Honourable PM Narendra Modi-led government has launched several important initiatives such as Startup India, Make In India and Digital India over the last few years to boost the growth of the Indian startup ecosystem. More than 20 states have implemented policies and schemes under Startup India that have accelerated the growth of the local startup ecosystem in their respective states.
As a result, today India has 7200 tech startups, 210 incubators and accelerators, 13 Atal Incubation Centres, 19 Technology Business Incubators, 374 Atal Tinkering Labs and 350+ co-working space operators. Even with 40,000 startups and an impressive YOY growth rate, India has a long way to go before it can catch up with the US and China.
Ahead of the upcoming general elections as the Honorable Finance Minister Arun Jaitley presents the interim budget on February 1, here are some of my observations as expectations.
In line with the constitutional convention, I do not expect a new policy framework to come into effect post the interim budget. Nonetheless, I wish the Minister announces supportive policies that remove angel tax, streamline decision-making process for faster execution of existing schemes, increase the revenue bracket for startup tax holiday and bring taxation on VC investments at par with listed equities.
Remove Angel Tax
US data shows about $25 Bn invested by 300,000 angel investors in 70,000 companies and about $85 Bn invested by VCs in 7,000 companies. India, on the other hand, saw $13.7 Bn being invested across 820 companies in 2017.
The Government needs to formulate policies that help startups with easy access to growth capital and combine them with compliance processes that are hassle-free, transparent and seamless. Recent developments in ‘Angel Tax’ have left the Indian startup ecosystem in a delicate situation that threatens the survival of many early-stage startups while pushing away angel investors. What we need is an effective and integrated policy-making and implementation with different policy-enforcement entities aligned together viz Central and State governments, the Income Tax department, among others.
To promote the Indian startup ecosystem, the government needs to remove ‘Angel Tax’ and keep regulatory requirements to a minimum so that the startups can focus on building globally competitive businesses and angel investors can focus on finding the right startups to back.
Startup Tax Holiday
Increase revenue bracket for the tax holiday
The early years of a startup do not generate significant profit thus making the ‘Tax Holiday’ redundant. The government should change the current revenue bracket from INR 25 crore to INR 100 crore allowing startups to take a tax break for any 5 years within the first 10 years of existence.
Remove Taxation on ESOPs
The government should provide tax benefits to employees who take the risk of joining a startup in the early stages by leaving a comfortable and secure job at a large company. As startup exits are difficult, we need to do away with taxation on ESOPs to promote talented individuals to take the risk of joining a startup and reward them accordingly.
Bring Taxation on VC Funds at par with Listed Equities
Investments in listed equities are taxed at 10% – 15% while investments by venture capital and private equity funds are taxed at 20% if held for more than two years. We need to bring taxation on investments from VC funds at par with equities to trigger the growth pace of the Indian startup ecosystem. By doing so, we can give a push to family offices and local investors in addition to attracting an inflow of foreign funds.
Allocate Funds for Startup Skill Development Programs
Over 3 lakh new jobs are expected to be created by startups by 2020. Once the startup is able to survive the initial couple of years and sustain itself, the next stage of growth requires the hiring of talented people. While Bengaluru and couple of other cities have shown that they have the ability to attract such talent for startups to grow, the government needs to enable talent development programs that will allow startups from Tier 2 / Tier 3 cities and beyond to hire talent with the expertise to take local startups to the next stage of growth.Tell Us Your Expectation From The Upcoming Budget
Identifying key focus areas and allocating significant funds/grants through the National Skill Development Corporation for specific technical and vocational programs such as AI, ML, big data, genome technology, blockchain, among others, will positively impact the next wave of technology startups. Moreover, the labor laws need to be reformed to help startups who increase their scale of operations and ramp up hiring from a few employees to a few hundred employees in a short period of time.
Create more Awareness of Intellectual Property
1.4 Mn patents were granted in 2017 globally. The patents granted by India touched 12,387 in comparison to China’s 420,144 and 318,829 by the United States. While India continues to move up the Global Innovation Index, the government needs to give a bigger push to promote innovation programs and streamline processes.
The Startup India scheme has enabled patent filing through fast track examinations, 80% rebate in fees and on-boarding facilitators to help startups. However, creating more awareness initiatives about the benefits of intellectual property with a focus on quality rather than quantity is the need of the hour.
Execution of Existing Schemes
Appoint VCs to manage FFS
The Central Government launched INR 10,000 Cr Fund of Funds for Startups (FFS) in 2016. About INR 1611 crore has been committed to 32 AIFs and 170 startups have been funded so far. The government should appoint professional investors who have strong experience in managing venture capital funds to manage FFS with relevant checks and balances in place.
Governing bodies for faster decision making
Total of 15417 startups have been recognized under the Startup India scheme and disbursements of allotted funds has picked up the pace in 2018. Successful execution of Ayushman Bharat-National Health Protection Scheme, smart cities, GST, digitalization and skill development initiatives will positively impact the productivity.
However, more needs to be done to execute existing schemes at a much faster rate by reducing processing time and creating governing bodies for faster decision making.
For example, as an advisor to Wadhwani Foundation, I had the opportunity to work with SMEs in the automotive and manufacturing sectors and MSME scheme execution issues persist. Under the ‘Rs 1 crore loan in 59 minutes’ MSME scheme by the government, 1.12 lakh MSMEs have received approvals but the paperwork following the approval is a long and tiring process resulting in just over 40,000 sanctions. Again, execution is important and disbursement of loans must take place within seven days as promised.
In conclusion, economic growth and job creation for India will come from innovations driven by startups in the next decade. India has jumped from the 100th place to 77th on the ease of doing business and moved up to 57th rank on Global Innovation Index.
By implementing some of the changes suggested above and related, the government will be successful in bringing about progressive growth, stability and maturity in the Indian startup ecosystem that it really deserves. I hope and expect the FM will announce measures that will put the Indian startup ecosystem on an upward curve.Tell Us Your Expectation From The Upcoming Budget