Info-tech

India needs more disruptive reforms to unlock its startup potential

Debjani Ghosh | Updated on February 02, 2021

In the wake of the mini Budgets presented last year, and responding to the clarion call for Atmanirbharta (self-reliance) by PM Modi, it was no surprise that Budget 2021 focused on economic recovery and job creation, on health and well-being, capital and infrastructure, inclusive development, reinvigorating human capital, innovation and R&D, and minimum government and maximum governance. It was a very pleasant surprise to see the FM present the first digital Budget from a Made in India tablet, which bears testimony to the government’s deep commitment to tech adoption and support for Indian players.

Against the backdrop of an expanded fiscal deficit because of the pandemic and a need for fiscal consolidation, it is to the government’s credit that direct taxes have remained largely unchanged. Inasmuch, compliance burden has been significantly eased. For instance, National Faceless Income Tax Appellate Tribunal Centre is to be set up to enable digital communication with appellants. Corporate Affairs MAC21 Portal Version 3.0 and NCLT will leverage regulatory tech for e-scrutiny, e-adjudication, and compliance management. Reduction in period for re-opening of income tax returns has been brought down from six years to three.

In addition, the Budget has provided clarifications relating to the imposition of Equalisation Levy (EL) as not being applicable to transactions subject to income tax. It has also provided tax incentives for relocating foreign funds in the International Financial Services Center (IFSC); and to allow tax exemption to the investment division of foreign banks located in IFSC.

With the world’s largest vaccination drive under way, a massive boost in healthcare spending was on the cards. To be sure, a 137 per cent increase in Budget allocation over the previous year is a substantial push. With an overall outlay of ₹64,180 crore for healthcare programmes in addition to the National Health Mission, and ₹35,000 crore earmarked for Covid-19 vaccination, it should be a major step forward in preventative and curative healthcare in India. This is also a sector where start-ups are deeply focussed and we saw some incredible breakthroughs over the last year levered on cutting-edge technologies.

Boost for innovators

Speaking of start-ups, this year’s Budget had some positive announcements while recognising their contribution to the economy. The definition of start-ups has been expanded to include companies with paid-up capital and turnover up to ₹2 crore and ₹20 crore, respectively. The government will also incentivise the incorporation of One-person Companies (OPC). This is a boost for innovators because such companies can grow without restriction on paid-up capital and turnover, and can convert into any other company-type at any time. The residency status of an Indian citizen for setting up an OPC has been reduced from 182 to 120 days. It also allows NRIs to incorporate OPCs in India. Moreover, the burden of taxation has been reduced — start-ups can get capital gains exemption for one more year and extend their tax holiday up to March 31, 2022.

However, no better timing than now for some disruptive reforms for this sector. We urge the Government to seriously consider some of our asks like the extension of available tax holiday of three years to all start-ups registered under DPIIT, which will positively impact over 40K start-ups and taxation of ESOPs at the time the sale of share. These steps can have a huge impact on the segment.

Disruptive reforms

Also, given the increasing importance of domestic funding, it is high time the Government reduced the long term capital gains tax in the hands of resident investors to 10 per cent and provide them with a level playing field with non-resident investors.

Wanting to strengthen the nation’s innovation & research focus, there was an announcement of an outlay of 50k crore INR over 5 years. This can and should be read in conjunction with a few other things. The National Translation Mission, for one. A massive amount of governance & policy-related information in regional language can be disseminated once this Mission takes shape. Yet another is the budget allocation for post-education training and the proposal to amend Apprenticeship Law. Also,1.5K crore INR has been allocated to promote digital mode of payments which also circles back to another announcement – setting up a world-class fintech hub in Gujarat International Financial Tech City. The point is, whether India can become a Fintech hub or bridge the knowledge gap with “Bharat” or develop relevant talent will depend on our ability to innovate and make solutions available to the masses at affordable price points.

The Budget did miss one key opportunity for accelerating growth and jobs. India’s ITeS companies have played a major role in economic recovery and going forward in a hybrid world, they will continue to be pivotal. The future of work and workplace has changed. Towards addressing this new hybrid operating model, we had suggested a few recommendations (direct & indirect taxes) and requested clarification on the SEZ policy. We remain hopeful that during the year, some of these recommendations will be suitably addressed as the government remains focused on increased digitisation to put the economy back on a fast-growth track.

Debjani Ghosh

President, Nasscom

Published on February 01, 2021

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