With the Union Budget on the horizon, Indian startups and venture capitalists are advocating for key policy measures to foster growth and innovation in the ecosystem. Their recommendations include simplified ESOP taxation, extended tax holidays under Section 80-IAC, tax parity between domestic and foreign funds, and increased sovereign funding for startups.
While the previous budget addressed a long-standing demand for the removal of the Angel Tax, another constant demand has been simplifying the taxation of Employee Stock Option Plans (ESOPs). Currently, ESOPs granted to employees imposes a double taxation burden. ESOPs are taxed first as a perquisite when exercised and again upon the sale of shares.
Rashmi Guptey, CFO and general counsel at Lightbox, stated that only a limited number of startups registered under Section 80-IAC can defer tax payments on ESOPs. “Extending the tax deferral to all startups would make ESOPs a more effective retention tool, as employees would only pay tax on actual gains. Currently, the number of startups with 80-IAC registration is dismal,” she said.
Startups are also pushing for an extension of the tax holiday under Section 80-IAC from three years to five years, which provides a 100% tax exemption. Alouk Kumar, founder and CEO of Inductus, stated, “A five-year tax holiday would provide the necessary breathing room for startups to stabilise operations and achieve profitability.”
Tax parity between domestic and foreign funds is another key demand. “If foreign funds enjoy better tax treatment in India, they will remain the preferred vehicle, undermining Indian AIFs,” said Siddarth Pai, founding partner and CFO at 3one4 Capital. He noted that quarter-on-quarter capital formation via AIFs dipped to single digits last year, compared to double-digit growth in 2023. AIFs are also seeking tax clarity on numerous operations, such as the characterization of their gains and tax treatment at the end of a fund’s life, Pai added.
VCs are calling for enhanced domestic capital deployment into AIFs through initiatives like SIDBI’s Fund of Funds for Startups Scheme, which previously deployed approximately ₹10,000 crore. Increased sovereign funding would strengthen the domestic investment landscape.
Liquidity challenges under the GST framework are another bottleneck. Ramesh Bafna, CFO at Zepto, recommended reforms to unlock funds tied up in input tax credits. “Allowing GST credit utilization for Reverse Charge Mechanism (RCM) payments and introducing tradable GST scripts would free up cash flow, enabling startups to reinvest in growth,” he said.
For deep-tech startups, where long gestation periods and high R&D costs deter private investment, state-backed funding mechanisms are essential, industry executives said. “The government could introduce matching funds for early-stage investments in areas like biotech, semiconductor design, and advanced materials,” suggests Ganesh Raju, CEO of Turbostart