After unveiling a new policy to boost India startups on Saturday, among the major sops announced by Indian Prime Minister Narendra Modi were a three-year tax holiday, establishing a $1.5 billion startup fund, a $310 million credit guarantee fund to help flow of venture debt from the banks, exemption from labour department inspections for first three years, and a simple exit policy.
The new 19-point policy was received well by the startup community, which eagerly awaited the policy for the last 20 months since Modi became prime minister. When it came, it boosted confidence that the new initiative would provide a fillip to the ecosystem in the country. Some of the concessions, like tax benefits, will be part of budget proposals and implemented after Parliament passes them in the Budget session, beginning next month.
Addressing the "Startup India, Standup India" summit, held in Delhi on Saturday, Modi said that the successful startups were created by those who were driven by an idea and the urge to solve problems faced by people. Startup innovators are often driven by a sense of compassion for others. "We have a million problems but at the same time we have over a billion minds to solve them," the prime minister asserted.
The startup movement was not merely guided by money and fame; its purpose was beyond that. Youth must turn from job-seekers to job-creators. "If a startup can offer employment to even five people, it would be doing a great service to the nation," Modi said.
"The government will set up an exclusive fund for $1.5 billion for funding them; no income tax on profits for first three years; 80 percent exemption in patent fee for startups; a self-certification based compliance system for startups for nine labour and environment laws, besides fast-tracking work on startup patent applications; and Atal Innovation Mission to be launched to give a boost to innovation," the prime minister added.
Co-founder and CEO of GREX Manish Kumar said that the new policy had few important and measurable benefits that the startups could gain. Most importantly, the prime minister outlined a change in the principle approach of the government towards the economy -- to stay away from deciding and directing on what needs to be done. "Instead, the government was looking at a policy of arm's length enablement. This stand is a bold new change in the government policy and disruptive in its own right," Kumar said.
He said that venture debt was miserably missing in the ecosystem and startups were only used to equity as a mode of capital. "Our company is poised to launch venture debt in the near future and the new policy will help our partner banks and non-banking financial companies (NBFCs) walk the road along with us more aggressively as credits become guaranteed," Kumar said.
However, he said that what the startups anticipated but was not announced was the redressal of concerns around notional valuation gains to investors over and above the fair market value. The incidence of such tax deductions today lies at startups' ends. "Some other steps are in favour of companies such as a tax holiday for three years, which is welcome," Kumar added.
Himanshu Meena, founder of Dropbase Software Private Company Parsel, felt that the most refreshing aspect was the prime minister's pointed emphasis on minimum government intervention and his promise to ease bankruptcy laws, which indicated the government's willingness to provide space to entrepreneurs for experimentation, without worrying too much about archaic legalities.
"With newer business models, we see that existing legal frameworks are found wanting, as with shared economy models of Airbnb or Uber. In such a scenario, the prime minister's rhetoric asking startups to tell the government what to do was very reassuring," Meena added.
Terming the new startup policy as "disheartening and disappointing and nothing but another rhetoric without concrete action plan and change in ground position," Kandadai Partha Sarathy, managing director of Hyderabad-based Madhyam Communications, said that the prime minister did not touch on several issues that were affecting the startups in the country.
Recalling his experience since his college days in the early 1990s, Sarathy said that though he had the ambition to become an entrepreneur and applied with the banks, he could not get loans or the requisite land in small industries' industrial estates. "Things have not changed even after two decades of reforms as official apathy and complex rules and regulations that used to be there in the early 1990s still exist even after 20 years," he said.
The banking system is so inefficient that thousands of crores of rupees would be given to people with influence while the small entrepreneurs would be subjected to scores of enquiries. "We are asked to submit loads of documents as proof even to open a bank account, thus killing our enthusiasm," Sarathy added.
However, India Red Ribbon Asset Management CEO Aditya Kanoria sees a ray of hope. "The best of concepts failed due to lack of funding and the initiative would motivate more and more investors to invest in startups, solving the issue forever. But more clarity is needed on capital tax gains on angel investments and we expect this to be solved in the Indian budget proposals next month," Kanoria said.
Joint managing director of Bonita India Umang Srivastava said that startups in the country will usher in a new era, and that the fundamental idea of reducing government interference to improve the ecosystem is itself revolutionary thinking. Another heartening message has been that the government wants the startups to not only focus on IT but in other areas as well.
"Some of the new policies including tax holiday for startups, patent fees reduction, self-certification, funding for innovative companies, credit guarantee insurance, and tax exemption for capital gains, among others, will definitely make a huge change and will become visible in the next few years," Srivastava added.