This article is part of the special coverage of the upcoming Union Budget 2018 from the lens of Indian startup ecosystem. In this pre-budget series, we’ll shed light on major expectations of the startup industry from Budget 2018 for various industries across all the key areas including taxation. To read all the stories of this special coverage of Budget 2018, click here.
Finance Minister Arun Jaitley is all set to present the Union Budget 2018 of India for the fiscal year 2018-19 on February 1. As 2019 is a general election year, this budget is going to be the last full-fledged budget announced under the current term of Modi government and the Finance Minister would be presenting only vote-on-account next year.
In its special efforts, Inc42 Media plans to present to its readers a seven-part pre-budget series providing a comprehensive analysis of the general state of affairs of key sectors in India including agriculture, ecommerce, logistics, health, education and real estate from the lense of the startup ecosystem. The special pre-budget series comes with the expectations of different stakeholders in the Indian startup landscape from the upcoming Budget 2018 along with a comparative analysis of the preceding budget provisions and their actual implementations.
This part of the series explains the prevailing macro-economic conditions in India along with the major expectations of Indian startup community from the Union Budget 2018.
Review: Budget 2017 for Startups
- The financial budget for 2017, in order to make the process of setting up startups and survival in the Indian business market conducive, allowed startup companies to pay tax only for three years out of a seven-year period if only they make profits. The move of providing income tax holiday to startups was meant to promote startup ecosystem in India.
- The finance minister, while giving much relief to the MSME sector, announced the reduction in the tax rate from 30% to 25% for the companies with an annual turnover of less than $7.83 Mn (INR 50 Cr).
- The budget also provided a tax cushion to small businesses and startups with a turnover of up to $313K (INR 2 Cr), by reducing the presumptive tax rate to 6% of the total turnover. Earlier, this rate was 8%. However, the tax relief was given conditional on the fact that the gross receipts must be received through digital means.
- Though refusing to bulge for the demand for the abolition of Minimum Alternate Tax (MAT), the finance minister allowed companies to carry forward their MAT for a period of 15 years from the present period of five years.
- For the purpose of carrying forward of losses in respect of startups, the condition of the continuous holding of 51% of the voting rights has been relaxed subject to the condition that the holding of the original promoters continues.
This budget also actively promoted digital transactions in order to make India, a less-cash economy. Overall, a policy thrust was given to increase digital footprint in the country by capping cash transactions and by financially incentivising digital ones.
The Finance Minister whilst giving a push to digital transaction also recognised the significance of cybersecurity and therefore, proposed to set up a Computer Emergency Response Team for Financial Sector (CERT-Fin).
However, the budget gave muted responses to many queries raised by the Indian startup community.
- It was silent on Angel Investor Tax which proved to be a bone of contention for startups.
- The community demanded the total abolition of MAT rather than a mere extension of carry-forward period.
- There were no major announcements made for the ecommerce sector.
- It also did not touch the issue of framing ‘easy exit policy’ for startups.
On that note, the startup community is expecting these significant issues to get resolved in the upcoming budget for the financial year 2018-19.
Review: Macroeconomy 2017
- High paced economic reform zeal led by big bangs like demonetisation, GST and recapitalisation of Public Sector Banks (PSBs) by the Modi government has apparently created some sort of confusion among the economic analysts to estimate the right state of the economy.
While one data after the other, officially released by the government, have indicated a slowdown or stagnancy in terms of growth, the domestic institutions as well as the international ones including the World Bank and the IMF, have consistently expressed their confidence in the Indian economy.
The Central Statistical Office (CSO) has projected a 6.5% of growth rate for Gross Domestic Product (GDP) for the current fiscal year which is significantly lower than the 6.7-7.5% range of forecast made by the RBI, Niti Aayog, and the Finance Ministry.
As per the Global Economics Prospect report released by the World Bank, India will once again emerge as the fastest growing economies with GDP growing at 7.3% in 2018-19 and then it will further accelerate to 7.5% in the next two years.
- The twin balance sheet problem of over-leveraged debtors and bad-loan-encumbered creditors is also likely to stay due to high-interest burden, low capacity utilisation and weak earnings of the former and poor asset quality of the latter. However, the announcement of recapitalisation of the banks to the tune of about $33 Bn (INR 2.11 lakh crore) is certainly going to scale down the magnitude of the problem.
- However, the year 2017 has also marked a record inflow of foreign investments in the form of both debt and equity markets of India.
Factors like high-interest rate differentials, fundamental reforms took up by the government and expectation of better corporate earnings in the coming quarters have caused a $30 Bn plus inflow of foreign funds out of which $22 Bn has come alone in the debt segment and the rest in the equities. In a way, foreign inflows have been the USP of the Modi government.
Overall, Foreign Portfolio Investors (FPIs) are basically concerned with fiscal conservatism, low level of inflation, high real interest rate differentials and stable exchange rate. However, numerous factors like inflation taking on the upward spiral, rising oil prices disturbing the fiscal math and the general trend of normalisation of monetary policy across the world resulting into a decrease in interest rate differential benefits, are expected to slow down the foreign inflows.
Further, any deviations from fiscal prudence are going to create additional inflationary pressures and volatility in the exchange rate markets. The corporates need to report an exceptional rise in earnings in order to have sustained interests of FPIs in the Indian debt and equity markets.
- India also witnessed a number of positive developments on the business cum economic front in the year 2017. India emerged as one of the fastest growing economies in the world and secured a 100th position on the ease of doing rankings released by the World Bank making an impressive jump of 30 notches. The US-based global rating agency, Moody’s, upgraded India’s sovereign ratings after 14 years to Baa2 with a stable economic outlook. The foreign exchange reserves reached record high levels settling at record levels about $413 Bn in the last week as per the data released by the RBI.
- The government must be credited for successfully clearing its ambitious $109.38 Bn (INR 7 Lakh Cr) Bharatmala Project in order to give thrust to the construction projects for roads and highways across India. The project is designed to be completed in a five-year time frame and is expected to generate a whole lot of jobs especially rural jobs which will eventually give thrust to the rural economy.
- India also retained its position as the third largest startup base in the world with over 4,750 technology startups as per a report released by NASSCOM. India is expected to have 100,000 startups by 2025 which will create employment for 3.25 Mn people and $500 Bn in value as per T V Mohandas Pai, Chairman, Manipal Global Education.
Fresh Hopes Of Indian Startup Ecosystem From Budget 2018
On the tax policy front, the experts have shown confidence in the tax simplification and rationalisation drive to continue. There are speculations about the tax exemption limit under the 80C section is to be increased from $2,352 to $3,136 (INR 1.5 Lakh to 2 Lakh).
The corporate sector is pitching for a reduction in corporate tax which Jaitley had promised in the previous budgets but at a gradual pace. One possibility of reducing the tax burden on corporates can be by doing away with dividend distribution tax which is currently charged at the rate of 20.36%, if it actually happens, this could be a great breather to the heavily indebted corporate balance sheets.
There could be a possible revival of Long Term Capital Gain (LTCG) tax as suggested by some tax experts to compensate possible revenue loss due to an increase in tax exemption limit. Clarity on bitcoin tax and on Minimum Alternate Tax is also awaited from the Budget 2018.
The startup community has been furiously protesting against tax terrorism launched by the income tax officials while allegedly misassessment the revenues of startups and imposing disproportionate amounts of tax penalties in form of angel tax. It would be an important point to see whether the finance minister will address the concerns of Indian entrepreneurship community.
Agriculture And Welfare
The current dispensation may carve out policies and welfare benefits to please the rural community. Since 2019 is going to be an election year, the government may have plans to woo its vote bank including the middle-class sector and the farmers and labourers community.
Already the GST council has taken the decision to reduce the rates which directly affect this community, be it a reduction of tax rates on dining in restaurants or on farm equipment. Large-scale job creation can be the primary agenda of the government as it has already been facing strong criticism for poor performance on job creation front. The target is to boost rural demand, increase wage income and support small and medium scale enterprises.
Coming to the agriculture sector, as expected, the finance minister has set the agenda by declaring agriculture to be the top priority for the Budget 2018. The government needs to push through its agenda for achieving the goal of doubling the farmers’ income by 2022.
The government needs to devise more schemes and financial allocation to ensure greater application of technology to increase agricultural yield, efficient utilisation of resources, reduction in input cost, growth in agricultural wages, remunerative and stable prices and also give proper forward and backward linkages to the farmers.
At a time when 50% of the entire workforce is associated with agriculture and allied sectors accounting only 13-14% of the GDP, clearly, there has been a huge gap in terms of productivity, efficiency and technology implementation. And, this is where startups in the agritech space are filling the gaps – optimising climate forecasting, recognising crop diseases at the earliest by infusing IoT and AI, channelising the farm-to-fork way and more.
In his last year budget, though the Modi government had raised the funding to agriculture and allied sectors by 24% to $29.4 Bn (INR 1.87 Tn), however, it appears that the actual spending has been less than that of previous years’ budget spending in agriculture.
Also, the beneficiaries of the funding remain traders and mid players at large. For instance, two years back, when there was a huge demand for potatoes, farmers were asked to keep the price same under the government-allowed limit preventing them to encash the opportunity; however, this year, when farmers had to bury thousands of tons of potatoes owing to low demand, the government didn’t process measures to save the day.
As voiced by a number of startups while interacting with Inc42, the angst was most apparent in their words, “If you can’t lead the agritech stakeholders constructively, stop interfering and let startups take the lead to bridge the gaps.” Hope, FM Arun Jaitley’s Budget 2018 will reflect the same spirit.
In terms of healthcare, the sector is hoping for higher fiscal allocation from the Budget 2018. According to ICRA, public sector investment in healthcare is one of the lowest, globally accounting about 1.5% of the GDP.
Airing similar view in a statement made to ANI, Biocon Chairman, Kiran Mazumdar Shaw stated that “I would like to see a greater spend on healthcare as here we have stagnated at below one percent GDP levels. For a country like India which is trying to aim to deliver universal healthcare, we will need to treble this investment in healthcare”.
Reportedly, the Finance Minister is poised to raise health spending by 11% to $8.2 Bn which could help in meeting critical health infrastructure gaps. However, it may not still please the Union Health Minister, JP Nadda, who has reportedly demanded a bare minimum health budget of $10 Bn for 2018-19 which translates into a steep 33% increase!
Healthtech startup community is expecting greater health spending on infrastructure facilities, increase the number of healthcare specialists, reduction of GST on drugs, focus on e-pharmacy sector, greater use of medical devices in diagnostic and treatment and a larger space for technology inclusion and innovation. Like agriculture, health sector would also be a beneficiary if the finance minister plans to decide to make a populist budget show.
Real estate sector witnessed many positive developments in the last year through the implementation of Real Estate Development and Regulation (RERA) Act, 2016, Benami Property Act, setting up of Real Estate Investment Trusts (REIT), expediting the listing process and granting infrastructure status to affordable housing.
However, the developers are still biting the dust caused by reforms like GST and demonetisation. Moreover, the launch of REIT is still pending and the industry expects a smooth launch without any tax and regulatory hurdles.
The regulations brought in real estate sector will ensure transparency and also boost the credibility. Market analysts are expecting the reform wave to continue in this year to revive the real estate market.
In the digital landscape, the growth of online real estate portals catering to demands like renting or buying real estate properties have grown large which the market expects will continue to flourish. However, the online property buying and selling are still fragmented in India as there is no benchmark for service offerings which leads to unpleasant experiences for the buyer in search of a genuine property at the right price.
Experts are betting on lower interest rates on home loans, easier clearance of projects, smoother legal compliance, frictionless land acquisition and better credit access. The real estate sector is pinning its hopes on lower tax rates, paced up the listing of REIT and infrastructure status.
The government is also expected to push its ‘Housing for All by 2022’ agenda along with the ‘Smart City Mission’ which in turn is expected to create a lot of fresh possibilities for technology-based real estate startups, especially in the affordable housing sector.
Real estate tech in India is still fragmented at large as every piece of the country’s land is still not addressable online. The transactions are not recorded and recognised online, inviting huge corruption in the sector.
In 2017, as a number of startups such as image-processing deeptech and blockchain-based startups have come forward to address the gap. Under Budget 2018, the government must make some tech-tonic arrangements to encourage these startups.
Indian logistics sector has been consistently on upward trajectory registering a CAGR of 9-10% in the last few years. Government’s infrastructure push to accelerate economic growth and better operational efficiency due to a larger use of digital technology especially by startups have been the two major drivers of growth for logistics sector. Recognising the promising potential of the sector, the government has recently given infrastructure status to it.
Further, the implementation of Goods and Service Tax is also going to have a favourable effect on logistics sector due to the removal of the multiplicity of taxes levied by states and the central government making smoother interstate transportation.
However, at 14% GDP, the logistics sector in India still suffers from one of the highest logistics cost in the world. The sector is expecting from the government to bring down this cost in order to enhance global competitiveness while keeping up the infrastructure push.
Further, in terms of policy, the logistics startups are making a demand for the government to formulate an integrated transportation policy to ensure efficient and smooth transportation of the goods.
Last year, the express startups like Hipship, Delhivery, Blackbuck and Rivigo were some of the direct beneficiaries when the budget provisions allowed the startups to use railways for the end to end solutions. In line with that this year also, logistics startups are expecting market integration while capitalising on techno efficiency offered by such startups and creating direct demand.
The ecommerce industry in India has managed to gain substantial growth rate over the past couple of years due to increase in internet penetration and the convenience provided to the customers along with competitive prices by online retail platforms.
As per a report by statista, the user penetration in ecommerce is expected to reach to about 30% in 2021 from the current 17%. The ecommerce startups welcomed government’s initiatives taken in 2017 budget and steps like reduction o the tax rate by 5% led SMEs to have a turnover of up to $7.83 Mn (INR 50 Cr), lowering the cost of digital transactions, reduction in income tax rate for medium class and proposal of implementation of GST.
Besides the ‘Digital India’ movement of the government, the demonetisation decision and liberalisation of Foreign Direct Investment (FDI) norms in ecommerce has helped the sector in becoming much more organised and in expanding its footprint across the country.
The ecommerce industry including the startups, further expect rationalisation of the tax structure to increase the purchasing power of the general population, continuous liberalisation in FDI, further push to ‘Digital India’ campaign and much more financial incentives for transacting digital from the upcoming Union Budget.
Though the total outlay put forward for the education sector in the Union Budget 2017-18 was $12.5 Bn (INR 79,685.95 Cr), which represented an increase of 9.9% over the previous fiscal, many people are expecting that the finance minister would give priority to the education sector in the budget 2018.
However, the overall allocation to the education sector as the percentage of GDP has been falling under the tenure of the current government. Reportedly, the education spending as a share of GDP has dipped from 0.63% of GDP in 2013-14 to 0.47% in 2017-18.
As reported by IBEF, the education market in India is currently valued at $100 Bn and is expected to nearly double to $180 Bn by 2020. Therefore, the sector represents a huge opportunity for edtech startups.
The total amount of Foreign Direct Investments (FDI) inflow into the education sector in India stood at $1.42 Bn from April 2000 to March 2017, according to a data released by the Department of Industrial Policy and Promotion (DIPP).
According to a May 2017 report by Google and KPMG, online education in India will see 8x growth in the next five years. This will certainly have a significant impact on edtech market that has potential to touch $1.96 Bn by 2021 from the current $247 Mn.
Therefore, there is a need for the government to recognise the potential of the education sector of India and raise its spending for ensuring quality education. EdTech startups expect easier access to credit, funding support from the government under ‘Startup India’, liberal regulatory norms and a greater push to digitalisation drive.
This post presents the larger view of the Indian startup ecosystem’s expectations from the Budget 2018.
Whether these expectations get translated into reality or remain just a matter of speculation, only February 1 would tell but yes, it can certainly be said that from the current juncture, Union Budget 2018 is going to play a critical role in determining the political fortunes of the government, the economic fortunes of the country as well as the scope of growth for the Indian startups.
In the coming parts of the pre-budget series, we will be providing a detailed analysis of expectations from Union Budget 2018 accompanied with commentaries and diverse views of multiple stakeholders including views from the leading startups of India from different sectors. To read more articles on this series click here.