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Investing in the future: What the Indian investment community expects from Budget 2017

Apoorv Ranjan Sharma     January 30, 2017

To say that the upcoming Union Budget has everyone waiting with bated breath would not be an overstatement. It is the first budget announcement to be made by the government since its decision to demonetise high-currency notes. In the months following the shock move, the World Bank slashed its fiscal growth estimate for India by 0.6 per cent to 7 per cent. With the country only just beginning to recover from the note ban, the budget announcement holds the key to answering just how quickly the economic apparatus can be brought back on track.

The latest budget is of particular interest to the investment community. Despite having remainedrelatively low-key, investors have demonstrated signs of increased activity in the year that just passed; there has been a year-on-year growth of 3 per cent in the number of deals in 2016, thanks in large part due to an increase in early-stage investments. This, after a blockbuster 2015, marks a tangible shift in investor sensibilities; instead of funding start-ups with hyper-inflated valuations and growth projections, investors are now choosing toinvest in promising early-stage ventures with robust unit economics and great scope of market disruption.

This brings us to what the investor community expects from the Union Budget 2017. For one, there is expectation of continued fiscal consolidation. Aligning capital gains tax regime for unlisted businesses with that of publicly listed companies, at least for risk capital speculations made by SEBI-registered Alternate Investment Funds (AIFs), will go a long way in incentivising investors - both Indian and foreign - to inject cash into high-potential start-ups in India. Cutting down the lock-in period for long-term capital gains for unlisted securities from its current duration of 2 years is another measure which can boost investor activity. Start-up investments are high-risk business propositions and are subjected to a higher tax rate. Reducing the lock-in timeframe will facilitate swifter investor exits and give them a chance to maximise their profits, which in turn will result in increased investment frequency and better availability of funds for start-ups.

Given the risk that is inherently associated with new business ventures, entrepreneurial association must also be made more rewarding for start-up founders and employees. Capital gain taxes for first-time entrepreneurs should be waived-off, while employees working in start-ups must be given tax concessions on employee stock ownership programmes (ESOPs), unlisted securities, and convertible instruments. The government should also look to bring in policies which facilitate lower interest rates for business loans, as well as convenient long-term repayment schemes for companies turning around to financial solvency. Exempting start-ups from multiple direct and indirect taxes, such as MAT (Minimum Alternate Tax), will also aid in reducing the burden of cash outflows on entrepreneurs. Furthermore, there is a need to revise the current tax 'holiday' period; most tech start-ups do not make profits during the initial years of their operations, and only generate profit around 5-7 years down the line. Provisions must therefore be made to allow such start-ups to claim tax abatement benefits of five years within a period of minimum seven years of their inception.

Certain infrastructural concerns need to also be addressed in the upcoming budget. Given that most start-ups today are leveraging the digital medium for service enablement, strengthening the country's digital infrastructure must be given the foremost priority. Massive investments are needed to bring digital penetration in India on par with the more developed economies. Framing of policies and guidelines also need to be streamlined for faster implementation, as it willmake it possible for cash-strapped start-ups in the country to gain approval more swiftly under the Credit Guarantee Fund Scheme and make funds more available and accessible.

India, at present, presents a strong growth proposition in a global market which is largely troubled by instability. As such, making start-up investments attractive for potential investors will help in fostering a healthy growth environment for the country's entrepreneurial ecosystem. The aforementioned measures can assist emerging ventures in the country achieve greater heights of entrepreneurial success by facilitating higher fund availability and supporting start-up operations. All that remains to be seen is whether this budget will see them implemented.

(The writer is Co-Founder, Venture Catalysts, a Mumbai-based seed investment platform)

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