Entrepreneurs and industry bodies in India have pinned a lot of hopes on the 2016-17 annual budget, which Finance Minister Arun Jaitley will present to Parliament on February 29.
While launching the new policy to boost the startup ecosystem a fortnight ago, Prime Minister Narendra Modi launched a number of initiatives to support startups, including a $1.5 billion fund, and a string of tax breaks for investors and companies such as exemption from income tax for the first three years, exemptions from capital gains tax, cheaper and faster patent applications, and 80 percent rebates on the cost of patents.
Federal Bank Governor Dr Raghuram G Rajan followed up by announcing that restrictions on accessing foreign VC funding for these startups will soon be removed. The startup community was elated at the announcements, but will have to wait as some of the decisions have to be ratified by Parliament during the budget session.
While lauding the government's Startup India initiative, co-founder and director of Chennai-based startup Energy Alternatives India Narasimhan Santhanam said that his company has been interacting with dozens of cleantech startups and found that most of them were not looking at the government for businesses; in fact, they considered the government a nuisance for obvious reasons.
However, for the cleantech domain, the government happened to be the key stakeholder in many energy and environment-related projects. "With Startup India, they can expect a more proactive participation from government in their projects and this would make a big difference to their success," Santhanam added.
In its pre-budget recommendations for the startup and ecommerce ecosystem, National Association of Software and Services Companies (NASSCOM) urged the government to exempt startups from direct and indirect taxes including Minimum Alternate Tax (MAT), a move that would reduce compliance burden and reduce cash outflows.
Further, there was an urgent need to remove angel tax that serves to tax the capital receipts, when the availability of financing from recognised sources such as banks and VC funds were unavailable and angel funds were the only available source.
The industry body also wanted companies to be allowed to carry forward losses even if there a change in ownership structure, if it for capital infusion in the entity.
In a statement, NASSCOM President R Chandrasekhar said that policy regulations like ease of compliance, reliance on self-certification instead of audits, and tax exemptions for startups will allow entrepreneurs to devote their time, energy, and resources to build upon their innovative ideas.
"With the number of tech startups in India growing over 40 percent over the last year, they can potentially develop innovative solutions to address the development needs of the country as they focus on development solutions for health, infrastructure, and energy, amongst others," he averred.
He further said that to enable investments in startups, tax rates need to be rationalised as investments in early-stage startups were prone to high risk. "The government should harmonise capital gains tax for resident investors with non-resident investors and tax rates for angel investors, allow proprietary domestic capital to set up an LLP as an investment vehicle, and exempt capital gains tax on income from sale of equity of a startup if the proceeds are reinvested in securities of new startups," he said.
He said that ecommerce was a powerful instrument that encouraged people to transact online, offering traceability and transparency. However, there were disturbing trends whereby states were considering taxing ecommerce transactions, thereby introducing barriers to technology adoption, he felt.
Himanshu Meena, founder and CEO of Parsel, a hyper-local delivery startup, said that given the current economic scenario, startups expect strong measures and economy boosters to restore confidence and spur growth.
"The Finance Minister's announcement on the introduction of entrepreneur-friendly tax regime for startups is very encouraging. However, we expect the budget to exempt them from direct and indirect taxes which will help new businesses find their ground faster and help create a conducive ecosystem for entrepreneurs in the country," he said.
The implementation of the nationwide Goods and Services Tax (GST) Act will also help in simplifying the entire tax structure, thereby cutting business costs and helping to generate more revenues. "Steps like minimising time-consuming procedures and minimum interference from the government will go a long way in promoting the startup culture in the country," Meena added.
Last month, Arun Jaitley received various suggestions at the fourth pre-budget consultative meeting with the representatives of the IT sector. The participants suggested reduction of corporate tax, specific time-bound policy to revive the mobile industry, making all state and interstate duties and procedures online, and creating duty differential benefits for Indian IT hardware manufacturers, especially in the case of mobiles and tablets.
MobiTrack's managing director Manoj Patel said that he expects something good for incubators and mentorship programmes in the budget. "Funding is important for startups as the surviving ones make it to the next round of funding where private investors will be keen to put their money," he added.