Budget 2020: VC investors seek relaxation of rules for funding govt-recognised businesses

Updated: January 23, 2020 1:37:46 PM

Budget 2020 India: The Finance Minister may consider loosening her purse strings and allocate more funds to support to the VCs and alternate lending platforms.

Budget 2020, Union Budget 2020, Budget 2020 India, Budget 2020 expectations, Budget 2020 expectations of life insurance industry, pension plan, additional tax benefit, NPS, 80C limit, Life Insurance CouncilBudget 2020-21: Under Section 79 of the IT Act, startups operating in India are restricted from forwarding their losses in the event of a change in shareholding.

By Dr Apoorva Ranjan Sharma

Union Budget 2020 India: With February right around the corner, there is great anticipation regarding the Union Budget 2020-21. As Finance Minister Nirmala Sitharaman gets ready to present her second budget, expectations are running high across sectors. Venture capital firms and startups, too, are looking forward to the budget announcements with much excitement. Let’s see why. India’s startup ecosystem, the third-largest in the world, might have a lot to gain from the upcoming budget. Last year, the government had relaxed the norms of the infamous Angel Tax, bringing much relief to venture capitalists and private equity investors alike. A separate committee was also set up under the Central Board for Direct Taxes (CBDT) for tackling the challenges faced by startups. Despite the positives, the government overlooked a few areas that should be addressed in this year’s budget. 

Relief from Section 42 of Companies Act

Raising capital remains a major pain point for startups. Entrepreneurs tend to approach hundreds of venture capital firms to secure funding. Typically, they only hear back from just 20 to 30 recipients. However, Section 42 of the Companies Act rules that an enterprise seeking interest from more than 200 investors amounts to a public issue. This means a startup will be deemed as a public company if it sends information to over 200 investors. The government should relax this rule for investments in DPIIT-certified startups and/or those registered under SEBI raising less than Rs 25 crores. 

Budgetary Aid for VCs

While India has the third-largest base of incubators in the world, funding crunch remains a major problem for startups. According to a recent study by the IBM Institute for Business Value and Oxford Economics, around 90 per cent of startups in India die out within the first five years of inception. The study, titled ‘Entrepreneurial India’, states the majority of up-and-coming companies don’t receive the monetary support they require to sustain in the long run. As a result, they turn to foreign organizations and often lose their ingenuity. The Finance Minister may consider loosening her purse strings and allocate more funds to support to the VCs and alternate lending platforms. This, in turn, will provide the much-needed financial assistance to the deserving but struggling startups across the country.

Dedicated Tech Startups Fund

Over 1,300 tech startups came into being in 2019 alone, taking the total tally up to 8,900-9,300. A large percentage of this ecosystem is comprised of deep-technology startups, which require a continuous inflow of capital to survive. Until recently, they have been relying heavily on foreign investors to raise funding. In fact, industry estimates reveal that 85 per cent of funds are from outside India. The government should increase local funding to ensure the controls remain within the country. Industry body NASSCOM suggests the Centre could consider setting up dedicated Rs 3000 crore-fund for deep tech startups. 

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Revised Esop Tax Policy for Startups 

Stock options are considered a popular employee-retention tool in startups. Many startups offer stocks to their employees as part of their compensation package. At present, if an employee turns the stocks into shares, he/she becomes eligible to pay additional taxes. However, there exists no ready market or buyer for startup stocks, unlike listed companies wherein employees can sell their shares on the stock exchange. The government had indicated last year that it was thinking of revising the Esop tax policy, but there was no mention in the budget announcement. The Union Budget 2020-21 is expected to bring in a favourable regime for Esops, that is, Esops will only be taxed when the actual sale occurs. Once this comes into play, it would become a lot easier for startups to attract and retain a high-skilled workforce.  

Streamlining GST, other Tax Incentives

Another area of expectations is around the Goods and Services Tax (GST). Given the ongoing NFBC crisis and the funding crunch faced by startups in India, the government should make GST and TDS filing every quarter, compared to the current monthly filing. Additionally, home-grown startups are also seeking a reduction in AIF management fees. More importantly, these tax benefits should also extend to the angel investors and VCs.

Longer Timeline for Startups to Carry Forward Losses 

Under Section 79 of the IT Act, startups operating in India are restricted from forwarding their losses in the event of a change in shareholding. This interpretation should not apply to startups as it impedes the growth of the entire startup sector. Likewise, the direct tax regime should be revised to allow startups to carry forward their losses for at least 15 years as against the current 8 years. 

The Indian government has taken several measures and initiatives to bolster the country’s startup ecosystem, and it continues to bring in positive changes. As some of the above-mentioned reforms have already been recommended by the Department of Promotion of Industry and Internal Trade (DPIIT), final approval is awaited in the upcoming budget.

(Dr Apoorva Ranjan Sharma is the President & Co-Founder at Venture Catalysts. Views expressed are the author’s own.)

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