Indian budget to boost startup ecosystem

Indian Finance Minister Arun Jaitley's budget for 2016-17, which was presented in Parliament on Monday, did not offer everything that was expected by Indian startups.

In his 100-minute budget speech, the finance minister said that startups will get 100 percent tax breaks for three years and there will be no tax on capital gains on investments. But considering over 90 percent of the startups will not make profits in the first two to three years of their inception, this concession will not benefit many.

He also announced that the government will introduce a bill to amend the Companies Act and help startups complete their registration as companies within a day. This is a welcome step, as a startup in a country like Singapore, which is known to be industry friendly, takes three days for registration. This is also expected to encourage more of India's youth to launch their own initiatives and generate employment for others.

One notable proposal has been to earmark $74 million (500 crore rupees) for underprivileged sections (Scheduled Castes and Scheduled Tribes) of the society, as well as women entrepreneurs, in order to provide them easy access to funds.

Besides which, the budget proposals are expected to help the startups gain, due to the revision of the presumptive taxation scheme, under which the income ceiling has been doubled from 1 crore rupees to 2 crore rupees.

The government is also establishing a mechanism SETU (self-employment and talent utilisation), a techno-financial, incubation, and facilitation program to support startup businesses and other self-employment activities, particularly in technology-driven areas.

Additionally, section 10AA of the Special Economic Zones (SEZ) Act has been extended to 2020, enabling technology units to set up and commence operations in SEZs. The rates on IT hardware products have also undergone a considerable change under the Central Board of Excise and Customs.

While most of the announcements made by Prime Minister Narendra Modi at January's "Startup India Standup India" action plan summit were fulfilled, no decisions were made on two major demands: Exit policy for the new companies, and finalising listing norms for them in the stock markets for mopping up resources.

The startups hope that these two demands will be considered by the Indian law makers before they pass the budget by March 31, when the Indian financial year concludes. Even the Reserve Bank of India's plans to allow startups to tap foreign funds without any restrictions was not mentioned, but may be included in the budget during discussions in the coming days.

The Indian startups welcomed the announcements as they aimed to promote entrepreneurship and create a favourable business environment in the country.

U2opia Mobile CEO Sandeep Ganguly felt that new businesses were vital for the growth of the economy and the budget has reinstated a positive push to the startup ecosystem.

With the amendment to the Companies Act to ensure speedy registration and a boost to startups, he opined that it would spearhead the growth of a robust startup environment across the nation. "The tax holiday for startups for three out of five years of setting up the company will bring about a spur in opportunities," Ganguly said.

Ankita Jain, co-founder of GoPaisa.com, India's largest cashback and coupon site, said she was "positively enthused" over the tax holiday, as the earlier policy covered no taxes for the first three years, which did not provide any relief for over 90 percent of startups.

Atlanta Healthcare CEO Vibhor Jain said that 2015 was year of planning and the startups expected 2016 to be the year of action.

"With these announcements, the government has underscored its focus on the Indian startup ecosystem. A tax holiday and the lowering of the corporate IT rate to 25 percent are welcome steps in the right direction. In addition to tax relief, we are looking forward to the ease of regulations around startup capital, registration, and closure processes for entrepreneurs in the country," he added.

Prafulla Mathur, founder and CEO of WudStay, felt that with changes in taxation policies, startups will have a great opportunity to utilise these funds into further scaling its business and operations. Also, the finance minister's decision to relax taxes on capital gains for investors will generate a positive sentiment amongst the venture capital community, which could help entrepreneurs looking to raise funds.

CEO and founder of Mebelkart Rahul Agrawal said that a focus on skill development centres will create more employable talent and bridge the demand-supply gap in the startup ecosystem.

However, Srikumar Misra, founder and managing director of Milk Mantra, said that the budget could have followed up with specific incentives for entrepreneurial risk, along the lines of entrepreneurial relief in the UK's tax structure. "The financial sector reforms fell short of addressing startups' needs for accessing debt capital, which needs to come to the table sooner or later," Misra pointed out.

Rajat Gandhi, founder and CEO of Faircent.com also said that, "Reducing the benefit of long-term capital gain regime to two years denies startups of the initial handholding that is very much necessary".

Pratik J Shah, an expert on indirect tax service and Partner of the Mumbai-based SKP Group, said that the budget was India's window to IT and startups.

"As India is slowly transforming itself into a new and improved digitally efficient country, it comes as no surprise that its digital economy has grown consistently at a pace of 10 percent per year. Currently, India has a well-established IT industry with revenues of about $160 billion, with over $100 billion from exports, and the industry employs nearly 4 million people," he said.

Given that the IT industry has traditionally enjoyed considerable preference over other industries, this budget has not failed to impress either. With an increasing share of IT service revenues, the government's commitment to IT startups seems like a natural inclination.

"The budget incentives coupled with Startup India shall further attract budding developers from around the world to capitalise on the country's thriving human resource in this field," Shah added.