Currently, foreign investors pay 10% tax on LTCG in unlisted companies, while domestic players pay 20%
Out of the combined AUM of insurance companies and pension funds worth INR 85 lakh Cr, not even a single rupee is being invested in Indian startups and AIFs: Pai
The government needs to reduce the taxes on EV parts to make the vehicles affordable
Stating that the Union finance ministry has been insensitive towards the startup space, Mohandas Pai, cofounder and partner, Aarin Capital and former CFO of Infosys has called for a greater need to address the challenges of Indian startups and their founders in the Union Budget 2023.
The industry leader has specifically highlighted changes to ESOP tax policies, LTCG taxation, and startup funding initiatives. Further, sharing his expectations, Pai said that the government should focus on creating more jobs in North India, giving tax relief to the middle class, retaining the remaining HNIs, and completing the infra and social welfare projects.
Edited excerpts…
Inc42: What are some of the key changes the Indian startup ecosystem is looking forward to in this year’s Budget?
Mohandas Pai: Some of the key changes that are imperative for the Indian startup ecosystem are related to ESOP tax policies, LTCG taxation, and the availability of funds.
Tax ESOP At The Point of Sale And Not At the Point of Exercise: We have seen that many people in companies that went public recently had ESOPs at high prices and were forced to pay tax. ESOP taxation should be at the point of sale for unlisted companies. This is because, for unlisted companies, there is no market. If you do it at the point of the exercise, when they go public, they could lose a lot of money if the market falls.
Parity On Long-Term Capital Gains Tax: The listed and unlisted companies should fall under the same long-term capital gains tax (LTCG) regime. Further, foreign investors and Indian investors should be taxed equally. Currently, foreign investors pay 10% on LTCG in unlisted companies, while domestic players have to pay 20%. How will more Indian capital come into startups if we are forced to pay more tax compared to our foreign counterparts?
Indian Insurance Companies Need To Actively Invest In Startups: A report published by you (Inc42) states that while we received $136 Bn worth of startup investment between 2014 and 2020, Chinese and US startups received $832 Bn and $2.3 Tn, respectively.
How can we compete with such bigger countries if we don’t get capital? LIC and other insurance companies have an AUM of INR 60 lakh crores, and pension funds have an AUM of INR 25 lakh crores. Out of the total INR 85 lakh Cr, how much is being invested in Indian startups and Alternative Investment Funds (AIFs)? It’s zero.
So, I think it’s important to increase the flow of investment. The government is likely to cut its fiscal deficit from 6.4% in FY23 to 5.9% in FY24 to demonstrate that they’re not going to borrow too much money as the economy is under stress. We, therefore, need more private capital for private investment.
Another challenge is that the finance ministry has been very insensitive towards the startup space. There is a greater need to understand the challenges of Indian startups and their founders.
Inc42: The Indian government had earlier launched Startup Seed Fund as well as Fund of Funds for Startups. However, the implementation of these has been slower than expected. What more should be done to ensure adequate investment flow under FFS and SSF.
Mohandas Pai: The entire balance amount of INR 10,000 Cr under the FFS should be given to Small Industries Development Bank of India (SIDBI). Since the government moves slowly and investment is held up, it should have let the money remain in the bank for some time until the entire fund was disbursed.
Inc42: Is there a need to tweak the funding ratio being extended under FFS and AIFs?
Mohandas Pai: No. I think the existing ratio is fine. This is because the FFS should act as a catalyst. It cannot be the main source of funds to promote new fund managers. If you can’t raise the balance amount, you should not be a fund manager.
Inc42: Many of the fintech companies have been asking to reconsider the zero MDR policy for UPI and RuPay transactions. Should the Union Budget 2023 address this?
Mohandas Pai: The government is giving a subsidy of around INR 2,500 Cr. They must continue the subsidy for the next year. The scheme should be continued for another one or two years. We must make sure that small payments are popularised, which is happening in a big way. We are 50% there. After two years, the government can plan to implement MDR on transactions above INR 10,000.
Inc42: If we look at sector-wise requirements, such as EV, what should the Union Budget focus on?
Mohandas Pai: The government promotes EV under the PLI scheme to allow manufacturers to create jobs. The government must reduce the taxes on EV parts to make the vehicles affordable.
The FAME scheme is stuck in a controversy; however, you cannot penalise everybody because of a few. As far as edtech is concerned, leave it alone.
Inc42: India’s M&A process needs to be eased out. What more should be done in this regard?
Mohandas Pai: India’s M&A issues are different, as they are related to accounting. The NCLT process is too long. If you go for a merger or for an acquisition, it takes 18-20 months. This is a long process and must be cut down. Else, it will become very painful to do business in India. The NCLT was enabled to make things faster. Instead, it has become slower. The judges are not being appointed. In the CCI, the members are still not appointed. Due to the government’s inability to manage properly, everything is stuck. What would people do?
Inc42: Section 80IAC has not been beneficial as advertised. So far, only 993 startups are eligible for tax benefits under Section 80IAC. What can be done in this area?
Mohandas Pai: Section 80IAC is a boogeyman. It should be abolished. Nobody wants those tax benefits because startups are not going to emerge profitable anytime soon.
Inc42: On a broader note, what, as per you, will be the key focus area of the Union Budget 2023?
Mohandas Pai: For the last nine years, adequate funding for all the social sector programmes has been made. The biggest achievement of Prime Minister Modi has been that he has worked hard to remove the deprivation from Indians. He is trying to make sure that every Indian has a house, water supply, electricity, a toilet in the house, some food on the table, medical insurance, a gas connection, a mobile connection, education for the children, and a bank account, among others. To me, PM Narendra Modi has been the best Prime Minister India has ever seen. I am making this remark because of what he has done for the people of this country. No prime minister has been able to accomplish so much in just a span of nine years. And the data is very clear.
The focus of this Union Budget 2023 will be to complete these projects. It will require a large amount of money, and I expect him to do that before the general elections.
Further, I expect the government to put more money into infrastructure. There are a number of road, port, railway, and metro projects, which are under work in progress. All of them need to be completed. Some of these projects are: the Delhi-Bombay expressway, Bathinda-Bombay expressway, Bangalore-Chennai expressway, and the Ganga expressway, among others.
Further, the government needs to focus on jobs. I would like the government to have a special employment scheme, particularly for tier 2, tier 3, tier 4 towns and cities of the country. We need to focus on creating employment and jobs in extremely poor districts.
If we look at the EPFO data, 11 to 12 Lakh new people join the EPF every month. Of this number, 4.5-5 lakhs people are below the age of 25. A glaring problem is that jobs are being created in the southern part of India when the population in North India is growing faster. We need to focus more on North India.
Next on the cards should be to give income tax relief to middle-class families. The middle class has been paying very high taxes.
Tax rates, surcharges and inflation have gone up. So, I expect the government to rejig the tax slab. Taxpayers above 55 years of age should get some tax benefits.
I expect to have a new tax regime under which people earning up to INR 5 lakh are not taxed; people earning above INR 5 lakh and up to INR 10 lakh are taxed at 10%; above INR 10 lakh and up to INR 15 lakh at 20%; and people earning more than INR 15 lakh are taxed at 30% with a 12% surcharge.
Further, the 28% surcharge for the top of the slabs should be reduced because today more than 40,000 high-net-worth individuals (HNIs) have left the country. We don’t want the remaining HNI crowd to relocate because of high taxes.
The next thing on the cards should be to make sure all the AatmaNirbhar and defence projects are adequately funded.
