Tax reliefs for investors can ease startup financing

The new year began on a sore note for startups. A slew of factors, including layoffs, disappointing IPOs, and a funding drought in 2022, have left a bitter aftertaste among new-age entrepreneurs. Given the global recessionary fears and macroeconomic uncertainties, concerns are being raised if the funding winter of discontent extends to 2023 as well. Any loss of momentum in the Indian startup ecosystem—which also happens to be the world’s third largest—will be detrimental as the startup culture seems to be lifting even remote boats in its swell, with at least one new company cropping in each of India’s nearly 600 villages in 2021–22. With an estimated 250 unicorns by 2025 from about 100 now, the Indian ecosystem must ride out the rough spots without losing pace.

In 2022, the 35% decline in funding from $37.2 billion in 2021 to $25.2 billion was a major setback. Only 22 startups entered the unicorn club as against 46 in 2021, while the number of big-ticket funding rounds ($100 million and above) fell by 35%, according to number-crunchers at PwC India. There’s a mixed feeling in the air that the funding decline could last another 12–18 months, and one of the reasons fueling such grim observations is startup valuations.

Last year saw several big-ticket IPO disappointments led by poster boys Paytm, Zomato and Delhivery. Fewer exit options make investors jittery, and this hesitancy froze funding. Moreover, the bloodbath in the crypto land, collapsing global tech stocks and startup shutdowns added an extra layer of anxiety.

That said, some believe the great Indian startup party isn’t over yet and that 2023 might as well be a year of sustenance. Interestingly, the government’s Rs 10,000 crore startup fund announced in 2016 has run its course, injecting Rs 13,493 crore in 773 startups as of last November. In its second lap, the government appears keen on sector-specific schemes like the proposed Rs 50 lakh grant to technical textile startups or tapping cleantech, food and life sciences. Such selective hand-holding is good, but first, the government shouldn’t lose sight of broader issues. It must address the need for tax reliefs for foreign and angel investors, single-window registrations, reduction in minimum alternative tax rates, parity on capital gains tax on crypto vs virtual digital assets, and others without delay.