Budget 2019 and Beyond: How to Sustain a Culture of Innovation

With the start of a new year, perhaps now is an opportune time to take stock of how the Union Budget 2019 has impacted the startup community. Six months forward, let us recap the highlights of the budget for startups.

Among the bonanza of sops offered by the budget to startups was the relief from the heat of the angel tax. In an effort to mitigate the difficulties ensuing from the contentious Angel Tax, the Finance Minister announced that section 56(2)(viib) of the income-tax act shall not apply to a startup registered with the Department for Promotion of Industry and Internal Trade (DPIIT). To further simplify the Angel Tax issue, the budget also stipulated that startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums. Also, to meet the expectations of the burgeoning investment community, startups receiving funds from private equity firms and real estate funds are now exempt from scrutiny.

In a positive turn for eligible startups carrying forward losses from previous years, the budget relaxed norms on satisfying either of the two conditions: continuity of 51 per cent shareholding or continuity of 100 per cent of original shareholders. The new provision will help startups offset tax liabilities till such time they begin making profits, as also acknowledge the fact that as startups mature, their shareholding pattern could change.

The budget has given a tremendous boost to women entrepreneurs, which is appreciated. Besides granting more loans with less rates of interest, the Stand Up India Scheme for women entrepreneurs has been extended till 2025.

Other happy tidings for entrepreneurs, include an e-verification mechanism to save startups further scrutiny from the Income Tax Department, a dedicated TV channel for startups, the setting up of a grievance redressal forum for startups and extension of capital gains exemptions from the sale of a residential house for startup-centric investments till FY 2021. Efforts are in the pipeline to review the complex labour law structure in India and to streamline it into a consolidated bill.

Creating new opportunities for startups

One must acknowledge the government’s recent efforts to eliminate bottlenecks for entrepreneurs. Under the new policy of ‘Startup India Vision 2024’, the government has announced the setting up of at least 50,000 new startups, 500 new incubators and 100 innovation zones by 2024.

Further, with the view to prioritise job creation for the young workforce, the DPIIT is looking to create 20 lakh direct and indirect jobs through the new ventures. It also proposes a ₹1,000 crore fund focused on hi-tech ventures. Several regulatory measures are also in the pipeline, such as tax exemption for ESOPs, incentives for debt financing, reduction in the compliance time to just one hour per month for startups, a credit guarantee scheme and the deployment of the entire corpus of ₹ 10,000 crore fund of funds, among other sops.

In a bid to enable superior infrastructure or interface for budding innovators, the Reserve Bank of India (RBI) has announced the release of a proper framework for testing financial products in real-time. As the proposed platform will serve as a tool for entrepreneurs to test their business models, protecting consumer interests will be accorded utmost priority.

Eliminating startup speed-breakers

While the government can justifiably claim the budget is a move in the right direction to keep India at the forefront of the startup revolution, challenges still abound for entrepreneurs.

For example, the startup community believes more can be done for easing angel tax regulations and to evolve the policy further.

While angel tax will not be applicable for startups registered with the DPIIT, the provision has not been completely eliminated. According to PwC India, while the government is in spirit improving the taxation climate for entrepreneurs, in reality, startups can still be penalised for non-payment and avoidance of the angel tax. Entrepreneurs seek further clarification on whether the angel tax is still applicable for companies that have received I.T notices.

The concerns of the startup community about the definition of ‘registration’ of a startup that qualifies for angel tax exemption appears valid. Though a startup’s turnover limit has been raised from ₹25 crore to ₹100 crore, the marginal increase could still pose a dampener for foreign investors looking to invest in big ideas. Moreover, the conditions put on DPIIT-registered startups by restricting their investments in mutual funds and prohibiting capital contribution and the creating of subsidiaries have raised concerns in the startup community.

The government has to also address unresolved ambiguities about startups’ Income Tax-related issues. For example, investors are worried about the steep 28.5 per cent tax they will have to pay for investments in startups.

Building a robust innovation roadmap

Notwithstanding the existing challenges, the future is looking optimistic for India’s startup ecosystem. Undoubtedly, the Fourth Industrial Revolution has created a goldmine of opportunities for entrepreneurs the world over. While India is poised to leverage new technologies, such as AI (Artificial Intelligence), machine learning, IoT (Internet of Things) and blockchain, startups must align themselves with the new digital era. For India to realise its $5 trillion economy vision, key stakeholders — right from the government to the corporates and individual entrepreneurs — are responsible for spurring innovation forward.

I believe that we need to focus on building a culture of openness and consciously adopt a structured approach to nurture innovation in the country. Supportive government policies, an enabling infrastructure and a world-class educational ecosystem will go a long way in empowering next-gen entrepreneurs.

Over and above is the opportunity for the Indian government to pause and consider further steps to be taken to sustain India’s startup story. The creation of a special cell by Central Board of Direct Taxes (CBDT) to address grievances of startups is a much-needed shot in the arm for the ecosystem. Hopefully, more such resolutions to prickly issues are in the offing this year.

-Ravi Narayan, CEO T-Hub

NOTE: This article was originally published in The Economic Times on January 24, 2020 with the title ‘Budget 2019 and Beyond: How to Sustain a Culture of Innovation’.