Union Budget Invests into Startups: Premium or Undervalued
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India is at cross-roads and as the entrepreneurship bug is spreading all over the country, our vibrant entrepreneurial eco-system of India which sustains more than 20 per cent growth to meet the collective aspirations of a billion Indians have received a major kick with the union Budget 2019.
On July 05th, 2019 India witnessed a major landmark for the start-up industry where a major boost was announced by our Union Minister for Finance and Corporate Affairs Smt. Nirmala Sitharaman during her maiden Budget speech in the parliament. In my view, these host of reforms such as a dedicated TV channel for start-ups, relaxation of angel tax, specific opportunities in agriculture, electric mobility, digital currency, focussed skill training in AI, IoT, Big Data, are in sync with the vision of our Prime Minister, Narendra Modi’s campaign “Startup India” which was announced in 2015. While there are areas of improvement, this is a right step towards encouraging start-ups and bringing in adjacency across sectors.
What Does the Government Think?
It is indeed important to note that over the years the Indian Technology start-up landscape has evolved to become the 4th largest in the world. There has been a significant rise in the growth of technology startups. India is ranked 3rd globally with more than 80000 jobs been created every year by the start-ups. In fact, from time to time, the Government of India has continuously engaged with all stakeholders to address relevant issues related to the Indian Startup eco-system. At all levels, the easing of norms for providing tax exemption to the startup companies has always been a priority for the government. The general mentality about the startup ecosystem in India has increased critical footing with a great many people related with the business who trust the way that currently is the best time to end up a startup business visionary. This positive opinion is a result of the belief of investor that the startup nature has grabbed force over the most recent couple of months and is probably going to empower for the coming a half year to multi-year. In addition, government activities are relied upon to assume an indispensable part in the startup ecosystem’s brilliant future. For example, the trade and industry sector of the Indian government wants to sort out a south Asia locales’ meet of new businesses for trading new thoughts and expanding collaboration among them, along these lines demonstrating trust in new businesses.
Our honourable minister said that “startups in India are taking firm roots and their continued growth needs to be encouraged. To resolve the so-called ‘Angel Tax’ issue, startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums. In my view, while this is a great move, there is a need for more clarity and onus on self-compliance for start-ups and investors. Angel tax was a devil tax and a cause of concern for startups as it has caused much of harassment at the hands of the tax authorities.
Honourable Finance Minister also proposed to start a television programme within the DD bouquet of channels exclusively for start-ups. This can be a huge step towards familiarising one and all across economic communities to get inspired, support and work with start-ups. Familiarisation brings in trust, trust brings in opportunities, and opportunities bring in growth. It is important that the government works closely with all the public and private start-ups in India
Merchant tax discounts were applicable on all the Digital transactions made by the startups which used to be a disincentive for pushing digital payments has been removed altogether but the most likely to have the most positive impact on the acceptance of digital currency especially for higher transactions. While the focus on digital transactions is not new. The ministry of electronics and IT recently launched a scheme, wherein the government will reimburse MDR charges on transactions up to ₹2,000 made through digital modes.
However, as an extension of previously existing capital infusion encouragement in the form of Long-term capital gain on sale of residential house property, sold before March 31, 2021, will not face any tax if invested in eligible startups. Close to 350crs has been allocated for 2% interest subvention for all GST registered MSME, thereby boosting capital opportunities for such companies. Amongst all this, there is a huge opportunity on the NBFC and Fintech avenues with the government playing the role of partial guarantee(with a limit) to lending banks on such credits thereby unlocking a capital availability in excess of 1 lakh crores for deployment.
Social Startups and NGO’s
Social Startups and NGO's alike will now have renewed capital access through the soon to be set up social stock exchange to ensure fundraising or capital availability is now channelled to address social welfare objectives. The relaxation of carrying forward losses (with specific instructions ) and extended beyond the existing seven years limit, which is especially good in the case of startups where losses are aplenty and can be set off whence they start making profitable efforts.
At present, start-ups are not required to justify the fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF). The Finance Minister proposed to extend this benefit to Category-II Alternative Investment Funds also. Therefore, the valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny.
India is quick rising as a start-up country. The Indian technology landscape has seen a colossal development towards the formation of imaginative new businesses and has risen as the third quickest developing centre point for innovative new businesses in the nation. With the ease of doing business and relaxation of norms, this will give an impetus to the Indian startup ecosystem and shall foster greater Industry-Academia Partnership and Incubation.