Start-ups, investors seek easier tax regime

Union Budget 2020: Start-ups, investors seek easier tax regime

Budget 2020

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As the stage is set for the Union Budget, both startup investors and major players are keenly awaiting the speech to glean the policies related to the startup industry. Getting easier access to working capital, getting governments more invested in startups based in the country and a push towards digitisation are some of the issues that they are expecting in the Finance minister’s speech on Saturday. 

Most investors hope that there will be a rollback on the long-term capital gains tax (LTCG) on investments made in startups. Though the tax surcharge on LTCG was rolled back for the listed entities, the facility was not extended to unlisted companies. What this means in practice is that gains made through investments into startups would be taxed at 28%, while for the listed entities it stands at a mere 11%.

“Investors are unhappy that they are taxed higher, especially when they are injecting capital into a basic activity such as building a business. We should not have two separate tax rates, ”Siddarth Pai, Founding Partner and CFO, 3one4 Capital, that has invested in firms such as Tracxn, and meat delivery firm Licious points out.

He is also perturbed by the restrictions on the tax structure related to employee stock options (ESOP). “We hope the rules are changed and the tax is applied only when there is a sale of the shares and not before.”

Rohit Goyal, Managing Partner of an early venture fund, Windrose Capital agrees with the assessment. He states, “ We are hoping for a capital investment-friendly Budget. We should have rationalisation of LTCG taxation among listed and unlisted shares. Reconsidering DDT would help in increasing participation via formal company structures thereby resulting in better governance and compliance.”

Enhancing the government’s role in the startup ecosystem is the key issue that Sanjay Swamy, Managing Partner, venture fund Prime Venture Partners is looking at.

“With this Budget, we hope that the government continues to put in policies that make it easier for startups to set up and gain access to capital. It is time for the government also to become a customer for these startups.”

Swamy reckons that favouring local startups for procurement, a drive towards digitisation that involves consistent long-term policies with respect to digitisation and investments in the same, mandatory digital payment acceptance will be a step in the right direction.

Most investors and analysts also felt that a simplified setup and compliance regime is necessary to ensure startups continue to thrive in the country. 

From the standpoint of startup promoters, the focus seems to be on solving a multitude of issues facing the sector. The Ola mobility centre states, “ As India marches to become a global hotspot for electric mobility, a critical step in that direction is recognising battery swapping as a viable charging mechanism for two-wheelers and three-wheelers. This requires policy interventions such as including battery swapping in FAME-II, treating electric vehicles and batteries as separate entities and extending demand incentives for both, reduction of GST on Li-ion batteries and earmarking funds for R&D to develop batteries locally.”

It adds that the government must leverage data to build trust-scores for lending, streamlining KYC norms through uniform tiered KYC and eKYC, extending credit guarantee schemes such as MUDRA to those engaged on digital platforms.

This thrust to digitisation is an aspect that Krishna Kumar, Founder & CEO, Simplilearn agrees with. “There has been an increased awareness of the need to reskill and upskill the workforce in India. We believe that the next step is to give Indian professionals, the option to choose and pursue the skilling course that will meet their career needs. They should also be given an option to expense the cost of the course through their tax returns. By giving skilling and education for professionals the same treatment as in taxes for health insurance will only encourage more professionals to invest in their skilling proactively.”

Harshil Mathur, CEO and Co-founder, Razorpay is hoping for a fresh impetus on consumer spending. “The reduction of taxes and incentivisation of consumer spending through GST and personal taxes could help put the speed of our economy back on track. We also expect the budget to bring in some good news for the employees at startups. The introduction of some tax relief on ESOPs and charging tax on the liquidation of shares allotted under ESOP, instead of charging the employees on exercising their ESOPs will be very beneficial.”