced surcharge on capital gains from unlisted shares relevant for resident individuals. The sector is seeking changes in regulations that presently proscribe or prevent large enterprises, such as the LIC and pension funds, from investing in alternative investment funds (AIFs).

Unicorns are increasingly looking at listing on public markets, since they are well on their growth path. Although the government recently hinted at allowing direct overseas listings, specific directives are still awaited. Investor-friendly and liberal directions would be welcome as they will open new investment avenues for these businesses.

Industry bodies for venture capital investors are seeking exemption of capital gains on new investments made by AIFs. They are of the opinion that the loss to the state exchequer due to this will be minimal as higher capital influx (in startups and MSMEs) will boost job and asset creation.