Budget 2022: Progressive sops for startups will fuel India’s innovation economy

Since the onset of COVID-19, paving the way for the economy’s repair and recovery has been the focus of India’s annual Union Budget.

Finance Minister Nirmala Sitharaman’s presentation of the Union Budget 2022 made it amply clear that this year, too, the thrust has not shifted from the theme of rebuilding India in the post-pandemic transition. The series of measures that were unveiled to sustain the momentum of India’s startups were largely welcomed by founders and ecosystem stakeholders in India Inc.

The budget has been widely hailed by the startup community for its commitment to offer broad-based support across sectors and create meaningful job opportunities in the future.

Personally, I found the relief and impetus provided to startups in the budget as a sign of more positive changes on the anvil. It is a testament to India’s growing heft in the global innovation economy.

According to a recent report, India’s tech startups have cemented their position in the global startup ecosystem by raising $42 billion in total funding volume in 2021.

Let us look at how the budget aligns with the government’s long-term vision and commitment to nurture India’s startups and boost their resilience.

Extending the tax holiday for India’s young startups

The extended tax benefits for fledgling startups were one of the key takeaways of the budget. In a bid to support this segment during the pandemic, the government extended the tax incentives it offers to eligible startups by another year until March 31, 2023.

Such startups qualify for a 100 percent tax break on the profits for a period of three consecutive years within the first 10 years from incorporation, provided the overall annual turnover does not exceed Rs 25 crore in any financial year. Earlier, startups incorporated before March 31, 2022, had qualified for the same tax incentive.

Such an incentive programmeme will enable new startups to scale rapidly without being weighed down by the burden of taxes in their initial years of operation.

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Reducing the tax burden for investors in startups

Besides the startup community, even investors are expected to benefit from the Union Budget 2022. The government has capped the surcharge on the long-term capital gains payable on capital assets at 15 percent, irrespective of the amount of long-term capital gains.

The key beneficiaries of this policy would include high-net-worth individuals (HNWI) who have invested in unlisted stocks and hold equity shares in startups for more than 12 months. Thus, the gains on the sale of such shares would be considered long-term capital gains.

Venture capitalists (VCs) seeking to fund startups have welcomed the government’s decision to set up an expert committee to review the regulatory framework impacting the VC and private equity (PE) industry. This is a laudable initiative to validate the government’s faith in the investor community, especially when India’s startups are witnessing blockbuster growth and gaining global recognition.

Bolstering domestic manufacturing to become self-reliant

In another progressive step, the government offered a concessional rate of 15 percent for an additional year until March 2024 for newly incorporated domestic manufacturing companies registered on or before October 1, 2019. This provision builds on the philosophy of Atmanirbhar Bharat that seeks to make India a self-sufficient global superpower with superior manufacturing capabilities.

Further, to reduce arms imports and indigenise defence production, 68 percent of capital procurements in the defence budget are allocated for the domestic industry. This measure will open pathways for increased engagement with defence startups that have the R&D capabilities to design and develop world-class military equipment for the government.

This is a fine example of how a unique public-private partnership model can be built. Perhaps, it can be replicated across other sectors, too.

Modernising Indian farming with innovative solutions

The budget announced that a dedicated fund will be set up for agritech startups, which will be facilitated through the National Bank for Agriculture and Rural Development (NABARD). The fund with blended capital will finance startups that work in agriculture and rural enterprises and enhance the farm produce value chain.

The budget also underscored the importance of leveraging cutting-edge technology to modernise the agriculture sector and support farmers. It advocated the use of drones under the “Kisan Drones” programme to spray insecticides and execute land surveys and crop assessments. This announcement bodes well for drone startups that are ushering in a range of innovative solutions for the agriculture sector.

Disruptive agritech startups should seize such opportunities and collaborate with Farmer Producer Organisations (FPO) to sustain the growth of the agricultural ecosystem.

Channelling the ‘Shakti’ of India’s drone startups

The announcement of the game-changing Drone Shakti scheme has spread cheer among India’s burgeoning drone startups. It comes close on the heels of the centre’s new drone policy that was announced in 2021 to democratise the drone ecosystem.

The Drones-as-a-Service (DRaaS) model is a step in the right direction to fuel innovation in India’s drone industry that is expected to touch $1.81 billion by 2026. The initiative will spread awareness about how drones can be leveraged across sectors with the help of innovative startups that use the technology for various applications, including at the grassroots level.

Drone Shakti reflects the government’s long-term vision that advocates the use of digital technologies to solve India’s longstanding problems at scale.

Generating jobs across sectors

According to the finance minister, the government’s flagship Production Linked Incentive (PLI) scheme has the potential to generate at least 60 lakh new job opportunities across key industries like pharmaceuticals, medical devices, large-scale electronics manufacturing, textiles, food products, solar EV modules, and automobiles, among others. Also in the pipeline is the additional production of Rs 30 lakh crore worth products during the next five years.

Again, this scheme is consistent with the government’s Atmanirbhar Bharat initiative that aims to boost domestic manufacturing. The announcement bodes well for India’s homegrown startups and MSMEs that are on the path to employing a sizeable workforce as a result of their innovative activities.

Leading the way with optimism

In addition, the budget provides a shot in the arm for startups across industries. For instance, EV startups have reason to cheer since the custom duty on lithium-ion cells will be reduced, which would decrease the cost of production of vehicles. Ventures in the edtech space will also benefit from the budget’s focus on upskilling and digital learning.

However, I do have some misgivings about the budget. There continues to be a lack of clarity on the rules for allowing foreign direct listing—a key demand from the startup ecosystem that wasn’t addressed in the budget.

Also, despite virtual digital assets being acknowledged, the heavy 30 percent cryptocurrency tax has come as a disappointment for blockchain startups and investors.

However, despite the challenges that abound, the growth and recovery of India lies at the heart of the budget. The government’s push for promoting an innovation-led digital economy is reflected not just in its policies, but also in the finance minister presenting a paperless budget for the second time, via the Union Budget Mobile app.

It remains to be seen if India’s entrepreneurs would take advantage of the budget’s startup-friendly measures and seize the great opportunities that will catapult them to new frontiers of innovation.