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What Budget 2016-17 should have in store for startups

Alok Patnia
27th Feb 2016
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The Government of India will present its Union Budget for 2016-17 on February 29, 2016. The upcoming budget is expected to unveil the current economic issues, with focus towards Goods and Service Tax (GST), taxation, infrastructure segment and related impact-creating factors in view of ease of doing business.

In anticipation of perceived resilience towards uneven economic recovery, the Budget is expected to continue to flatter startups by focussing on further startup initiatives. After all, this is the first government to spot the startup space in India on such a wide scale.

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The startup movement has raised the bar for decoding emerging youth talent, restrain unemployment growth and contribute to Prime Minister Narendra Modi’s 'Make in India’ initiative. The fiscal budget year is expected to be the budget for the hard-working families, for budding entrepreneurs and for promotion of economic development.

However, the Budget has a restrictive role and cannot address all the issues. With regard to the startup movement initiated by Mr. Modi, certain clarifications are required.

The initially launched startup initiative defined startups as “An entity, incorporated or registered in India not prior to five years with annual turnover not exceeding Rs 25 crore in any preceding financial year, working towards innovation, development or deployment or commercialisation of new products, processes or services driven by technology or IP”. On the contrary, the turnover limit mentioned for startups, of 'Rs 25 crore,' definitely seems to be too limitless for new ventures.

On the other hand, creation and implementation of the VC and incubator schemes would be a great challenge for the government, and certain clarifications on the groundwork is expected from the Budget.

Clarification is also needed to address startups' early challenges:

  • Angel tax/startup taxation: Startups need tax breaks. In the Budget, the government needs to simplify the tax structure and provide clarity on the angel tax. Equity investments from angel investors should not be taxed in the hands of the startup, irrespective of valuation. Removal of angel tax will motivate individual investors to invest in startups and thus help startups explore funding from individuals. VC funds would be looking out for exemptions in taxation on angel investments. Needless to say, the budget has to deliver tax benefits for startups.
  • Relief from service tax for startups/increase in service tax threshold: Startups should be exempted from paying service tax, as it is a huge burden on them. This will make them more competitive. Alternatively, the service tax limit is expected to be raised. Exemption on service tax in initial years would help startups deploy their funds effectively. A lower service tax limits would definitely lead to progress toward the above initiative.
  • Reduction of long-term capital gain tax: Startups may get long-term capital tax reduction in this budget. Government may look at lowering the long-term capital gain tax on investments made in unlisted firms, particularly startups, to bring them closer to the levels prevalent for the listed companies. A long-term capital gain tax of 20 percent is levied on a three-year investment in an unlisted company, but holding of equity shares of a listed company for one year is exempt from any such levy. Expectation is to bridge this gap in this upcoming budget.
  • Groundwork on credit guarantee schemes, fund of funds and incubators announced in the Start Up India plan: There is a need for a lot of groundwork to be done on this so that the scheme does not remain on paper only. The creation of a Rs 10,000-crore fund for startups needs complete detailing on how the fund will be disbursed to reach the startups.
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During Startup India policy announcement, the government announced that it would create a 'fund of funds' (FOF) that would invest in private venture capital funds, which in turn will invest in startups. We believe it will be good for the FOF to invest directly in the startup as it will protect the entrepreneurs from the clutches of VCs.

Further, the government aims to set up 35 new incubators in existing institutions and 35 new private-sector incubators with government funding. The creation and implementation of the schemes would be a great challenge for the government and certain clarifications on the groundwork is expected from the budget.

  • Lesser regimes: Startups expect simplification of tax regime like MCA filings, service tax returns, TDS returns, which turn out to be unnecessary burden on There is a need to boost up e-commerce industry. Simplification of these filings would help startups save time. Startup-friendly initiatives are expected this month from the government.
  • Exemption in compliances with respect to labour laws: The inhibitor to the growth of startups could be well-circumvented by streamlining labour law requirements. After the Start up India initiative announcement, the Labour and Employment Ministry took steps to relax labour-related compliance measures for startups, wherein startups have been allowed to self-certify compliance with the labour laws.

However, real relaxation would be a time-phased exemption from key labour laws—including the Industrial Disputes Act, the Contract Labour Act, the Employees State Insurance Act, the Trade Union Act and the Employees Provident Fund and Miscellaneous Provisions Act. There is a need to desist from any unwanted interference related to labour law compliance in the functioning of startups, at least in the initial years.

  • Boost e-commerce and Digital India: IT sector has seen a tremendous growth globally. The Smart Cities mission, Digital India mission to promote various sectors has been really encouraging. The e-commerce and IT sectors are expecting big things from the Budget, especially that the government balances growth with policy and regulatory outline, which will in turn provide sustainable development opportunities. The Budget should lay emphasis on Digital India. The upcoming budget session is important from the perspective of the B2B e-commerce startup ecosystem. Focus should be there on developing the infrastructure.
  • Implementation of GST: The government has been looking very positive about implementing GST. The implementation of GST Act will help simplify the entire tax structure, thereby cutting business costs and helping generate more revenues. GST is expected to bring a number of benefits to the Indian economy. It will lead to efficiency and should ultimately transform into reduction in prices of goods and services. It will simplify the current indirect tax structure by doing away with the multiplicity of taxes.

It could be said that this budget has lot of expectation from people who are ready to wear the hat of entrepreneurs and promote creative entrepreneurial development. The Budget should throw more light on this emerging area, in a way that not only provides a clear roadmap for the campaign Start up, Stand up India, but also unveils the commitment to India’s youth development.

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