Union Budget 2024-25: What Do Startups Expect From FM Nirmala Sitharaman?

It’s Budget Day today. With finance minister (FM) Nirmala Sitharaman all set to present the Union Budget 2024-25 (FY25) in a few hours, the Indian startup ecosystem is hoping that she will spare some time and the nation’s resources for it.

While the general expectation is that the FM will go for policy continuity under the third term of Prime Minister Narendra Modi, startups are hoping for some sops and tax cuts to give a further boost to the world’s third-largest startup ecosystem.

Ahead of the Union Budget, Inc42 spoke to a wide gamut of entrepreneurs, VCs and other industry stakeholders to understand the hopes and aspirations of the Indian startup ecosystem. 

As usual, solving legacy issues such as simplifying India’s complicated compliance regime and the taxation regime figured heavily in the demands of the startups. 

Entrepreneurs and industry experts want the Budget to overhaul the country’s entire startup taxation regime and address “demons” such as angel and corporate tax, Section 68 of the Income Tax Act, and ESOP and Redomicile taxation regimes.

They also want tax credits and incentives for research and development (R&D) and facilitating the redomiciling of startups to India by minimising tax liabilities to foster a more vibrant entrepreneurial ecosystem in the country. Additionally, they want a more strategic blueprint to support the growth of startups in India in the long run. 

Streamlining India’s tax maze can have a far-reaching impact on the Indian startup ecosystem in terms of funding and help the country attract more foreign direct investment (FDI). 

Turning Around India’s FDI Fortunes

Many of the founders Inc42 spoke to expressed optimism that the Budget will see the FM announce measures to spur foreign direct investment (FDI) into the country. 

The industry stakeholders want a reduction in corporate tax rates, in line with global standards, to make India an attractive destination for foreign investors, at least in the sunrise sectors. 

While emerging areas such as climate tech and green energy might see tax rebates, experts want a clarity on their implementation. 

“If tax incentives in climate tech necessitate fresh investments, this could make large-scale investments in conglomerates attractive, but it won’t exactly be a boon for MSMEs or startups. We’ll have to wait and see how the government looks to enable smaller businesses in this space as the focus is always on large-scale energy production,” said an economist with Kotak Mahindra Bank. 

Meanwhile, the climate tech industry wants reduced customs duties on imports of solar energy industry, expansion of green and climate finance through registered entities, and revision of GST on renewable energy production and sources to woo international investors to India. 

On top of that, industry stakeholders believe that tax exemptions or reductions for strategic relocations, especially for startups in priority sectors, can be a massive boost for FDI. 

Bigger Focus On Spurring Consumer Spending

While the upcoming Budget, as per media reports, may rejig the personal tax regime, Indian startups opine that boosting consumer spending will require more long-term measures rather than just tax cuts. 

Founders believe that higher capital allocation for areas such as manufacturing and infrastructure development can propel consumer spending indirectly. They also want the government to spend more to improve last-mile connectivity in the logistics sector to improve order fulfilment and reduce cost of doing business for brands in the long run. 

These savings can be passed on to consumers eventually, an industry stakeholder told Inc42. Many also believe that these accrued savings can enable B2C startups to spend more in rural areas, particularly in infrastructure, manufacturing and agriculture, which can fuel job creation and revitalise the economy outside the large cities and metros.

Industry experts also want the government to build a unified logistics platform to bring all stakeholders on a single platform and simplify regulatory frameworks to offer further impetus to the logistics sector. Additionally, strong push for EVs may pave the way for transition towards green logistics and help consumer internet firms trim last-mile delivery costs. 

The Deeptech Focus

Moving on, manufacturing is widely expected to emerge as another key focus area in the Budget. Previously, the Centre has not shied away from offering sops to push India towards a product-led deeptech economy, with production-linked incentives (PLIs) being the bedrock of this push. However, industry stakeholders want much more. 

Deeptech startup Ethereal Machines’ cofounder and CEO Kaushik Mudda wants PLI schemes to be expanded across the value chain so that incentives are not limited to the top few beneficiaries in the end-product manufacturing.

The manufacturing industry also wants tax incentives like tax holidays, accelerated depreciation rates, credits for expenses, and reduction in GST for private sector electronics R&D investments. 

Additionally, electric vehicle (EV) players want GST rates on batteries to be reduced to 5% from 18% and reduction in customs duty for cells and other key components 

Another facet of deeptech is AI, which has rapidly gained prominence globally in the past two years. However, infrastructure remains the most challenging hurdle for the AI industry in India. It is this bottleneck for which the industry stakeholders are seeking a resolution in the Budget. 

AI startup founders want the Budget to subsidise upfront costs (GPUs and other resources) associated with training and fine-tuning machine learning models for the first three years. They want the finance ministry to waive or reduce import duties on GPUs and related hardware to help foster a thriving indigenous AI ecosystem.

The AI startups also want to engage with the government at a bigger level, and increase collaboration with government agencies, including increasing the number of AI-focussed incubators and crafting policies that advance startups beyond initial phases.

The ecosystem also wants the Budget to offer tax benefits for early stage AI startups and formulate clear and consistent AI regulations that foster R&D without stifling innovation.

While it remains to be seen how many demands the FM can accommodate as she tries to balance the country’s growth and fiscal consolidation, the Indian startups will be waiting with bated breath as Sitharaman takes the stage to deliver her Budget speech later today.