Union Budget Is A Big Disappointment For Startups: Mohandas Pai

Despite Finance Minister Nirmala Sitharaman mentioning the word startup almost a dozen times in her speech while presenting the Union Budget 2023-24, the Budget once again ignored startups and failed to address the key issues of the Indian startup ecosystem, according to T V Mohandas Pai, partner at Aarin Capital and former CFO of Infosys.

Barring a few announcements like the relaxation in eligibility of startups for carrying forward losses and the extension of the incorporation date for startups to avail tax benefits, Budget 2023 moved in reverse gear by bringing foreign investors under the ambit of angel tax.

Speaking to Inc42, Pai said, “For startups, Budget 2023 is a big disappointment. We wanted a reduction in the long term capital gains tax from the existing 20% to 10%. It did not happen. Startups wanted ESOP taxation at the time of sale, but that also did not happen.”

However, Pai hailed the overall Budget 2023, calling it “remarkable”. He praised the Budget for focusing on improving the quality of life for all Indians and increasing infrastructure spending.

Praising the increase in tax receipts, Pai said, “We are seeing buoyancy in tax rates, that is taxes have gone up much more than estimated in the Budget, and for the next year too a nominal GDP growth of 10.5% is envisaged. I’m sure it will be higher. 11% increase in revenue receipts is envisaged. It could also be higher.”

In what she described as a relief for “hard-working middle class”, Sitharaman proposed reducing the number of slabs under the new income tax regime to five from six and increasing the rebate limit to INR 7 Lakh in the new regime.

However, Pai was not impressed with the tinkering of tax slabs and said that the tax regime is still complicated.

“Well, as far as the tax lab is concerned, it is small tinkering. Next year, the target for income tax is INR 9.1 Lakh Cr, what has been used is INR 35,000 Cr, which is just 4% of the total tax collection which is neither here nor there,” he said.

Pai opined that the number of slabs should have been reduced to just three under the new tax regime. “Having more slabs only complicates and takes away in one hand what you give from the other. And increasing standard deduction marginally is not going to make a very big impact.”

A Few Crumbs For Startups

Among the major announcements for startups, Sitharaman proposed increasing the relaxation period for startups to carry forward losses to 10 years from incorporation from seven years currently.

Further, the finance minister also proposed extending the date of incorporation for startups to avail income tax benefits to March 31, 2024, from March 31, 2023.

Commenting on these announcements, Pai said, “The government has tinkered and thrown a few crumbs to the startups by saying that the date of incorporation for startups’ eligibility in order to be able to claim tax benefits under Section 80 IAC is extended by one year. However, very few startups have actually got these benefits. Similar is the case with announcing the relaxation period to carry-forward losses.”

It’s worth noting that out of 89,812 DPIIT-registered startups, only 1,048 startups have been found eligible so far for it, which is just about 1% of the total.

“These steps are not going to make a big difference. What startups wanted was something which will promote growth. It has been very disappointing. The finance ministry and the government need to be more sensitive to startups. They’ve been saying that startups and entrepreneurs are the future of this country, but that future is not reflected in the Budget announcements,” he said.

Agriculture Accelerator Fund A Good Idea

Sitharaman proposed to set up an Agriculture Accelerator Fund to encourage agritech startups in rural areas. The Fund will aim to find innovative and affordable solutions for challenges faced by farmers. It will also bring in modern technologies to transform agricultural practices, increase productivity and profitability.

On this, Pai said that while setting up the fund is a good idea, it requires a bigger allocation. At least a minimum of INR 5,000 Cr should be kept aside for investments in agritech, he added.

It must be noted that the finance minister announced a similar blended capital fund for agritech startups in Budget 2022-23 too. However, the scheme has remained only on paper till now. The draft submitted by NABARD on it is still under consideration.

Pai also raised questions on the Fund of Funds for Startups (FFS) announced by the government earlier. “Remember, the FFS was started in 2016 and even today the entire fund has not been invested because the government is releasing money in tickles. What we need is a sharp focus (on execution),” he added.

The FFS with a corpus of INR 10,000 Cr was constituted in 2015-2016 with an aim to catalyse over INR 60,000 Cr of investments and create 18 Lakh jobs by startups. It was supposed to be disbursed during 14th and 15th Finance Commission cycles, but is nowhere close to achieving this target. Out of the INR 10,000 Cr, only INR 5,409 Cr has been committed with a drawdown value of INR 1,485 Cr by 71 AIFs so far. A total of 1,150 startups/MSMEs have been funded under the FFS, according to SIDBI.

Resolving Tax Disputes

Pending tax disputes have been a big issue for startups. To speed up the resolution of the disputes at the Commissioner level, Sitharaman proposed deploying about 100 Joint Commissioners for disposal of small appeals. “We shall also be more selective in taking up cases for scrutiny of returns already received this year,” the minister said.

However, Pai said that the move is unlikely to make much of a difference.

“Records prove that at the Commissioner level, assessees lose most of the tax appeals because the Commissioners do not reverse the tax order and retain what tax assessing officers had ordered earlier. This is not very encouraging as we wanted big radical changes in the case of income tax for startups, but we simply got a few crumbs here and there,” he said.

‘Startup India’ is the flagship scheme of the Modi government on the back of which the number of startups in the country surged to nearly 90,000 from 452 in 2014. The prime minister has multiple times highlighted the importance of startups for innovations and job creation, and recently also referred to startups as the backbone of ‘New India’.

However, the startup ecosystem has often complained that the pace of reforms for the sector has been too slow. The absence of any major announcements for the startups in the Budget and the failure to address key demands is in contrast to the government’s aim to promote startups.