Capital, talent, and taxes top the budget wishlist for VC and PE ecosystem
The VC and PE ecosystem is looking out for thematic funds and resolution of longstanding demands on taxation of carry, ESOPs, and opening up new sources of domestic capital as part of the upcoming Union Budget 2024.
Simplifying taxation norms, relaxing the norms around identifying what constitutes a startup, and unlocking domestic capital for startups top the list of asks from the venture capital (VC) and private equity (PE) ecosystem in India from the upcoming union budget.
The budget, which will be presented on July 23, will determine the outlook for the startup ecosystem in Modi 3.0.
“Startups have to innovate and cannot be a copy-paste of bigger companies,” Padmaja Ruparel, Co-founder of (IAN), told YourStory. She added that it was essential to encourage startups which are responsible for job creation and upskilling.
Unlocking new sources of capital
“In order to encourage startups, two key factors come into account, money, and talent. For the first bit, the Fund of Funds structure (through SIDBI) has done well and we request the government to bring in funds from pension funds, insurance companies, and others to create thematic funds for key areas of focus including agritech, deeptech, spacetech, and others,” added Ruparel.
She said that Indian universities should also be allowed to invest as trusts in startups beyond the incubator model, similar to the endowment funds of the US, to open other sources of investments.
Removing bank guarantee for early-stage startups will also aid in ease of borrowing capital for growth, she said.
Anirudh Damani, Managing Partner at , points out the need for ease of borrowing by small and medium enterprises (SMEs) and startups, especially for working capital needs.
“A dedicated business bank could unlock vital credit and provide essential financial services tailored to business needs, such as business savings accounts, working capital loans, and business banking credit cards,” he said.
Talent retention
As part of its pre-budget consultation with Union Finance Minister Nirmala Sitharaman, industry body Indian Venture and Alternative Capital Association (IVCA) has requested the government to issue a circular to classify investments by AIFs as “capital assets” income, which do not attract GST. The body also said that gains from the distribution waterfall should retain the same characteristic as underlying source of income, such as income from securities or sale of securities, taxed under the CGST Act, 2017. This will do away with dual taxation of the carry or distribution of profits among investors under income tax laws and GST.
Another longstanding ask from the ecosystem has been parity of Long-Term Capital Gains and Short-Term Capital Gains taxes for listed securities and startups. This will also aid talent retention at startups by doing away with dual taxation of stocks granted under Employee Stock Ownership Plan (ESOPs), said Ruparel.
“While tax reduction is always welcome, the primary need of the hour is simplifying the tax code. Implementing a direct tax code, as promised for many years, would be a monumental step towards achieving a more transparent and efficient tax system,” said Damani.
Angel Tax
Earlier this month, the DPIIT (Department for Promotion of Industry and Internal Trade) under the Ministry of Commerce proposed the removal of ‘Angel Tax’ in a submission made to the finance minister to ease the pressure on early-stage startups and investors.
Angel Tax refers to the tax paid by early-stage startups raising money from angel investors at a premium on their Fair Market Value. According to current IT rules, investments greater than the FMV are treated as “income from other sources” liable to be taxed at nearly 31%.
Further, a key demand has been to expand the list of countries from which investment from non-residents in Indian startups be exempt from angel tax as part of the Finance Bill 2023. As of May 24, 2023, only 21 countries were part of the list.
With a long checklist, the focus remains on the ease of doing business. “From a venture industry perspective, we would look forward to measures that would improve ease of doing business and boost funding in sunrise sectors,” added Deepak Gupta, General Partner at .
Edited by Megha Reddy