Inc42’s Budget Survey 2019: Angel Tax Exemption Is Top Priority For Indian Startup Ecosystem

With the President of India Ram Nath Kovind’s address to the Parliament today, the Budget Session has already kickstarted and interim finance minister Piyush Goyal is set to introduce the Interim Budget 2019, tomorrow (February 1).

The President’s address has set the tone of the Budget — populist — as a significant part of his speech discussed the schemes focussed on BPL (below poverty line) and the common man.

Meanwhile, Inc42 has also carried out its own Budget Survey 2019 to crowdsource the demands of the startups and investors from the upcoming Union Budget. And, according to the Survey, as expected  — it’s the angel tax issue that tops the startup ecosystem’s list of concerns and 25% of the startups, as well as investors, agreed that Goyal must address and fix the issue tomorrow.

In a statement shared with Inc42, Rajan Navani, chairman of the Confederation of Indian Industry (CII) National Council also opined the same. “The one key expectation of startups from the budget is complete clarity and consistency on angel tax which has caused unprecedented levels of discomfort both for startups and angel investors. If not addressed this can cause a complete collapse of initial financial support for startups to start thereby making the entire startup India initiative redundant,” he said.

According to Navani, global models in countries like UK and others give tax exemptions to angel investors and even reimburse 70% of their investment in certain cases.

Let alone an incentive, the angel tax — taxes the startup on the share premium, discouraging angel investors but more so completely paralysing the startup with having to pay taxes without even starting. All other expectations and incentives have taken a back seat in light of this heated issue troubling and creating ruckus in the entire Indian startup ecosystem.

Bringing liquidity, enhancing the market’s credit capacity is something that the government should address, say startups.

Let’s take a look at the Survey revelations!

Inc42’s Budget Survey 2019: Ecosystem Demands Angel Tax Exemption

Angel tax and Fund of Funds for startups are probably the only policy issues where both startups and investors equally agreed that the government of the day must take some policy reforms to help ailing angel investments and improve FFS efficiency.

 

In a statement shared with Inc42, Akshaya Kamath, director, Pioneering Ventures said, “The government should stop the tax on angel investments which has ‘ill-treated’ many of the startups. In many countries, making risky investments by Angel Investors are incentivised. A similar practice can boost the Indian startup ecosystem. Consistency in tax laws and compliance is very important to allow start-ups to plan and execute their intentions.”

Over 25% of the startups and 24.71% of the angel investors and VCs participated in the Inc42’s Budget Survey agreed on the point that the Fund of Funds with a corpus of INR 10,000 Cr is being disbursed poorly and in order to meet the target of 2025, the government needs to make implementational changes.

Since its inception in January 2016, only 163 startups have successfully raised the funding under the Fund of Funds for Startups (FFS) scheme. Further, the success rate of startups getting tax exemption certificate from the Inter-Ministerial Board is only 4%.

Amid India’s unemployment rate rising to a 45-year high during 2017-2018, the startups clearly need more assistance from the government in order to be a successful employer and job provider sector in the country. Back in 2015, announcing the Startup India programme, the prime minister had said that startups would soon take the lead in creating new job opportunities in the country.

Investors Vs Startups: The Opinion Difference

Interestingly, Inc42’s Budget survey also brought out the differences in the priorities of investors and startups. For instance, 13% of startups think the income tax exemption given under Section 80-IAC must be extended beyond existing three years, however, only 6% investors who participated in the survey, think the exemption should be made beyond three years.

Kamath said, “While the Government of India has worked extensively to offer a good startup ecosystem, we have also seen many (significant) legal amendments, including to the Companies Act, 2013, RBI guidelines for reporting, such as the introduction of the Single Master Form for reporting FDI, FSSAI regulations etc. Each such change brings with it uncertainty in terms of process and teething issues with regulators which is a challenge for startups to work around.”

While 18.81% of the investors are of the opinion that another tax breather, in form of deferring TCS (Tax collected at source) should be given to ecommerce companies, only 8% startups support this.

Over 20% of the startups and 12.87% of the investors agreed that though many positive changes have been made to the Government eMarketplace (GeM) in order to incorporate startups, the e-marketplace still needs to be more inclusive and open for startups be able to onboard their products and services.

Budget 2019: The President’s Message That Sets The Agenda

Healthcare, agriculture and the Modi government’s schemes launched in various sectors got a special mention in the President’s message. And, the same topics are likely to be the Budget’s focus as well.

Last year, as part of the 2018 Union Budget, the government launched “Ayushman Bharat,”  which claims to be the world’s largest health insurance scheme and the MUDRA Yojna, which according to the Modi government, facilitates credit for professional and business requirements. Under the Mudra Yojna loans worth more than INR 7 lakh crore have been disbursed to the youth without any guarantee. More than 15 crore people have benefitted and over 4.26 Cr first-time borrowers have started their business under this scheme, claimed the government.

However, the tall claims pertaining to MUDRA Yojna has been rebuked by many reports. According to reports, there is no official data available on the number of jobs created due to the MUDRA loan scheme and in fact, 40% of the MUDRA fund remains idle.

Speaking on the Startup India initiative, the President said:

Under ‘Startup India’ and ‘Stand up India’, my government has provided financial assistance to make the youth self-reliant. As a result, in the world of startups, India now figures as a frontline country.

He said, “To improve the standard of education, the government is following a multi-dimensional approach. To secure the future of the country, it is imperative that children still studying in schools get full opportunity to transform their flights of imagination into concrete reality. The government is setting up more than 5,000 ‘Atal Tinkering Labs’ for taking ideas to innovation.”

The ecommerce policy has been flipping up and down amid differences of demands between online sellers and ecommerce companies. The President in his message said that the Government e-Marketplace has helped in bringing transparency in public procurement and at the same time has provided an opportunity to entrepreneurs in big and small cities as well as villages to sell their products without any difficulty to the government.

Sampad Swain, cofounder and CEO, Instamojo told Inc42, “The advent of the new ecommerce policy by the government last year did bring about certain massive changes not just to the ecommerce sector in specific, but also to the Indian business ecosystem, as a whole. These policy interventions will also lead to the creation of an ecosystem for the MSMEs to partner with the ecommerce companies, thereby making it a win-win situation for both.

However, “continuation of those efforts along with greater funds allocation will be crucial for their growth. Further, an increase in exemption threshold for the MSMEs should be considered to provide relief to the sector which is stressed with economic cues.” said Swain.

The President’s message also said that the government under the Smart City Mission will ensure the cutting-edge technology ecosystem across the top 100 cities of the country. This might bring huge opportunities for startups who drive the technology advancements in the country.

Real estate is another sector which hasn’t really emerged since the economic slowdown of 2008.

Through the President’s message, the government claimed that the RERA law enacted in 2016 has now ensured that construction of houses is completed and they are handed over to the buyers as scheduled so that the hard earned money of buyers does not get stuck. After enactment of this law, about 35 thousand ‘Real Estate Projects’ have been registered where lakhs of houses are being constructed and handed over to families, claimed Modi government.

On Budget expectations, Tanuj Shori, cofounder and CEO, Square Yards  said that the real estate industry is eagerly awaiting some sops from the government in order to make housing more affordable by increasing the deduction available on loan interest paid for acquiring a house for self-occupancy purpose from the existing INR 2 lakh per annum to INR 2.5 lakh. The additional leeway of INR 50K on interest paid on a home loan taken by a first-time buyer is applicable for only for loans availed in fiscal 2017 which should be extended to 2018 and 2019 also.

“We also hope the government addresses the anomaly in GST rates on under construction flats and brings it down to 5%, apart from providing an input tax credit to the developers. These measures will go a long way in achieving ‘Housing For All by 2022’ vision of the government,” said Shori.

Budget 2019: Startup India

Common man’s problems are the startups’ solutions. Even if the Interim Budget 2019 address the core issues such as healthcare and agriculture, the startup ecosystem is bound to get the direct and indirect benefits.

This being said, the market benefits could be encashed only when the government addresses the policy-related issues such as angel tax, Fund of Funds, FDI and GST under the startup.

We have already published in detail what the healthtech, epharmacy, fintech, EV and edtech startups have to say about the Union Budget 2019. Given the plethora of issues and the limited Budget to address the same, if not incentives, the government must address the policy issues.

And, with NPAs (non-performing assets) at public sector banks at an all-time high, the industry is expected to bring in more liquidity to the market.

The Inc42 team will do a live session tomorrow, bringing you the detailed and contextual analysis of the Interim Budget session and its impact on the startup ecosystem. Stay tuned in.