Indian startups faced unprecedented challenges and uncertainties in the pandemic 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.
However, with hopes high of a post-pandemic recovery, 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, besides making the inflow of capital into the sector easier.
The recent announcement of a Rs 1,000 crore package for seed investments in start-ups coupled with other fiscal measures during the pandemic signals government's intent on providing growth stimulus to the sector's ecosystem.
The stakeholders are keenly eyeing the much-anticipated regulatory changes in incentivising the domestic and foreign investments, easing the compliance burden on startups, among other measures, during the Budget 2021. Although the government has given startups priority sector lending status, the sector seeks a regulatory system that focuses on tax parity concerns.
Here are the key expectations of the sector: -
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 not only for fintech startups but encompassed sectors. Although the government has already provided respite to startups registered with DPIIT (Department for Promotion of Industry and Internal Trade) from the 30% Angel Tax, experts are of the view that there is more to it that needs to be addressed.
Exemption from GST under reverse charge
Early-stage startups securing services from foreign providers pay 18% GST under the reverse-charge system but can't claim input tax credits since they have little or no revenues. These businesses are seeking exemption from having to pay GST under this mechanism up to a specific revenue limit.
"Over the years, the government has taken several measures to minimise and eliminate tax terrorism. However, the concern still remains. India is home to a new age of entrepreneurs, wherein not everyone intends to evade taxes and flee the country. So, the scrutiny needs to end, especially if a company has received foreign funds. Another area that the government should look into is the simplification of taxes," said Bhanu Chopra, Founder & Chairman, RateGain.
"Startups are high-growth businesses. If they are spending more than 1% of their time to figure out their taxes, it's a great disservice to the nation. It will be ideal if the Finance Ministry can come up with a single clearance window. Similarly, if there are right tax incentives, the exodus of successful startups can stop. Lastly, my experience, especially in the SaaS segment, informs me that India will create about 50 Unicorns in the next 5 years. We should look forward to incentivising domestic capital as it can contribute and benefit from this growth if the right nurturing and incentives are provided," he added.
"As the Union Budget 2021 is released, the Modi government should focus on crucial points for MSMEs and startups. The taxation scheme for MSMEs should be revised and reduced, as it will provide more opportunities for MSMEs and startups to escalate more rapidly. Additionally, the loan approval process for MSMEs should be simplified, and collateral-free loans should be provided to startups and MSMEs. Many MSMEs remain unable to implement potential ideas due to the lack of initial funds or investments," says Anoop Gautam, CEO & Co-founder, Tinker Coders, an online coding platform.
Experts expect the government to incentivise startup funding and focus on relaxing policies to motivate angel investors to invest more. In addition, the Centre also needs to press major fund allocation, lower GST (Goods and Services Tax), which has constricted the scope of operations for startups, and not tax the ESOPs (employee stock ownership plan) unless they are cashed out in addition to widening the net of tax holiday for such initiatives.
In the previous budget, the government had lessened the tax burden on employees by deferring tax on ESOPs by five years, or when they leave the organisation, or when they sell their stock options. Startups are now calling for widening the ambit for tax exemptions.
Relaxation of compliance requirements
Since compliance requirements exhaust a lot of time and effort, as they involve a lot of paperwork, the government needs to recognise it and lessen the burden on startups besides reducing the time of tax compliance to a more optimum level.
Encouraging domestic capital participation
Since startups still largely depend on foreign investments for their funding needs, the industry wants government to focus on incentives and policies that encourage Indian investors to support home-grown businesses. This includes 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 alternate investment funds (AIFs). This, according to experts, will spur domestic capital participation in the startup industry.
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.
Capital gains' exemption on new investments
Industry bodies for venture capital investors are seeking exemption of capital gains on new investments made by AIFs, akin to what the US and the UK have done. 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.