The government has, over the years, announced a slew of measures to help startups, but are they enough? And what is it that startups really want from Finance Minister Piyush Goyal in the Interim Budget 2019 on Friday.
Two Budgets and one election: 2019 promises to be an action-packed year for India. As Finance Minister Piyush Goyal presents the Interim Budget for 2019 on Friday, almost everyone expects him to present a populist one. Populism or not, expectations from all quarters are aplenty.
In a survey conducted by YourStory, 88 percent of respondents – mainly startup founders – said they wanted the finance minister to raise the personal Income Tax exemption threshold from Rs 2.5 lakh. A total of 81 percent is also looking at sops – for farmers, rural India, and even India Inc – while 75 percent want announcement of fiscal prudence measures.
One of the main demands that came through from the survey – with a rating of 4.4 out of 5 – was to make Angel Tax more system-driven as opposed to the current dependence on the assessing officer.
An increase in the tax holiday period for startups and allowing them to defer paying taxes on ESOPs until actual realisation were other demands that got an average rating of 4.3 out of 5 respectively. Improving the Ease of Doing Business (EODB) got the highest average rating – 4.8 out of 5 – while exemption from GST for startups, with a 4 out of 5 rating, were other demands on the startups’ list of demands.
YourStory also spoke to some founders on the list for their demands from this Interim Budget.
Axe the tax in this Budget
Startup founders want notices under Section 271 (Fringe Benefits), Section 56 (2)(VII B) (Angel Tax), and Section 68 (Cash Credits) of the Income Tax Act to stop immediately.
A founder of a Bengaluru-based SaaS company says, “I have notices from the tax department to pay about Rs 40 lakh. At first, I panicked. Then I realised that if I paid the money out of fear, I would not be contesting it which is not fair.”
In reply to this concern, Pavan Sharma, Partner at accounting firm BCL India, says, “Startups have been getting notices for the last two years, and many have taken the legal route to tell assessing officers that they are in the right. What I would say is that a startup should not panic. Most assessing officers understand the valuation methodology, and agree with startups presenting a case to them.”
Angel Tax, many say, is one of the reasons why Indian startups are increasingly registering their companies in the US or in Singapore.
“There needs to be clarity on the ecommerce law. Several brands are digital first today, and it would be difficult for someone who is born online first to now invest in distribution. It will wipe them out,” says Manish Chowdhary, Co-founder of Fit&Glow.
To create a level playing field, the government has barred ecommerce companies from sourcing more than 25 percent of their merchandise from one distributor, and also restrained them from investing in private label brands (brands that are owned by ecommerce companies) that sell online. Announcements regarding this sector, many say, could decide whether Amazon and Walmart will continue to invest more money in India.
Patent application and IPR protection
“While the current patents regime in India is great for startups, there needs to be a way to protect Indian IP against global corporations,” says Madhan Sondur Babu, Founder of Mymo Wireless, a startup that manufacturers 5G chips for India.
There is a panel of 427 facilitators for patent and design applications and 670 facilitators for Trademarks applications to fast track the process of patent filing and acquisition. The DIPP bears the facilitation cost on behalf of startups and provides a rebate in statutory fee for filing applications.
A number of startups have availed the benefit of lower IPR fees and fast-tracked processing of application, but many say the government needs to be more proactive when it comes to protecting Indian intellectual property in disputes with global companies.
SIDBI and Fund of Funds
As per the government’s 2018 status report, a Rs 10,000 crore 'fund of funds' was set up and managed by SIDBI to support innovation-driven startups. The corpus was to be released by 2025. So far, Rs 600 crore has been released to SIDBI and total commitments to 32 Alternate Investment Funds that invest in startups stands at Rs 1,611 crore. In all, 170 startups have received funding from various AIFs so far.
“There were expectations of this fund to take off from 2014. It has grown to a particular size and it should be sped up because only a few startups have received any benefits from the scheme,” says Shashank Udupa, Co-founder of Avalon Labs.
The Department of Expenditure said the government will relax the condition of prior experience and prior turnover for all startups in public procurement if they met quality and technical specifications. On the ground, though, the effect of this is yet to be seen and startup founders say the Budget must address this at the earliest.
“Karnataka has been a very open state when it comes to implementing these reforms. We need to have this example across India at a faster rate,” says Poornima Shenoy, Co-founder of GAIN, an accelerator that helps startups scale up from the idea to the seed stage.
Ease of winding up
The Ministry of Corporate Affairs, in June 2017, said the fast track insolvency process will apply to startups as defined by DIPP. Startups can now wind up their business within 90 days from making an application for the same, as against 180 days earlier.
“I shut down my company a couple of years ago and yet I continue to keep it alive by paying taxes because if I chose voluntary liquidation, I have to run around and show the authorities that I owe no debts to people, although I have none. This means I have to track each vendor that supplied to me and get written letters and then tell the court that I owe them nothing,” says a founder who ran an ecommerce firm a couple of years ago.
Founders say while this process is simple and fast on paper, it needs to be implemented with more vigour so that it is easy for an entrepreneur to wind up an idea that does not work and move on to one that might be the next big thing for the ecosystem and perhaps even the economy.
Regulations make Indian startups one of the most thorough and legally compliant in the world, but can these same regulations allow them the space to grow, prosper, and make a difference to the economy with their innovations and ability to create jobs? That, only the Interim Budget on Friday will tell.