Budget: NAMO 2.0 continues to nurture ‘Start-up Bharat’

Budget: NAMO 2.0 continues to nurture ‘Start-up Bharat’

Relaxation in the shareholding conditions for carrying forward and set-off of losses by start-ups is a welcome step: Shalini Pillay (File Image)

By Shalini Pillay

The world economy is slowing down with anti-globalisation sentiment, protectionism, trade wars and nativism. Even in this backdrop, India continues to take giant strides forward and eyes a US$ 5 trillion economy by 2025 which our newly elected Finance Minister (FM) states is achievable “if we can appreciate our citizens’ purusharth filled with their inherent desire to progress.”

The nation has witnessed a spur in entrepreneurial ventures over the last few years and Modi 2.0 seeks to capitalise on this force of the Indians.  Acknowledging that offering an enabling ecosystem is critical to initiative, the recent steps of the Government – be it approval by the Securities Exchange Board of India for issuance of shares carrying differential voting rights by tech companies to the India Post opening for registration of all vendors for e-commerce business, seem to be in the right direction. 

However, the start-up ecosystem was shaken by the angel tax yardstick, i.e., the– anti-abuse provisions under section 56(2)(viib) of the Income-tax Act, 1961 (ITA), effected in 2012. Over the last years, several start-ups were slapped with income-tax demand notices.

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Recently, the Central Board of Direct Taxes, came out with a clarification regarding non-applicability of section 56(2)(viib) of the Act to registered start-ups, subject to fulfilment of certain conditions.  The dispute still continued for unregistered start-ups who had raised funding in the past.  

The recent budget proposals contain various measures recommended by the Hon’ble FM to directly support the start-ups as well as nurture the ecosystem that they operate in.
Exemption of eligible start-ups from the angel tax issue on the satisfaction of prescribed conditions should provide a huge sigh of relief from the imminent fear of plaguing litigation.

Extending coverage to Category II Alternative Investment Funds for exemption from angle tax and e-verification of investor’s identity and source of funds is again an investment friendly step.  To help start-ups who are mired in the current litigation cycle and to redress grievances, the proposal of the CBDT for making special administrative arrangements would ease their doing business in India.  Relaxation in the shareholding conditions for carrying forward and set-off of losses by start-ups is again a welcome step, given the extensive funding requirements that the sector needs, and this may also trigger consolidation in this sector.

For fostering flow of quality foreign capital into start-ups, the proposal to allow 100% FDI for insurance intermediaries would help digital/ broking insurance start-ups to attract high-quality foreign capital.  From a domestic funding perspective, an extension of the sun-set date by 2 years up to 31 March 2021 for reinvestment of long-term capital gains on the sale of residential property in eligible start-ups would see increased investment participation by individuals.

If one were to look at the policy recommendations, viz., proposals to consolidate labour laws, education, and rental housing, setting-up of Social Stock Exchange to fund common causes, enhancements to the digital payments ecosystem to help Fintech start-ups, impetus to Electric Vehicles’ sector, mega-investment in sunrise and advanced technology areas, etc will be a good feeder ground for start-ups to cherish in the country. 

Exclusive television programme (to be designed and executed by the start-ups themselves) to be launched for start-ups, shall serve as a useful platform for funding arrangements, tax planning, matchmaking with venture capitalists and discussing other issues.

It may perhaps seem like an unfinished agenda yet from the sector’s perspective, given that few of their proposals from this Government have remained unfulfilled.  Clarity in policy, clearer regulatory framework for start-ups in emerging sectors, government support in procurement from start-ups, etc are areas that this new Government should focus more on in the coming days.


(The author of this article is the Office Managing Partner of KPMG in India, Bengaluru)