Budget 2017: Digital push good but incentives for capital creation missing, say investors

Investors in India feel the union budget's sharp focus on digitisation will undoubtedly strengthen the whole ecosystem, but the need of the hour is consistency of policies, incentives for domestic venture capital creation and addressal of cashflow problems that startups often face.

That's not to say the community is not enthused about the government's massive digitisation push, given it presents a massive opportunity for startups in the fields of digital payments, including UPI-based apps, cyber security and PoS equipment manufacturers, to name a few.

"The investment in infrastructure to boost digital transactions should support the entire ecosystem. Second, the target of about Rs 2,500 crore of digital transactions over the next one year facilitated through BHIM, UPI usage should be an interesting area to look at. Taxation relief for digital payment equipment manufacturers will also encourage more hardware players in the segment," says Vikram Gupta, founder and managing partner, IvyCap Ventures.

Gupta says most of the fintech companies in the space should benefit from the budget's focus on the digital payments ecosystem.

Besides, the fact that cash transactions of over Rs 3 lakh will not be permitted, and cash expense allowance will be reduced to Rs 10,000 are likely to benefit online payment companies like Paytm, FreeCharge and MobiKwik.

What investors really want

Most investors Techcircle spoke to were of the opinion that consistency of policies and regulations, and the ability to have an outlook for the next 5-7 years—the typical holding period of their investments—is paramount to business. Some of them added that the sops announced for startups today would not result in a lot of change in their portfolio firms.

Investors should not expect anything drastic from a single event, says Jacob Kurian, partner at investment firm New Silk Route Advisors. "Budget should become a non-event. That is the sign of a maturing economy. There should ideally be consistent tax policy and other fiscal measures to ensure that there are no unplanned surprises that happen during a 5-7 year period...To that extent, the government has remained consistent on whatever its plans where, whether it is fiscal deficit or tax policy," he added.

In his budget speech, Jaitley proposed to tweak the tax concession policy for startups, offering them a tax holiday for three years in the first seven years of their existence, compared with five years earlier. The tax concession is applicable for startups incorporated after 31 March 2016.

For medium and small enterprises (MSMEs) with an annual turnover of up to Rs 50 crore, corporate tax has been reduced to 25% from 30% earlier.

Nitin Sharma, founding member and former principal at venture capital firm Lightbox Ventures, said that while disposable income growth through tax cuts, lower borrowing costs and rural stimulus will benefit some VC-funded companies in the consumer space, there were no game-changing announcements. "I would have liked to see a much bigger push for digital health and education. More than the tax benefits, I think incentives for more domestic venture capital fund creation and local listings will move the needle in solving financing and exit issues," says Sharma.

Gupta believes the union budget did not have many sops for startups other than extension of the carry-forward period for minimum alternate tax (MAT) from 10 years to 15 years, and that the challenge still remains in terms of actual cashflow for startups.

Anil Joshi, managing partner at Unicorn India Ventures, says fund managers in India are still looking for stronger capital avenues. A government-backed corpus for fund managers would have helped those looking to raise capital, he adds.