Budget 2019: Startups want less interference, more incentives

The startup ecosystem hasn’t had the easiest time in the last few months and is pinning hopes on finance minister Piyush Goyal to cut it some slack when he presents the Interim Budget on February 1.

Cutting across segments, startups are expecting the government to — one, abolish the controversial “Angel Tax” to boost startup investments, and two, raise the income tax exemption limit for the salaried class to improve purchasing power and create additional demands.

While the budget by Goyal, the replacement for Arun Jaitley who is in the US for treatment, may turn out to be a populous one to woo voters ahead of the general elections, it may not have a lasting effect as the incoming government will present a full budget mid-year.

Clarification on Angel Tax

Commerce and industry minister Suresh Prabhu has already spoken to the finance ministry on the issue of angel tax notices being sent to startups, but a clear message is expected to come out during the budget session.

The IT industry lobby body, National Association of Software and Services Companies (Nasscom), has said in no uncertain terms that the government should consider quashing the angel tax provision and instead focus on measures to incentivise startups.

Angel tax is levied on the funding received by startups and unlisted companies from an external investor. This tax (30%) is levied when startups receive angel funding at a valuation higher than its ‘fair market value’. The law reasons that this excess amount is akin to "income from other sources" and should be taxed under Section 56 (II) of the Income Tax Act.

“Angel Tax has been a contentious issue for the overall growth of Indian startup ecosystem and ease of doing business. Valuations of shares of unlisted companies is a highly subjective matter. The flaw in the present approach is the focus on valuation as a means to verify the genuineness of the transaction and it penalises the investor for taking risks of investing in early-stage startups,” Nasscom said in a statement.

'Boost MSMEs, remove GST bottleneck'

Sampad Swain, co-founder & CEO of Instamojo, a Bengaluru-based fintech company, said this interim budget will determine the extent to which the Indian government wants to expand the MSME (micro, small & medium enterprise) sector.

“Over the years, MSMEs have been battling to get loans, given their inability to produce relevant assets as evidence. The current gap between the demand and credit supply within the Indian MSME sector is about USD 230 billion, according to a World Bank study,” Swain added.

Bound by the limited access to funds for business operations, Swain said, MSMEs are hoping for the benefit of tax holidays and a reduction in GST (Goods and Services Tax) rates.

“With digitization disrupting the Indian ecosystem in multiple dimensions, one can expect a hike in the rate of digital adoption by MSMEs when given the right amount of funds and focus to secure their transactions and businesses online,” he said.

GST is a bone of contention for other players too. Real-estate startup NoBroker has said lowering the GST slab on under-construction properties to 5 or 6% from the existing 12% would usher in a lot of positive movement in the sector. It has also advocated for raising the personal income tax exemption limit for interest on home loans and rental income, as it would be “to the advantage of home-buyers and the sector as a whole.”

Electric mobility is an important segment for India considering the rising fuel prices and protests against it by the public and political opposition. However, its adoption has been rather slow due to the high cost of vehicles.

In this background, Akshay Singhal, founder of Log 9 materials, which works in the nanotechnology domain, said the high cost is driven by imports of technology and components for these vehicles. He said the interim budget should focus on incentivising development of indigenous technologies better suited for the Indian ecosystem.

“Current Li-Ion technology for electric vehicles is a big strategic disadvantage for India as it does not have any reserves of lithium or cobalt. From being dependent on imports for petroleum, India is headed towards dependence on other nations for lithium and cobalt in future,” he said. Singhal hoped nanotechnology would be given a boost by the government this time.

Meanwhile, Siddharth Angrish, founder of Jiyyo.com, an AI-based patient care coordination platform, hoped that startups would face decreased regulatory interferences while applying for various tenders.

Extension of deadline for FDI norms?

While e-commerce giants like Amazon and Walmart-backed Flipkart have sought to extend the February 1 deadline for online marketplaces to comply with the new foreign direct investment (FDI) rules, stating that they need more time to understand the details of the framework, smaller e-commerce players like Snapdeal and ShopClues have taken a contrasting stance and opposed any move to extend the deadline.

In December, the government announced a new regulation that bars online marketplaces with foreign investments from having exclusive marketing arrangements with sellers and bans them from selling products of companies where they hold stakes. The finance minister is expected to give more clarity to the issue.