Budget provisions for start-ups are baby steps

Sangeetha Chengappa Bengaluru | Updated on February 03, 2020 Published on February 03, 2020

Bolder, faster action required

Some provisions made in the Budget may seem to have fulfilled certain long-standing demands of start-ups, but a closer look at the fineprint reveals that they may not be enough to propel them towards innovation and growth.

For instance, while the proposed five-year deferment of tax payments on ESOPs is a great move to attract and retain high-quality talent, certain limitations restrict the benefits.

“The ESOP taxation changes in its current form apply only to around 200 start-ups recognised by the IMB (Inter-Ministerial Board), thereby severely restricting its scope. Making it applicable to all the 20,000 DPIIT-registered start-ups will empower all of the players to enjoy the benefits of the proposed changes, without unduly penalising others,” said Nakul Saxena, Director - Policy at technology think-tank iSPIRT. Currently, only 200 of the 20,000 DPIIT-registered start-ups have been validated by the Inter-Ministerial Board set up by DPIIT for granting tax-related benefits to them.

Burden on young, unlisted firms

While the Budget exempted start-ups/companies with turnover of up to ₹5 crore from auditing its books, thereby marginally reducing the compliance burden on them, overall, the level of compliance for young companies is the same as that required by larger companies. “This places undue burden on young unlisted companies, as they do not have the wherewithal and resources that large unlisted companies with hundreds and thousands of crores in turnover have, in order to be compliant. This issue needs to be addressed,” said Kannan Sitaraman, Partner at Fireside Ventures.

The Budget has not sufficiently addressed the working-capital crunch faced by start-ups. Removal of TDS (tax deducted at source) rates on payments to DPIIT-registered start-ups and MSMEs would be one way to address it, say industry experts.

Working-capital issues

Payments to DPIIT-registered start-ups/MSMEs are subject to TDS of 10 per cent under Section 194J, which affects their working-capital, as they have to wait till returns are filed for their refund. This affects their working-capital requirements as they are not profitable yet. The Government could stand guarantee for debt given to start-ups by banks or NBFCs, which would make working-capital financing much easier to get, they said.

“It would help greatly if universities and public trusts are allowed to invest at least 5 per cent in domestic AIFs (Alternative Investment Funds) that are approved by SEBI, which would unlock a lot of rupee capital for start-ups,” said Saxena.

Globally, the differentiation in tax treatment on listed and unlisted securities is not prevalent. However, the Budget has not addressed the disparity in tax rates applicable for capital gains on the sale of listed and unlisted securities. The higher holding period and higher tax rate, including surcharge (11 per cent if held for more than 1 year on listed securities versus 28 per cent if held for more than two years on unlisted securities), dis-incentivises investments into start-ups from Indian sources.

“The Indian economy needs to become an innovation economy in the next ten years. This needs increased R&D investments in both public and private sector, early-stage rupee capital formation, ramp-up of digital public infrastructure, an aggressive shift to an open-API based value-chain and the creation of a zero-friction environment for our entrepreneurs,” said Sharad Sharma, co-founder of iSPIRT Foundation. “This Budget shows an intent to move in this direction. However, bolder and faster action is needed. Baby steps are not enough,” he said.

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Published on February 03, 2020
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