Over the past few years, the Union Budget for India has become something of a naming and rechristening ceremony. At the Interim Budget in February 2019, the interim Finance Minister Piyush Goyal changed the name of DIPP (Department for Internal policy and promotion) to DPIIT ( Department for Promotion of Industry and Internal Trade) and last week the current FM Nirmala Sitharaman broke from tradition with the Indian bahi-khata (ledger).
Going back to previous budgets, we can see the tautological NITI (National Institution For Transforming India) Aayog where Aayog (commission) is excess to requirements, considering the prefix. In the latest Union Budget speech, Sitharaman spoke about the government’s vision for the Indian economy and the work done in this regard, which ironically cannot be incorporated into a ledger (or bahi-khata), but is indeed the Budget.
Despite these idiosyncrasies, on July 5, 2019, when Sitharaman brought the briefcase-less budget to the Parliament, there were huge expectations from the startup community.
The expectations only exceeded after President Ram Nath Kovind had stated in the Joint Session of the Parliament in June this year, “Today, India has joined the league of countries with the most number of startups in the world. To improve the startup ecosystem, the government is simplifying the rules. This campaign will be further expedited. Our goal is to establish 50K startups in the country by 2024.”
Besides expecting faster funds disbursal from the INR 10K Cr Fund of Funds for Startups, the startups were expecting the new Modi government to take initiatives towards its much-hyped Vision 2024 initiative, as reiterated in the ruling party’s manifesto.
However, despite the word ‘startup’ mentioned in the Union Budget speech 18 times, not a single major step was taken towards bringing Startup Vision 2024 to life. Commenting on the Budget, angel investor Mohandas Pai told Inc42, “There are more misses than hits. The marginal tinkering on taxes will not move the needle.”
Pai had a good reason for this to say and the startups Inc42 interacted with before the budget, had already prepared a list of demands and expectations which can be seen here:
- Union Budget 2019 Survey: Startups Demand An Innovation Fund For Each Sector
- Union Budget 2019: Tech Startups Look For Action On Digital India Front With New Budget
- Union Budget 2019: What Women Leaders From The Indian Startup Ecosystem Expect From This Historic Budget
- Union Budget 2019: Blockchain Startups Call For Greater Access To Funding, Talent
- Union Budget 2019: What Do Fintech Startups Want From The Upcoming Budget
- Union Budget 2019: To Ban Or Not To Ban Cryptocurrency, That’s The Question!
- Union Budget 2019: Agritech Startups Call On Govt To Address Structural Issues In Ecosystem
Tax Reforms: Announcing The Announced
My tax proposals will aim to stimulate growth, incentivise affordable housing, and encourage startups by releasing entrepreneurial spirits. It will also be geared towards promoting digital economy. I aim to simplify tax administration and bring greater transparency. – Sitharaman
Like in the case of ‘Study In India’ programme which was approved in March, 2018, by the HRD Ministry and was launched on April 18 last year, the angel tax exemption route was devised by former commerce minister Suresh Prabhu through a notification issued in February this year. While 702 startups have already been exempted from angel tax under the route, Sitharaman announced it as if this step is being taken as part of the 2019 Budget.
She added, “To resolve the so-called ‘angel tax’ issue, startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums.”
According to the February 2019 notification, “All startups are liable to receive angel tax exemption regardless of their share premium values given that the aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of shares, if any, does not exceed, INR 25 Cr.”
Further, Sitharaman did not provide any clarity over the issue of startups that had already received assessment orders and such startups will still have to fight the long battle against the IT department. She added that “Special administrative arrangements shall be made by the Central Board of Direct Taxes (CBDT) for pending assessments of startups and redressal of their grievances.” The government will also ensure that no inquiry or verification in such cases can be carried out directly by the Assessing Officer without obtaining approval of a supervisory officer.
Commenting on this, “special arrangement” Sreejith Moolayil, cofounder of True Elements told Inc42 that the budget has brought back more powers to bureaucrats. “No structural change, no mention on retrospective effect. The status quo continues,” Moolayil said.
Sitharaman did announce some new initiatives. At present, startups are not required to justify fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF). She said, “I propose to extend this benefit to Category-II Alternative Investment Funds also. Therefore, the valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny. I also propose to relax some of the conditions for carry forward and set off of losses in the case of startups.”
The issue of establishing identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by startups will not require any kind of scrutiny from the Income Tax Department.
This move has been lauded by startups and investors. Raman Roy, founder, Quatrro and cofounder, Indian Angel Network said e-verification mechanism is an enabling one for both startups and angel investors. “This, coupled with the exclusion of startups and investors who file requisite declarations from tax scrutiny, is an uplifting step taken by the Government. The ‘requisite declaration’ clause, though, requires a closer inspection. In any case, the overall development looks extremely optimistic for the Indian startup ecosystem.”
Avnish Sabharwal, MD, Accenture Ventures & Open Innovation, India and Middle East added that this simplifies all the angel taxation confusion. “The proposed angel taxation simplification is an encouraging move for the Indian startups. We believe Indian startups will be able to raise a higher amount of risk capital from investors and e-verification will lead to higher number of angel investors funding in Indian startups.
According to the Union Budget 2019, the startups can now carry forward their losses on the satisfaction of any one of the two conditions: continuity of 51% shareholding/voting power or continuity of 100% of original shareholders. The provision which allows exemption of capital gains from the sale of residential property on investment of net consideration in equity shares of eligible startup shall be extended by 2 years.
Further, the condition of minimum holding of 50% of the share capital or voting rights in the startup has been relaxed to 25%. The condition restricting transfer of new asset being computer or computer software is also proposed to be relaxed from the current 5 years to 3 years.
Budget Won’t Stop Startups Shifting Their Base Out Of India
The finance minister has tweaked the corporate tax slab. Earlier, for companies of turnover upto INR 250 Cr had to pay 25% corporate tax while companies above it had to pay 30%. Revising the slab, Sitharaman said all companies having annual turnover up to INR 400 crore will now have to pay 25%. This covers 99.3% of the companies.
However, the market may not see this as an added advantage. As, on the other end, the finance minister also proposed to enhance surcharge on individuals having taxable income from INR 2 Cr to INR 5 Cr and INR 5 Cr and above; the effective tax rates for these two categories will increase by around 3% and 7% respectively.
It’s worth noting that other Asian countries or regions such as Singapore and Hong Kong offer 17% and 15-16.5% corporate tax respectively. Such a combination of taxes proposed by the finance minister will only encourage startup founders to shift their base to such countries.
Terming these steps as ineffective and incompetent, Columnist Swaminathan Ankleshwar Aiyar in his ET column said, “The increase in income tax rates you say you want more and more surcharges the troublesome thing is you are becoming uncompetitive compared with your neighbours and this is what you have to look out for more on corporate tax and income tax. You do not want a situation where more and more Indians disappear to Dubai or Singapore!”
The fact of the matter is most of the crypto startups have already either moved abroad or shut down their companies owing to adverse and vague regulatory policies.
However, responding to these complaints, Sitharaman said in an interview with Aiyer that the Budget must be looked into context.
“One classic example is GST which I have also quoted. The rate reduction in GST for Manufacturing and Services, a benefit of around 90K-94K Cr has been given back to the market. Isn’t that making them more competitive. There are several factors, which I concede must be looked into; however, if there is some change done regarding one factor, I don’t that alone will affect the competitiveness.
No Relief For Middle Class
Right before the General Elections, the interim finance minister Piyush Goyal was lauded for the tax waiver to the salaried class with income up to INR 5 Lakh. Those having an annual income up to 5 lakh would not be required to pay any income tax, the government had said.
However, post-election, Sitharaman announced plans to increase Special Additional Excise duty and Road and Infrastructure Cess each by one rupee a litre on petrol and diesel. The government also proposed to increase customs duty on gold and other precious metals from 10% to 12.5%.
This will, directly and indirectly, hit the middle class. While many of the states including Madhya Pradesh have already increased fuel prices by INR 2-INR 3 per litre, this will also negatively impact the cost of FMCG products, agricultural produce and food.
In FY 2019 alone, the centre had collected INR 2.579 Lakh Cr by levying taxes on petroleum products. Further, there is an argument that crude oil is expected to go cheaper, so there’s obviously a lot of ire around the government’s decision to increase the price after crude oil price hike, but not lowering the price when crude oil gets cheaper.
The middle class has been the backbone of Indian economy. With a sum-total zero relief to the middle class, the budget will definitely not boost the buy-sale curve of ecommerce, epharma, healthtech, edtech and many other startup sectors.
In the larger context, where the government intends to promote electric mobility by increasing taxes for fossil fuels, the argument holds ground. As done previously, the government, however, must disclose the utilisation of surplus taxes.
Easing Out FDI Norms
Claiming that amid global FDI slowdown by 13% last year, India’s FDI inflows in 2018-19 remained strong at US$ 64.375 billion marking a 6% growth over the previous year, the FM made three proposals on FDI:
- The government will examine suggestions of further opening up of FDI in aviation, media (animation, visual effects, gaming and comics) and insurance sectors in consultation with all stakeholders
- 100% foreign direct investment (FDI) will be permitted for insurance intermediaries
- Local sourcing norms will be eased for FDI in single brand retail sector
This is definitely a good news for the AVGC, insurance and single brand retail sectors. Sudish Sharma, Executive Partner, Laxmikumaran & Sridharan Attorneys said that the relaxation in local sourcing norms requirement for SBRT (single brand retail trading) is a move to benefit foreign investors (especially those dealing in technology advanced products) to invest in India.
He added, “The proposed liberalisation will provide a much-needed boost to the aviation sector. The proposed amendment seeks to further liberalise the aviation sector including with respect to leasing of aircraft and aircraft-related products. Currently, the government allows 26% FDI in print media through the approval route, while in the aviation sector, foreign airline companies are allowed to own 49% stake in Indian aviation companies.”
On the liquidity crunch, several initiatives and announcements have been made in this regard. In 2018, the then finance minister Arun Jaitley had announced bank recapitalisation worth INR 80K Cr, while Sitharaman has made an announcement of INR 70K Cr bank recapitalisation programme, the biggest announcement from the budget.
This should be seen in sync with the previous initiatives. For instance, for the third time the RBI has cut the repo rate in continuation by 25 basis points, and post the announcement, the current repo rate stands at 5.75%, down from 6.00%.
The finance minister has also announced a partial loan guarantee on 10% of losses up to INR 1 Lakh Cr on high-rated pooled assets. “This guarantee will provide banks with the required safety net to infuse liquidity into the NBFC sector,” said Sameer Aggarwal, founder & CEO, RevFin.
Sitharaman also said that the government is sincerely looking into the regulatory issues pertaining to NBFCs. However, despite several initiatives and recommendations made by various committees, the issues remain.
It’s true that the implementation of most of the flagship programmes are not in sync with their corresponding targets. However, if compared with the Congress-led governments, the rate of implementation and the impact on the ground level has been far better for the cleaning and hygiene drive, manufacturing, digitisation or other initiatives.
The electric mobility sector is no different. Despite the flip-flopping on FAME incentive schemes, and transitioning to electric vehicles by 2030, the EV sector has seen a huge spike in terms of awareness, adoption and infrastructure development.
The government has kicked off the FAME Scheme Phase II worth INR 10K Cr for the next three years. Sitharaman, however, clarified, “Only advanced battery and registered e-vehicles will be incentivised under the scheme with greater emphasis on providing affordable and environment friendly public transportation options for the common man.”
Government has already moved the GST Council to lower the GST rate on electric vehicles from 12% to 5%. Also to make electric vehicles affordable to consumers, the government will provide additional income tax deduction of INR 1.5 Lakh on the interest paid on loans taken to purchase EVs. This amounts to a benefit of around INR 2.5 Lakh over the loan period to the taxpayers who take loans to purchase electric vehicles.
Union Budget 2019: If Startup India Was The Key Focus, Where Is The Fund?
Budget Session or not, many of these announcements are just minor tweaks in terms of policy and tax reforms, which could have been initiated even outside the budget. Since the Interim budget and BJP’s manifesto, there were huge expectations among the startup community and there’s a feeling that the key demands were completely neglected.
Based on Inc42’s Survey, and interactions with startups before and after the budget, here’s what was lacking in terms of clear plans of action:
- Innovation Fund and Innovation Zone for each sector and City
- Creation of INR 20K Cr Seed Fund
- Fast disbursal of Fund of Funds for Startups
- Tax reforms, which the Union Budget 2019 addressed to an extent
- Regulations pertaining to cryptocurrency in India
- Recapitalisation of banks
- Roadmap for creating 1 Lakh Digital Villages, as announced in Feb
As mentioned, while the Union Budget 2019 did address some of these, many of the demands were left unheard. While the RBI earlier on July 1 waived off fee on NEFT/RTGS transactions to boost digital transaction, the FM in the Budget announced the interchangeability feature of PAN and Aadhaar.
Further, the government’s SFURTI plan envisions setting up 100 new agro-based clusters in 2019-20, and its ASPIRE scheme will see rural incubators established by 2020 to develop 75K skilled entrepreneurs in agro-rural industry sectors. However, the INR 50K Cr question is will these initiatives be enough to bring to reality the government’s dream of creating 50K new startups by 2024?