by Tanya Krishna
01-August-2019 | 10 mins read
The month of July witnessed Narendra Modi Government 2.0’s and the newly appointed Finance Minister Nirmala Sitharaman’s maiden Union Budget and it had start-ups as the biggest shining spot. The Government had a clear agenda of addressing the issues of unemployment and reviving the ailing economy which necessitated building confidence of start-ups and SMEs through reforms and policy amendments in their favour.
Recently, start-ups in India have started attracting large investments and giving them a fertile environment is the first agenda in the Government’s list of to-do things. From being one of the ‘Fragile Five’ in 2014, India has emerged as an intensively growing economy, overtaking even China in terms of GDP growth. Today, the country is working with a vision of becoming a five trillion dollar economy by 2025 and one of the leading factors driving this growth will be start-ups. India has seen the rise of over 40,000 start-ups, which have created more than US $ 130 billion of value from January 2014 to September 2018. In such an exciting phase of the Indian economy, Sitharaman has emphasised on push for start-ups, mudra loans for up and coming entrepreneurs and also easier approval system to create companies, which has been lauded by the overall start-up ecosystem.
The positive(s) for a better ecosystem…
Calling it a pro-ease of doing business, Kumar Rajagopalan, CEO, Retailers Association of India (RAI), maintains, “It is a satisfactory budget that reaffirms the Government’s commitment towards promoting ease of doing business. The simplification of the GST, the simplification of tax reforms and indirect taxes and the support to start-ups is all dovetailed towards ease of doing business.” India is the third largest ecosystem in the world in terms of value and numbers after China and the US and the Government’s ‘Start-up India’ mission has brought this to the forefront and created regulatory infrastructure to achieve this. While it helped over 40,000 start-ups on record currently, India is now looking to reach 1,00,000 start-ups and will need to work on ‘Start-up India 2.0’ to accelerate the process. Anupam Arya, Co-Founder & VP, Fabriclore agrees, “This budget certainly takes the previous budget’s initiatives further in the right direction. Recognition of start-up ecosystem in budget is paradigmatic and immensely positive change in this way will evolve the ecosystem for good.”
To delve deeper into what budget has brought for the Indian start-ups…, the Finance Minister has begun the process of clearing the tax issue which mostly discourages discerning entrepreneurs from turning their ideas into businesses. According to the announcements by the Finance Minister, start-ups and investors filing necessary declarations are no more constrained to any kind of scrutiny with respect to the valuation of the share premium and the funds raised by the start-ups are no more subject to undergo the scrutiny of the Income Tax Department. Also, income tax assessing officers need to obtain prior approval from their supervisory officers before conducting an inquiry or verification of the income tax return filed by the start-ups. Sandeep Gonsalves, Director and Co-Founder, SS Homme acknowledges: “Lowering the corporate tax percentage is a good way to promote business expansion in India. Additionally, the new skill development proposal in AI, IoT and 3D printing is a boon in itself since it demonstrates the Government’s willingness to develop future forward processes.”
Furthermore, the announcements by the Finance Minister also ruled that the start-ups funded by Category-II Alternative Investment Fund (AIF) are now exempted from angel tax and they no longer will be questioned where funding exceeds the face value of shares under Section 56(2)(viib). This amendment is effective from 1st April 2019. The move was immensely welcomed by the start-up fraternity as well as investors across the country. Ravi Mehra, Managing Partner, Pour Femme asserts, “Announcements such as relaxation in angel tax and corporate tax are very encouraging and gives a much needed push to start-up ecosystem in the country.” Talking about the proposal, Sumeet Kapur, Co-Founder, Inflection Point Ventures says, “The key highlight of this budget is the relief on angel tax for start-ups. The unnecessary trouble of handling tax officers in the early stages of the company will surely reduce going forward. Also, the inclusion of exemption of AIF category 2 funds will make it easier for more investors to invest in start-ups without the fear of angel tax looming on their investee companies.” Adding to this, Mitesh Shah, Active Partner, IP Ventures, maintains, “Budget 2019 has finally delivered a shot in the arm for start-ups with much-awaited relief on the angel tax allowing funds raised by start-ups to be free of scrutiny by the Income Tax Department. This will put an end to the inconsistent stand taken by regulatory authorities in the past. The Finance Minister’s budget offers an extension to the exemption on capital gains arising from the sale of residential properties if used for funding start-ups. We welcome this move which will be a significant enabler for the ecosystem.”
While taxes was one concern which the Union Budget tried to address, Sitharaman also proposed a dedicated TV channel for start-ups to allow more and more people to present and propagate their ideas and also interface with investors. This is also directed towards helping them build their brands and reach out to potential customers and clients. Sandeep avers, “The TV programme is a brilliant idea to promote the start-up ecosystem. You can see the impact that Shark Tank and Dragon’s Den have had on the entrepreneurial spirit in the USA and the UK, respectively. I do believe that in order to get the message across clearly, they will need to really invest in the show and promote it well with branding that resonates with all types of viewers.”
Besides these, there are other indirect reforms announced as well. Allowing 100 per cent FDI in insurance intermediaries and reducing the local sourcing norms in single-brand retail will help start-ups in these spaces. The proposal to strengthen banks, NBFCs, and the debt and bond markets will also help start-ups to find sources for tapping funds. The Finance Minister also encouraged women entrepreneurship through the Union Budget which was lauded by the industry. “Women entrepreneurs have been prevalent in the current start-up ecosystem, but existing Indian norms lack in providing financial independence to women. I feel this must change if we are truly committed to encourage women business leaders,” maintains Sandeep.
Challenges and the way ahead
Even as the Union Budget 2019 remained focused on the start-ups, the overall ecosystem is yet to receive the right push through implementation of these proposals. For launching a start-up in India, there are endless challenges but the Government’s intent of encouraging entrepreneurship has given a blow in the right direction to the upcoming start-ups. Aashray Thatai, Co-founder, PostFold informs, “The challenges include hefty tax laws, compliances and audit systems. Also, slabs of GST make it a very long and time-consuming process that start-ups have to keep pace with. However, the new provisions like the TV channel, removal of 30% sourcing norms, streamlined labour laws, etc. will help in much more efficient running of start-up businesses.” The positivity that the Union Budget 2019 brought with it has shown a ray of hope for the overall ecosystem and going forward, India might even be ready to leave behind countries like US and China. “We see a huge potential in the Indian start-up ecosystem. However, it would be too soon to conclude because lots of things are in its initial stage right now. We believe that it will take at least 10-20 years for the industry to go stable, concludes Ravi.
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