Editorial: Give start-ups a level field

No tax on listed-stock profits, why put on start-ups?

Given that eight of the world’s 140 unicorns—start-ups valued at $1 billion or more—are located in India, it is not surprising the start-up ecosystem is maturing as fast as it is. From a handful just a few years ago, India had over 1,200 start-ups in 2015 alone, taking the total up to 4,200 according to Nasscom. While it is e-commerce players like Flipkart, taxi aggregator Ola or mobile payments firm Paytm that most recall, the fact that venture capitalists put in $5 billion into various start-ups in 2015 tells you just how diverse they have become and the quality of the work they are engaged in—this funding barely existed in 2010, rose to $2.2 billion in 2014 and then more than doubled in 2015. As a result, India is today ranked the 3rd in the world when it comes to the number of start-ups, just behind the UK and the US, having beaten Israel this year.

Not surprisingly, then, that the government too wants to get into this space, and has announced a start-up fund for this purpose. How well the fund will do will depend upon how well it is insulated from the normal processes of government—if the CBI or the CVC or the CAG are to question the valuations given to firms that have yet to prove their worth, the fund is doomed from the start; in any case, it is mentoring that is perhaps even more important than funding, and that is something the government cannot provide. In which case, rather than giving sops—which are being withdrawn in other sectors anyway—the government would do better to just concentrate on removing hurdles in the way of start-ups, whether by way of labour laws and other issues that regularly come up in the ease of doing business rankings such as quick winding up of businesses once they have failed.

One such, for instance, is unfair tax treatment that the IT ministry has now taken up. Today, if a VC invests in a start-up and exits before one year, she pays a tax of 33%, and if the exit happens during 1-3 years, she pays a capital gains tax of 20%. If, on the other hand, the same investor were to put money in a listed firm and hold it beyond one year, no capital gains taxes are to be paid; all that is paid is a tiny securities transaction tax. Allowing tax-free long-term returns for a VC, as the IT ministry is suggesting, is not a sop, it is just providing VCs a level playing field—indeed, since the losses VCs make in most of their investments can’t be written off against the profits in a few, as happens in all stock market trades, even this doesn’t fully level the field. Providing tax breaks is easily done if the VC exits through a listing, but it needs to be allowed even if a VC exits by way of a sale to a PE firm—of course, to keep the field truly level, such a tax regime should also be made available to any investors exiting unlisted firms, even if they are not start-ups. ESOPs, typical not just in the start-up environment, also need to be taxed at the time of sale, not at the time they are awarded. Hopefully, most of these suggestions will find mention in next year’s budget.

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