Budget wish list: Tax sops for startups, focus on Tier 2/3 cities

2017 is still in its infancy, but there is a general feeling among startup founders and investors that things are beginning to return to normal. Budget 2017 could be transformative and hasten this process further, imparting some much-needed momentum to India's startup ecosystem.

Though the current government has taken several initiatives to boost the ecosystem, notably the 'Startup India' programme and a Rs 10,000-crore fund, the job is far from done. In 2016 alone, 212 Indian startups had to shut shop, a number 50 percent higher than the previous year. Many who managed to sail through 2016 have witnessed a drastic dip in their valuations. Amid the slump in valuations, private equity (PE) investments into India fell to $16 billion in 2016 across 652 deals, an 18 percent year-on-year decline in terms of value and 23 percent in terms of volume.

PE accounts for more than 50% of foreign capital in the startup ecosystem and has been pivotal to India's growth aspirations. The union budget would play an important role in reviving investor confidence, and further growth in India's startup ecosystem depends on the government delivering on its promised reforms. In fact, the need to do so is even more given the disruption created by demonetisation.

The union budget 2016 painted an optimistic future for Indian startups, quoting a series of policy initiatives and schemes aimed at removing the hurdles that startups face, including a tax cut for micro, small and medium enterprises (MSMEs). This year, all eyes will be on the rate the government caps the Goods and Services Tax (GST) at and, once the uniform tax rates replace the old multi-level tax system, startups can focus on their core competencies rather than trying to work out the complex tax system.

Despite the clamour around boosting the entrepreneurial ecosystem, the budget allocated to startups in FY18 will be a bone of contention given the several startup exits in 2016. However, the government must offer credit guarantee schemes to meet the needs of emerging entrepreneurs, and other similar policies.

Tax sops 

Several developments in terms of government policies and changing trends have affected entrepreneurs' outlook. And the expectations from the budget are going to be very high, after a rough 2016 that witnessed many exits at the close of the financial year. One of the crowning concerns would be a cut in tax rate, so there could be a revival in demand for startups. Tax concessions on employee stock options (ESOPs), unlisted securities and convertible instruments will give a fillip to the Indian startup ecosystem. Early-stage capital (seed and angel) is crucial for startup survival, and the government needs to amend the tax levied on angel/seed funding to make it more investor-friendly and tax-efficient.

GST will allow startups to focus on core competencies than trying to work out the complex tax system

The startup ecosystem duly looks forward to the implementation of the 'Startup India Action Plan'. The budget of 2016 aimed to provide some very important steps around ease of doing business, taxation, skilling and access to capital for MSMEs. However, the three-year tax exemption for startups still seems to be far from satisfactory as most startups do not break even during that period. The duration of tax break needs to be extended to a minimum of 5-7 years, in order to be effective. Moreover, relaxation from taxes is subject to evaluation by an inter-ministerial panel, which decides if a startup qualifies for tax breaks. The industry needs a bigger buffer to grow. Reforms in long-term capital gains tax for startups is another area that entrepreneurs will be watching out for.

Startups play a crucial role in the implementation of government-to-citizen schemes, be it the Digital India Programme, Smart City Mission or the Swachh Bharat Abhiyan. The government has been actively introducing schemes, and many startups have spotted this opportunity to grow their businesses. Whether the budget will help strengthen this new-found relationship is another concern. Digital transactions could get a boost if the budget introduces tax rebates to startups and consumers for promotion and adoption of digital means above a certain amount.

The duration of tax breaks for startups needs to be extended to a minimum of 5-7 years

Equal opportunities

Bridging the social divide for entrepreneurship is a towering concern. It is important that a nation provides equal opportunities for entrepreneurs across Tier 1, Tier 2 and Tier 3 cities. Most startups in the country have very young people at the helm and they need a lot of handholding and guidance to make it work. Incubators and accelerators make it possible for startups to find their feet. The introduction of incubators in Tier 2 & 3 cities can help bridge this divide. The Stand-Up India scheme for women entrepreneurs also holds a beacon of expectations.

Initiatives fostering rural entrepreneurship, skill development and vocational training should be the government's focus areas to generate employment. With government initiatives like 'Make In India' and 'Start-Up India' to support entrepreneurs, the country looks forward to a budget that supports such initiatives at both the monetary and policy levels. Entrepreneurs will also be looking forward to measures that reduce paperwork and allow faster exits, which currently take at least 2-3 years.

All these concerns are a cursory glance at what goes on in an entrepreneur's head. But the biggest concern that remains is the funding opportunities that the new budget ushers in. The support that the government wants to provide, via a credit guarantee through National Credit Guarantee Trust Company/Small Industries Development Bank of India, is of vital importance.

In terms of consumer adoption, some of the sectors that are likely to emerge winners in 2017 are content-based products for non-English speaking users, fin-tech (payments, SME lending, consumer lending, insurance, etc.), education, healthcare and utilities. From an investment and funding perspective, interest is likely to grow in areas like artificial intelligence and machine learning, and it will be interesting to see what the budget has in store for them. Also interesting to see will be whether the budget constrains the flow of investments from VCs, or provides another opportunity of approaching the government with open arms.

Amid all the noise in the run-up to the budget, I hope it delivers on the above areas.

Gautam Sinha is CEO, Times Internet Ltd, the digital arm of the Times Group.

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