Budget 2021 Expectations: 7 key areas govt must address to give impetus to startup founders, investors

• By Ankur Pahwa

Union Budget 2021-22 Expectations for Startups: The year 2020 has been one of unprecedented challenges and uncertainties. However, as we come into the new year and with expected relief in terms of the announcement of the vaccination drive, we expect the upcoming budget session to be an exciting one to look out for. In the midst of the pandemic, startups have stepped their game and come to the rescue for daily essentials and setting the path for the future of business. There are high expectations from the start-up ecosystem for the upcoming budget session to provide the necessary impetus to enable further expansion for both entrepreneurs and investors:

Relaxing compliance requirements for startups – Compliance requirements consume a lot of time and effort, involving a lot of paperwork. The government has acknowledged the need to reduce the burden placed on start-ups and reducing the time of tax compliance to a more optimal level.

Easing withholding taxes resulting in increased liquidity – Many companies in the space are high cash-burn and loss-making companies resulting in minimal or low tax liabilities. However, this aspect has been overlooked while withholding taxes on payments made to these young startups causing hardship in terms of liquidity crunch. Relaxing such withholding tax obligations made to startups will provide much-needed relief.

IPO guidelines – Leaders in the startup ecosystem are well on their growth trajectory and are now looking to list on public markets. While the government has recently hinted at permitting direct overseas listing, definitive guidelines are still awaited. Liberal and investor-friendly guidelines would help these startups open new investment channels

Encouraging Indian investors – Startups are still largely reliant on overseas investments to help build their footprint. The government should consider policies and incentives that encourage Indian investors to back home-grown startups such as a re-look at an enhanced surcharge on capital gains from unlisted shares applicable for resident individuals.

Startup exemptions – The current qualifications to be labeled a startup is an annual turnover cap of Rs 100 crores. This threshold should be increased, which would help provide necessary traction and encourage further expansion without the worry of losing ‘eligible startup’ status and necessary exemptions allowed by the tag.

‘Gift tax’ provisions – This tax is applicable for incoming investors when shares are acquired at less than fair market value (as per prescribed tax rules). While meant to be anti-abuse in nature, this acts as a deterrent to investors, as many share transfers happen at a genuine discount to their market value, owing to the current economic slump. Accordingly, exempting such genuine secondary transactions at a discounted price would be much appreciated. Additionally, a more objective/clear valuation mechanism is expected for convertible instruments based on book value (like equity).

Ease of raising funds – ‘Angel tax’ on shares issued by startups has been an ongoing topic of discussion. While the government has relaxed the regulations and process for startups to claim exemption from angel tax, there still exists various issues relating to angel tax that need to be re-visited and appropriately addressed – such as, adopting an ‘exception-based’ approach for applicability of angel tax; relaxation of the current regulations/thresholds, etc.

The startup sector will continue to look for the government’s support in helping ease of access to capital, encouraging domestic investment environment, scaling up the business, easy exit processes, and reducing regulatory and compliance burden on startups. India is the third-largest startup nation in the world, and the government should ensure that startups have enough care and backing to successfully recover and thrive, as the startup industry has vast amounts of untapped potential to generate employment, stimulate spending among the public, generate positive inflows in the form of FDI, etc.

Ankur Pahwa is the E-commerce Sector Leader at EY India. Views expressed are personal.