Budget 2020: Indian startups pin their hopes on Nirmala Sitharaman to lessen entrepreneurship woes

All eyes will be on Finance Minister Nirmala Sitharaman as the startup ecosystem is hoping the Union Budget will take measures to improve investment in-flow, and solve some pressing taxing issues around ESOP, LTCG, and GST.

The Indian startup ecosystem is eagerly waiting for Union Finance Minister Nirmala Sitharaman’s Budget speech on February 1, with the hope that there would be measures that facilitate ease of doing business in the country, while at the same time solve some knotty tax issues around ESOPs, LTCG, and GST.

The startups in the country have been on an upward curve, but the larger concern surrounds issues like crunch in the working capital and the easy flow of investor money into the ecosystem.

“This is a highly anticipated Budget as startups are hoping that the government will unveil certain measures which will further improve the ease of doing business, especially when there is a genuine crisis around working capital,” Siddarth Pai, Founding Partner and CFO, 3one4 Capital, says.

For many startups today outside of the well-funded entities are struggling to raise money to meet their day-to-day working capital requirements. Further, banks are unwilling to lend, and startups have to also bear the brunt of the goods and services tax (GST), as they have to pay the amount before they even realise their revenue.

“Startups are facing a cash flow problem where they have to deposit GST based on their invoices rather than revenue receipts. Hopefully, this time, the Budget will provide a solution,” Sachin Taparia, Founder, LocalCircles says.

Union Finance Minister Nirmala Sitharaman

The liquidity crunch for the startups also extends to the delay in payments from their customers, especially the large public sector enterprises. The ecosystem expects that the Budget would put forth a mechanism that can ease this crisis.

Tax issues

The bigger concern for the startup ecosystem in India has been certain inhibiting factors around the flow of capital into these young companies. The key discordant note is the long-term capital gains tax (LTCG) on investments made into startups.

Industry observers say that the tax surcharge on LTCG was rolled back for the listed entities, but the same was not extended to unlisted companies. Essentially, this means that any gains made through investments into startups would be taxed at 28 percent, while for the listed entities it is just 11 percent.

“Investors are annoyed that they are taxed higher, especially when they are injecting capital into a very primary activity like building a business, unlike a secondary transaction of stock trading,” Siddarth adds.

At the same time, startups are also worried about the taxation structure around the employee stock option (ESOP). It is a critical tool for startups to retain their talent, and tax comes into play for ESOP, while it is being exercised by employees. The demand has been that tax should only apply when there is a sale of these shares.


Today, the startups are also faced with red-tapeism which diverts too much of their time and attention towards non-business activities. For example, every time a startup raises a fresh round of funding, it has to submit necessary documents to multiple authorities. The sector now demands a single point of contact that will take all this information.

The Government also came up with a fund-of-funds (FOF) to invest in startups, but, in reality, not much headway has been made into it.

The government’s fund-of-fund model (as with SIDBI), is a highly replicable model by seeding investors. It creates leverage through a much larger capital pool while keeping the decision making market-driven,” Utkarsh Sinha, Managing Director, Bexley Advisors says.

He hopes that there would be more dedicated fund-of-funds that can focus on sectors such as manufacturing and deep tech.

The key indicator that startups are looking at today is the overall improvement in the sentiment from the economy, so that it would give a boost to business activity.

The Indian economy needs an urgent dose of consumption booster. Thus, it would be wonderful to have provisions in the Budget that could assist in an instant rise in consumer expenditures. Relaxation on personal income tax rates could be one such move that can act as a booster shot. We expect the Budget to bring in provisions for lesser and reduced compliance for smaller companies, which, as of today, have to follow almost similar compliance to that of larger corporations,” Siddharth Jain, Co-founder, Vaahika says.

FableStreet Founder Ayushi Gudwani adds that the Budget should also focus on spurring investment and simplifying taxation and regulations, as entrepreneurs are hard-pressed for time and there’s too much attention diverted to these issues.

“The past year has been sluggish in growth. So on an overall level, we hope to see stronger actions by the government in driving growth and consumer demand,” she says.

Angel tax

One of the key positive aspects of the Indian startup ecosystem has been the issue of angel tax. The various measures taken by the government over the last year have lessened some of its impact. While industry observers believe that the whole issue surrounding the angel tax is muted, however, some irritants remain, especially on the aspect of loans and advances.

Indian startups will stand much to gain once the economy starts to pick up, with an overall improvement in consumer demand, even as the government has set an ambitious target of becoming a $5 trillion economy.

“Aspiring to become a $5 trillion economy by 2025 is very ambitious, and for that to happen, we need to bring growth back on track. I would like to see wide-ranging reforms across all areas instead of focussing only on one or two sectors,” Ramki Gaddipati, Co-founder and CTO, Zeta, says.

He adds that the Budget should further evaluate the ease of doing business, and take a pragmatic view on issues like angel tax, which may be hampering growth.

"I also think that digital infrastructure needs another push, especially in the areas of banking and payments, so that it can be made more inclusive for the Tier-II and III cities,” he says.

(Edited by Suman Singh)


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