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Startups at core in FM Arun Jaitley's Budget 2015: Key Takeaways

Budget 2015 has brought a slew of good measures for encouragement and betterment of entrepreneurial ecosystem in India.

Tags: Budget 2015, Budget 2015-16, Budget for startups, Arun Jaitley, Narendra Modi, private equity, funding, venture capital, skill india, make in india, tech startups, Alternative Investment Funds, foreign investors

BY Swadha Mishra  |  Feb 28, 2015 comments ( 0 ) |

The much awaited Union Budget 2015-16 has brought a slew of good measures for encouragement and betterment of entrepreneurial ecosystem in India.

To further promote entrepreneurship and self-employment opportunities in India, this year's Budget has clearly stressed importance on achieving an inclusive and sustainable growth of the country via education, skill development, ease of doing business, access to domestic and global capital, and indispensible role of accelerators and incubators in the entrepreneurial ecosystem. Reacting to the budget, Dr Subho Ray, President, Internet and Mobile Association of India (IAMAI), said “We are briskly moving towards a better regime for startups and the budget underscores this move after the first set of provision supporting entrepreneurship.”

Building World Class IT Hub in India

FM Arun Jaitley has announced to earmark Rs 150 crore for Atal Innovation Mission (AIM) to create a world class IT hub in India. In his words, "Indian economy is a super giant on the move. AIM will be an innovation promotion platform involving academics, entrepreneurs, researchers to draw upon national and international experiences to foster a culture of innovation, R&D and scientific research in the country. The platform will also provide network of world class hubs and grand challenges for India."

"India has a well regarded world class IT industry with revenues of $150 billion, and over $100 billion exports employing nearly 30 billion people directly. We are now seeing a growing interest in startups, experimenting and cutting edge technologies creating value out of ideas, initiating and converting them in a sustainable enterprises and businesses is at the core of our strategy for engaging our youth for inclusive and sustainable growth of the country. Concerns such as more liberal system of raising global capital, incubation facilities in our centre of excellence, funding for seed capital and growth, and ease of doing business needs to be addressed to create jobs," Jaitley added further.

Enabling Tech Startups

In a bid to create self employment opportunities, the government has announced to establish a mechanism - known as Self Employment and Talent Utilisation (SETU) to be techno financial incubation and facilitation programme to support all aspect of startup business and other self employment opportunities, particularly in technology driven areas. FM Jaitley has announced to set aside Rs 1,000 crore initially for investment in NITI (National Institution for Transforming India) to enable tech startups.

"Government's decision to set aside Rs 1,000 cr fund for tech startups will certainly enhance entrepreneurship in the country. There are provisions in the Budget for encouraging entrepreneurship, innovation and incubation for the startup community, which is welcome. Increasing job creators instead of job seekers is a good move," said Dr Radha Iyer, Associate Professor, K. J. Somaiya Institute of Management Studies & Research, Vidyavihar.

"This is certainly a move in the right direction for fostering a sound startup ecosystem in our country. Any assistance from the government would be a shot in the arm for startups and small businesses. With support towards the self-employment, being a startup, we comprehend the importance of any kind of support and when it comes from our country's government, we truly wish to deliver the best for the country and make a difference at large," said Toshendra Sharma, Founder & CEO, Wegilant, SINE IIT Bombay.

Achieving Skill India Mission

To achieve the Skill India mission, the government has announced to launch a national skills mission soon to enhance employability of rural youth. Emphasizing the thrust needed to encourage entrepreneurship and businesses in India, Jaitley said that the government will aim to make India a manufacturing hub with the 'Make in India' programme. "India is going to take off on a faster growth trajectory. While global growth forecasts have come down, India's forecasts have either been maintained or scaled up," Jaitley said.

Expressing her views on the same, Professor Asha Bhatia, Faculty, Entrepreneurship & General Management, Chairperson, Enactus Somaiya Social Cell, K.J. Somaiya Institute of Management Studies & Research, said, "In the Indian education system, the 'pay off' comes after a long time. And it has been observed that even though a person is educated, he is not necessarily employable. The Budget talks of Skill India to coordinate with Make in India, which is a good move to focus on vocational training. This is the need of the hour, especially for the underprivileged. It will give them a means to meet the immediate requirement of their family and other dependents."

Easing Finance Accessibility

To further ease funding and access to capital, the government has announced to set up a bank to facilitate funding for small entrepreneurs that make up the backbone of the country's economy. The MUDRA Bank will refinance microfinance institutions under a Prime Ministerial scheme, he said, allocating $3.24 billion to the plan.

"Two budget measures that will greatly accelerate the availability of debt capital to unlisted mid-sized companies are: 1) Enabling NBFCs (mid-sized) with SARFAESI Act, and 2) MSME refinancing mechanism through the MUDRA Bank. The first measure gives greater protection to the lending NBFCS, and hence, enhances their ability to lend particularly at the growth stages of companies," Gopal Srinivasan, Member, Chennai Angels.
 
These changes come at a time, when India is superbly poised for sustained, high GDP growth.  These measure will create a very enabling environment for entrepreneurship and growth, providing ubiquitous equity and debt capital for all capable entrepreneurs.

Big Boost to PE/VC Industry

In a big move, the government announced to allow foreign investment in Alternative Investment Funds (AIFs), a category of pooled-in investment vehicles for real estate, private equity and hedge funds. Jaitley said that the government would do away with different categories like Foreign Portfolio Investors (FPI) and Foreign Direct Investment (FDI) for such investments with a view to making it easier for overseas investors to invest in AIFs.

Expressing his views about the same, Srinivasan KA, CFO, Ventureast, said, "As the general consensus goes, this year's Budget is indeed a growth-oriented in nature, particularly for the PE/VC investor community and startup ecosystem in India. Two encouraging points are that Minimum Alternative Tax (MAT) will not apply to foreign investors and the General Anti-Avoidance Rules (GAAR) applicability has been deferred by two years."

The government has decided to do away with FIIS from ambit MAT, in order to reduce litigation. Experts believe that with the government clarifying on tax pass through, the move will act as a big boost to PE Industry. “Alternative Investment Funds (AIF) will get a major boost with foreign investments allowed and tax pass-through status afforded. Category 1 and 2 AIF are given pass through for tax and permanent establishment norm removal will certainly spur the private equity industry by locating fund managers onshore and mobilize money for SME funding. This would further avoid confusion and possible double taxation,” said Vineet Toshniwal, Managing Director, Equirus Capital.

"This has truly been a break-through Budget for the PE/VC industry. Tax pass-through for all Category I and Category II funds, and the ability to blend foreign capital in AIFs, will provide significantly greater access to funds for Indian PE/VC industry.  This could propel the industry from making annual deployment of $8-9 billion to a trajectory of making 3x the current annual deployment ($25 - 30 billion) in the next 3 years. Unlisted companies, who face the most scarcity of capital, are the primary recipients of VC/PE equity," said Gopal Srinivasan.

The Permanent Establishment Safe Harbour provides a sense of comfort to fund managers for choosing India as the base for investment managers. It means that fund management activity undertaken in India by an eligible fund manager on behalf of an eligible offshore fund will not trigger business income taxation for the offshore fund in India. However, there is a qualifying provision that the overseas fund should have a minimum of 25 members, which would be challenging for a fund which have limited institutional investors.

AIFs are funds established or incorporated in India for the purpose of pooling in capital from Indian investors for investing as per a pre-decided policy. The Category-I AIFs are those funds that get incentives from the government, Sebi or other regulators and include Social Venture Funds, Infrastructure Funds, Venture Capital Funds and SME Funds. The Category-III AIFs are those trading with a view to making short-term returns and it includes hedge funds, among others.

The Category-II AIFs can invest anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day operational requirements. These AIFs include private equity funds, debt funds or fund of funds, as also all others falling outside the ambit of two other categories.

Envisioning Cashless Economy

In another positive move, the government calls for promoting cashless transactions in the economy. The government will incentivize spending through debit/credit cards to encourage India to become a cashless economy. In this regard, Jaitley proposed to go cashless through RuPay debit cards for every citizen. RuPay is a domestic card scheme under the National Payments Corporation of India (NPCI).

"It's a great direction that FM has taken. The whole push of direct subsidy transfer will make these new bank accounts and RuPay debit cards very relevant. Further, the national insurance scheme will be linked to this bank account (Re 1 per month premium will come from this account), which will increase the usage. As a result, number of cashless transactions will increase significantly. In future, small things like paying salaries to maids and drivers will be into bank accounts, instead of paying in cash. Further, there is a big boost for the corporate sector/startups, with tax policies and reduction in corporate tax from 30 per cent to 25 per cent," said Nitin Gupta, Co-founder & CEO, PayU India.

This move will likely give a major boost to startups/enterprises working in this space like PayU, My Mobile Payments, Momoe, iKaaz, etc. Even Prime Minister Modi in last month called for promoting cashless transactions, saying these could be the best solution for the problem of black money.

The Other View

Giving a rather contrarian view, serial entrepreneur Krishna Lakamsani, Founder & CEO, IPay Tech India, said, "Government allotted Rs 1,000 crore for tech startups, but it has to be more clear in how this fund is going to be deployed in future. The last government also allotted desperate fund for startups, but it did not reach to its potential because of the lack of understanding among government officials about how and where to deploy the same."

"If the government focusses on startup tax, when they raise investment, it would help startups, but unfortunately, there is no clear view on this issue. Just like the US government did with American Dream Act -- giving employers to benefit when they hire new employees -- the same will increase and help startups to hire, but there are no incentives specific to startups in this area," Lakamsani pointed further.

The overall mood created by the Budget is positive. Several measures announced for startups will have a long-term positive impact on the country's economy. However, the fine print of the budget has to be seen for understanding the nitty-gritty of the various decisions announced by the government.

"The budget has not done enough for the startup ecosystem. It didn't talked about the Rs 10,000 crore Venture Capital Fund that was announced in a grandiose manner in the July 2014 Budget. Further, it is not clear if Rs 1,000 crore allotted to enable IT startups is part of that Rs 10,000 crore," said Chennapa Naidu Darapaneni, Founder & CEO, MeraEvents.com.

The government's plan to encourage startup culture and budding entrepreneurs is not reflected exactly in the Budget. The mechanism to support self-employment to support all aspects of startup businesses should have been outlined more clearly to take encourage young entrepreneurs and enthusiasts, Darapaneni added further.

Speaking on the same lines, Alan D Souza, CEO, Vavia Technologies, shared, "Rather than announcing such funds, more focus needs to be given on how utilisation of such funds have impacted job creation and then additional support that can be provided for the same. The proposal to reduce taxes for tech startups from 25 per cent to 10 per cent is great news as this will really encourage tech startups in the country." 

Moreover, Service tax is perceived to be an additional burden and it is transferred to the end-user. The increase in service tax to 14 per cent is surely a burden, especially on small enterprises and startups. While most of it would be encompassed by the Goods and Services Tax, experts are of the view that the government should have announced some steps to provide relaxation to certain services with a specified threshold limit to ensure that the burden is eased initially.

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