More Capital, Less Tax Hurdles: A Startup Friendly Budget

More Capital, Less Tax Hurdles: A Startup Friendly Budget

SUMMARY

The renewal of this FoF by an additional INR 10,000 Cr will see an increased focus on women entrepreneurs

Electronics manufacturing will see a boost through policy interventions

Budget 2025 also removed the TCS provision which could have been applied to the sale of securities

The Startup India Fund of Funds (FoF) must be commended on galvanizing 9 times its initial corpus as capital available for investments in Indian startups. The FoF acted as a nucleus around which rupee capital poured into startups and helped reduce the Indian startup ecosystem’s dependency on foreign capital. The boldness of the decision in 2016 for such a model has helped seed many of today’s unicorns and startups looking to IPO.

The renewal of this FoF by an additional INR 10,000 Cr will see an increased focus on women entrepreneurs. This shows the government’s commitment to increasing women participation in the economy. The Economic Survey noted that close to half of all DPIIT registered startups have at least one woman director and such measures will boost itself.

Startups also saw the window for their tax holiday expand to all startups incorporated until March 31, 2030. In order for startups to get any of the tax benefits mentioned in the Income Tax Act, 1961, they need to be:

  • DPIIT registered startups
  • Incorporated after April 1, 2016 & before March 31, 2030
  • Be granted a certificate by the Inter Ministerial Board (IMB)

The IMB has been a dismal failure of an initiative, having deprived numerous startups of tax benefits through an opaque process. The tax holiday can be done away with, but the other benefits around deferred ESOP taxation, carry forward of losses are important to early-stage startups. 

Reforming this IMB certification to make it more objective and driven by market participants will be crucial for the Indian startup ecosystem as countries in the Middle East look to attract Indian startups through tax breaks.

Indian startups will also benefit from the strategic use of India Post as a force multiplier for the rural economy. India Post will now provide services such as:

  • rural community hub colocation; 
  • institutional account services; 
  • DBT, cash out and EMI pick-up; 
  • credit services to micro-enterprises; 
  • insurance; and 
  • assisted digital services. 

Which will allow D2C brands to reach all the pincodes of India. Even Amazon uses the USPS for its last-mile delivery. Allowing startups to do so will democratise access to their products. This, along with the tax changes, which render income up to INR 12.75 Lakh as tax-free, will help boost domestic consumption.

Electronics manufacturing will see a boost through policy interventions. The decrease in inputs for domestic manufacturing shows how the government wants to boost this industry.

Measures For AIFs

Classifying securities held by an Indian AIF as a “Capital Asset” under Section 2(14) will ensure that all gains from their sale will be taxed as capital gains, not as “Business Income”. This was offered to FPIs in 2014 to reduce litigation. Indian AIFs now have the same clarity. Capital formation through AIFs should increase.

Budget 2025 also removed the TCS provision which could have been applied to the sale of securities. This provision was ambiguously worded to bring AIFs under its ambit and led to friction and uncertainty around exits. Its removal will increase the pace of exits and give tax clarity.

The government’s moves to reduce tax litigation and provide tax certainty may not be as glamorous as big bang allocations; but the ease of doing business is a fundamental driver for capital formation and economic growth. Budget 2025 has provided this.

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