Abolish angel tax for SMEs, capital for women, deeptech entrepreneurs; here’s what startups expect from new government

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Updated: May 20, 2019 10:20 PM

As 2019 Lok Sabha election results draw near, hopes are running high among startups of an accelerated change to be ushered in by the new government.

India is the third largest startup ecosystem globally.

Over a decade old Indian startup ecosystem has already been ignited in the past five years with favourable policies around taxation, investments, ease of doing business, incubation, foreign capital, cross border programmes between governments, startup lobby groups, industry associations and chambers. So the base of a high-scale growth of the ecosystem is already in place with the country being the third largest hub for startups globally. What’s required now is to propel it further with timely policy improvement and intervention.

As 2019 Lok Sabha election results draw near, hopes are running high among startups of an accelerated change to be ushered in by the new government. Here are the key expectations from the key voices of the ecosystem:

Angel Tax: While angel tax has been worked around for startups but section 56 56(2)(viib) of the Income-Tax Act still applies to companies that are not startups and have grown beyond 10 years. “So government should, in fact, abolish Section 56 for small businesses or SMEs as well. It is an unnecessary piece of legislation. If the idea is to curb black money then we already have Section 68 which says that government can ask for your source of money or by General Anti-Avoidance Rule,” Dr Saurabh Srivastava, Chairman Emeritus, TiE Delhi-NCR and Co-founder at Indian Angel Network told Financial Express Online.

Capital: While the existing government had introduced Rs 10,000 Fund of Funds during Startup India launch that disburses capital via SIDBI, capital is sought in sectors that have longer gestation and return cycle. “We would expect the government to look at working capital funding especially for deep-tech and related areas including machine learning, robotics etc., that have a longer gestation period and the cycle time for return and development are also longer than other businesses like in e-commerce,”Suresh Jayaraju, Senior Director, Head,10000 Startups, Nasscom told Financial Express Online. Moreover, there should be an additional capital allocation for women entrepreneurs, said Dr Srivastava and a special focus on sectors such as agritech, biotech, healthtech, and education.

Focus on Social Startups: The real problem of India is all social such as challenges with respect to lack of potable water, women safety, air pollution, etc. “Social startups cannot solve them on a large scale because most of them are not well funded unlike startups in other sectors. While there are few funds like Aavishkaar that invests in social startups but there is no real apparatus to fund high-impact social startups,” said LocalCircles Founder and Chairman Sachin Taparia told Financial Express Online. So whatever amount government allocates to startups, “25 per cent should be given to social impact startups.”

Government Engagement: Startups are looking at more engagement with the government that would drive growth in the startup ecosystem. For instance, the Maharashtra government earlier this year hosted an innovation challenge for startups to solve problems around crop pest, credit card data leaks, tracking crime trends etc. Other states such as Karnataka, Kerala, Rajasthan etc., have launched similar programmes in the past. “As independent entities, startups can think of solutions on behalf of the government for problems that they can solve in a very different way. It will be great if startups can solve large problems for the government that is funded by the latter”, said Jayaraju.

Local Ecosystem: To scale SMEs like startups, it is imperative to create an environment that is conducive to physical, offline small businesses and hardware product firms operating locally in small cities. “SMEs are not able to become startups because nobody gives them capital even as they are not able to present their model as a startup. So the government should create city-based ecosystems where you connect startups of that city, local authorities, to the central government,” said Taparia. Hence, it would help the government to see what is happening at the ground level and improve ease of doing business beyond Delhi and Mumbai.

ESOP Reform: Taxation should not happen at the point of the exercise of vested options but at the point of actual sale or exit. “For example, the startup raised capital and one share was for Rs 100 and then they hired few employees and gave shares over a 3-year horizon. When an employee has completed three years and looks at exiting the company and wants share certificate, and let’s say the value of the shares is Rs 300, he/she is unable to exercise the vested options because as per the current IT law, their Rs 200 per share price increase becomes liable for taxes. In case, the startup shuts down in future or raises money again and one share is for Rs 100 because it is not able to raise funding at the inflated valuation, then that employee will now have a net loss,” explained Taparia. Hence, the government should look at changing the law such that ESOPs are taxed at exit/sale event rather than at the exercise event at least for startups and preferably for all companies.

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