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Will Budget 2015 be a game changer for startups?

Considering the fact that Govt is working towards pushing MSMEs, the upcoming Budget 2015 is likely to bring some good news for startups.

Union Budget 2014-15 has brought a ray of hope for the startup community with the Union Finance Minister Arun Jaitley announced the launch of Rs 10,000 crore funds to increase capital flow to start-ups and SMES in the country. This announcement had created a wave of expectation among the startup community.

However, there are certain issues which still remain unaddressed by the government like Tax Policy, Angel Tax, Unstructured expenses of the incubation fund, Reviewing Companies Act, Absence of focused policies, Lack of infrastructure support, Lack of adequate tax incentives and others.

“We would expect the government to focus on minimising indirect taxes and not imposing retrospective taxes. The industry would also certainly like to see a pro-investor tax policy and avoidance of double taxation for foreign investors to enhance investments in the country,” says Safir Adeni, President, TiE Hyderabad.

In order to boost the startup ecosystem, there are certain wish lists of the industry experts, which they expect to be fulfilled by the government in the upcoming Union Budget 2015-16.

First, they expect tax policy to be on lines of Singapore and New Zealand for faster growth of startups in the country.

Second, experts urge the government to avoid Angel Tax, which negatively impacts the fund raising activities of startups as they have to dilute more stakes to cover the tax amount.

Third, there is a requirement of structured disbursement of the incubation fund as a streamlined process.

Moreover, the government should review Companies Act to make it simpler and less expensive for startups to maintain compliances.

Association’s Wish list

The Internet and Mobile Association of India (IAMAI) has put forward its recommendations for the upcoming Union Budget. They expect the government to create an enabling market condition and tax environment for the promotion of digital entrepreneurs and smooth operation of marketplaces. They also suggest introducing tax holidays to promote large internet companies from India, which will help new-age digital companies and entrepreneurs to expand their business and provide growth impetus to the fledgling industry.

To facilitate a business oriented environment and enable technology startups to maintain a sustainable growth, NASSCOM too has come up with some of its key recommendations like – Addressing regulatory and tax challenges for technology startups and SMEs, incentives for technology startups and SMEs, interest rates on penalty for service tax and for amount under litigation should be rationalised, etc.

Startups: The Powerhouse

Startups play a significant role in the growth, development and industrialisation of any country. Therefore, it has become imperative for the government to develop an environment, wherein these micro units can flourish. And what could be more favourable platform for the startup community than the Union Budget 2015 to express their wish list.

Easier access to credit, simplified regulatory framework, relaxation on the service and capital gain tax policies, incentives or subsidies to support smooth operations are few issues that need to be addressed in the Budget.

“To harvest the economic benefit and return on entrepreneurial investments, the government must actively support the development of India’s high potential firms by providing a right ecosystem and policy support. We need clear and unambiguous policy framework that addresses concerns of high-potential start-ups,” points Shripal Gandhi, Founder, Swipe Technologies.

R Narayan, CEO, Power2SME and VP, CMSME – FICCI, tells “The emergence of SMEs in the SEZs of the country is another point to be looked at. The government should support the set-up base of the SMEs in these zones as the manufacturing capabilities of these small enterprises have a direct bearing on the growth of larger enterprises.”

One of the reasonable expectations from the Union Budget 2015 would be to waive off income and certain tax benefits to the startup entrepreneurs. “Certain expenses like R&D expense garner a 133 per cent tax benefit. Startups too should be given similar benefits to work out innovative solutions for a better entrepreneurial atmosphere of the nation,” explains Shrenik Gandhi, Co- founder, White Rivers Digital.

When asked about bringing any globally active startup model in India, Gandhi shares, “According to a study, New Zealand has the "one-stop" shop approach, where most of the government agencies that a startup needs are linked online, making it very startup friendly and the best country in the world to start a business. On the contrary, in India, it requires a lot of time, effort and energy to launch a business, which again is not startup friendly. There should be government recognised startup friendly organisations, which smoothen up the initiation/germination of any business idea.”

However, initiatives like ‘Make in India’ and ‘Digital India’ are likely to bring some relief to the startup community and enable them script a success story of India. “It will be interesting to see the policy and Budget commitments for Digital India initiative, in the upcoming budget,” narrates Vijaya Kumar Ivaturi, Chief Technology Officer, Crayon Data.

Further, Ivaturi highlights, “It is generally seen that majority of Indian startups deliver solutions for clients outside India. But they ignore the fact that they cannot win a substantial part of business in this manner. However, if the deals are related to Public Sector or Government programmes, then that will act as a great demand driver for them to address local challenges with their solutions. Hence, a specific policy support regarding such deals is expected from the government’s side.”

Accelerators’ Say

Last year, India’s startup ecosystem has witnessed a paradigm shift with the sharp increase on investments front because the most promising ventures are picking up the highest chunk of investments. The government support of Rs 10,000 crore to the ecosystem signified the emergence of the promising startup economy in India. Since then, the ecosystem has gained great traction and maturity, with entrepreneurship being considered as a priority career by the Indian youth.

“To support this phenomena, in addition to financial support, the upcoming Budget is expected to introduce provision for the facilitation and growth of the ecosystem in terms of investor friendly and tax friendly policies for startups, which would be required to cater to the entrepreneurial ambitions of the youth and the ‘Make in India’ initiative,” says Vikram Upadhaya, Founder, Green House Ventures Accelerator.

Upadhaya also emphasised on the top three issues that the government should implement:

1) Giving service or corporate tax relief to accelerators that are home-grown and well-funded
2) High subsidy for infrastructure setup to all the accelerators and incubators, and
3) Low interest debt financing or bridge loan up to Rs 3 crore for all startups funded by accelerators.

Both the startup community and investors are looking forward for the clarifications and positive developments on some of the taxation related issues that has already been highlighted to the relevant ministries.

Prajakt Raut, Founder, The Hub for Start-ups, expects this budget to include a dedicated minister in each state for Entrepreneurship, the term  'Small & Medium' in SME to be replaced with the word 'Emerging' and a contingent of entrepreneurs in the Republic Day Parade.

Investors’ Expectations

Exemption for Angel Investments from Section 56 (2) (viib) of IT Act is at the top in the wish list of Angel Investors. In the last year, a recommendation has been made to exempt angel invested companies from section 56 (2) (viib) – Angel Tax, but it was not implemented. There is a holistic need to bring amendments in the clause to give a fillip to the industry because it prevents business angels from providing the angel funds to innovative startups before VCs (Venture Capitalists) get interested.

“We now have a piquant situation, where startups in India can raise money from foreigners, who are exempted from Sec 56, but have to relocate overseas to raise money from Indians,” said Saurabh Srivastava, Co-founder, Indian Angel Network (IAN).

When asked about the expectations on the upcoming Budget, Srivastava shares, “Many tax policies like Angel Tax, Service Tax, MAT (minimum alternate tax) etc., hurt startups in their initial stage. Policies like Angel Tax and Sec 56 should be relooked at, whereas, MAT should be removed for the companies that have revenues up to Rs 25 crore. Sec 56 in effect taxes a startup on equity investments in their companies, if made above fair value.”

Unlike India, other developed nations provide tax benefits on angel investment. For example, UK provides tax benefits of up to 50 per cent. Usually, startups start their journey with an idea and without having any assets in hand, so they naturally raise one and half times the money based on the valuation of their company. 

Coming to the Rs 10,000 crore VC fund announced in the previous year’s Budget, it is very important to leverage this government fund 5 to 10 times and then deploy it across the various components of the entrepreneurial lifecycle - VC funds, Social impact funds, Angel groups, Incubators, etc.

While talking about the optimum utilization of Rs 10,000 crore startup fund allocated in Budget 2014, V Shankar, Member, The Chennai Angels (TCA) suggest the government to consider factors like – mechanics of the operations of the fund, composition between debt and equity, and the manner in which proposals will be solicited and vetted etc. Also, the role of existing players such as Incubators, Accelerators, Angel Associations, and VCs in this framework is equally important.”

Thus, considering the fact that the government is working towards pushing the micro, small and medium enterprises (MSMEs), the upcoming Union Budget 2015-16 is likely to bring some good news for startups.

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