The entire nation looks forward to the budget with expectations. The budget not only encapsulates the policies of the government but also sheds light on the direction the economy is expected to take. This year’s budget, if anything, is anticipated with even more eagerness. For one, there are many policies and schemes that have been under consideration for quite some time now which have been introduced. In addition, the government as also shown an interest in changing the status quo when it comes to enabling startups. So, the expectations from the budget are even greater.
Funds
Funding is an important concern with any startup. The Rs.10,000 crore corpus dedicated startups, which was announced in earlier budgets and reiterated at Startup India, is a great initiative. However, what is equally important is its execution on the ground which must not be hindered by corruption and red-tapeism. What we hope to see in the budget is a clear and measurable timeline and a detailed roadmap for the implementation of this initiative.
Similarly, we look forward to the implementation of the credit guarantee mechanism for funding startups, which was announced earlier at the Startup India event. This scheme is crucial, especially in smaller towns and cities where there are no venture capitalists or angel investors. We also hope that the government explores alternative ways of raising funds, including crowdsourcing.
Incubators and accelerators make it possible for startups to find their feet and the plan unveiled by the government to support existing incubators and set up 35 new ones seems quite promising. However, not all enterprises will be eligible as only those which are deemed to be ‘innovative’ by the Department of Industrial Policy and Promotion will qualify as a startup. Furthermore, startups will need a recommendation from an incubator in order to be eligible for a piece of the funding pie. This could be potentially deterring to the objective of the initiative. Nevertheless, this scheme can be looked at as a step in the right direction and we hope that it does not remain on paper but is reflected in the budget in the form of both budgetary allocations as well as a detailed implementation roadmap.
Tax
Funding can have only a limited effect until supported by a startup-friendly tax regime. For instance, the funding received from angel investors is itself taxable at 33%. This compounds the funding problems for startups. The elimination of this tax will remove a hurdle for startups looking for investments from potential investors.
The three-year tax break proposed for startups in India is very good, but it will have a limited impact. Not all disruptive innovations begin to generate a profit in the first three or even five years. We hope that the government will relook at the policy and extend the tax benefits to the first three years of profits of any company beginning to make profits. Similarly, service tax, which is payable each time an invoice is generated, is often difficult to bear for startups because of the long payment cycles. A waiver or rebate on the service tax would be a great deal more helpful to startups.
The current proposal to waive capital gains tax if reinvested in the government startup fund is a start, but reducing long-term capital gains tax in the budget is the awaited for action. These measures will encourage individuals to invest in startups, and enable startups to explore individual funding sources apart from venture capital and private equity. Policy decisions on these points in the Union Budget can substantially ease things for startups.
Digital India
Over and above direct methods, there are also indirect measures that can boost the startup ecosystem. We look forward to a lot of initiatives from the government’s other flagship programme, Digital India. Financial inclusion at every level is essential for progress. The role of technology in financial inclusion is increasing by the day. One example is the way technology is leveraged to develop Common Services Centres (CSCs) to provide banking facilities to village-level entrepreneurs (VLEs), who are a significant part of the startup ecosystem. We are seeing proliferation of mobile technology like never before. The mass adoption rates are simply phenomenal. The need of the hour is better infrastructure for higher mobile internet penetration, especially in rural India, and we hope to see policies supporting this in the budget.
On the one hand, customer adoption is strongly shaping technology initiatives. The response to TRAI’s consultation paper on differential pricing of Internet services by Indian consumers in favour of Net Neutrality is a case in point. At the same time, government initiatives are essential to instil confidence among consumers and usher in higher digital literacy among the people so that they are comfortable using technology. Initiatives like Aadhaar-based eKYC, E-Sign, and digital lockers will support CSCs and extend the reach of banking facilities to millions of people who do not currently have access except through brick-and-mortar setups. This will boost the proliferation of such services and bring bigger opportunities to startups operating in these sectors as well as their consumers. A strong push by the government in this direction in the form of budgetary allocation will go a long way in improving acceptance of such technology initiatives.
For years, startups – with their passion and their ability to harness great Indian talent – have changed the face of India through innovation. It is heartening to see that the government is taking measures to support startup initiatives. We look forward to seeing fantastic co-operation between the two.