Budget 2020: Startup ecosystem hails budget with a mixed bag as FM Sitharaman skips these key areas

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Updated: Feb 01, 2020 6:25 PM

Budget 2020 India: Among the key suggestions made by the Indian startup ecosystem stakeholders including entrepreneurs, investors, and consultants, the government has taken into consideration most of them.

Budget 2020, Union Budget 2020 India, Budget 2020 India, Budget 2020-21Budget 2020-21: Experts welcomed the proposal to set-up an investment clearance cell.

Union Budget 2020 India: The world’s third-biggest startup ecosystem has almost welcomed the second budget presented by the Finance Minister Nirmala Sitharaman. Among the key suggestions made by the Indian startup ecosystem stakeholders including entrepreneurs, investors, and consultants, the government has taken into consideration most of them. This becomes critical for the country to break into the World Bank’s Ease of Doing Business ranking in which India is already at 63 rd position for the year 2020, jumping 14 places from the preceding year. Before we get down to what startup experts think about the budget, here’s everything Sitharaman said about startups in today’s budget speech:

  • Proposed seed fund to support ideation and development of early-stage startups.
  • Easing the burden of ESOP taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest.
  • Proposed extension of the turnover limit for startups from Rs 25 crores to Rs 100 crore. So far startups with up to Rs 25 crores were allowed deduction of 100 per cent of its profits for three consecutive assessment years out of seven years.
  • Proposed extension of the eligibility period for startups for the claim of deduction from the current 7 years to 10 years since a startup may not be profitable or have enough profit in the initial years to avail the deduction.
  • Proposed Investment Clearance Cell (to work through a portal) to provide “end to end” facilitation and support, including pre-investment advisory, information related to land banks and facilitate clearances at Centre and State level.
  • A digital platform to be promoted for seamless application and capture of intellectual property rights. Also, an Institute of Excellence to come up to work on the complexity and innovation in the field of intellectual property.
  • Knowledge Translation Clusters to be set up across different technology sectors including new and emerging areas.

While a seed fund for startups may be a nice move but experts are not convinced over its implementation without appropriate guidelines. “I am not sure of the fund. There are already enough funds that have been announced. Government trying to run a fund is always a challenge,” said Harish HV, independent startup consultant told Financial Express Online. “The allocation of seed funds to early-stage startups seems like a populist measure. It should have a clear plan and execution otherwise it could jeopardize our momentum of the startup ecosystem in India,” said Ravi Narayan, CEO, T-Hub.

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However, on the contrary, as the majority of the investment in Indian startups by value are concentrated at the mid and late stages, it might not be a bad idea to have a seed fund even as it goes without saying how and when the disbursement happens will be the key. “Seed fund is a good idea. Foreign capital tends to prefer later stage risk and in any country, the seed stage risk is always born by the domestic capital. In India, we have insufficient domestic capital so I think it is a good idea,” Saurabh Srivastava, Chairman, Indian Angel Network told Financial Express Online.

With respect to increasing the turnover limit to Rs 100 crore for claiming deduction of profits, instead of having it based on the turnover, the government could have kept it based on the value-added. “In one of our consultations with the government on the startup policy, I had suggested it to value- add based or gross profit based thing because in some businesses Rs 100 crore is a lot of money while in other it is very less. For instance, in real estate, your top line can be Rs 100 crore but that doesn’t mean you become a big company,” Harish said.

Another area that the Finance Minister didn’t touch upon was a respite to investors from long term capital gains tax (LTCG) on investments made in startups. Even as the surcharge on the tax was rolled back for the listed entities, the unlisted ones including startups were left out. The current rate stands at 28 per cent even as it is 11 per cent for listed businesses. “We had requested for a was parity in long term capital gain tax between listed and non-listed companies. Investors back startups with high risk and pay higher tax during ext. This looks unfair for investing in startups versus investing in a listed company,” said Srivastava.

On the better side, experts welcomed the proposal to set-up an investment clearance cell to facilitate further the ease of doing business and deferring ESOP to provide taxation relief. “There is a good announcement regarding deferment of taxes for ESOPs in the hands of employees which will be an important decision for the employees to own shares in the employer without getting worried about organising cash to pay taxes. This will also provide greater flexibility to the employers and employees in structuring their employment prospects,” said SR Patnaik,   Partner & Head – Taxation, Cyril Amarchand Mangaldas.

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