The Union Budget 2017 is expected to be unprecedented in history in many ways. For starters, it will be presented at a much earlier date i.e. on 1 February 2017 as opposed to the customary date 28 February 2017. The Budget 2017 promises to be of great interest to the startup ecosystem in India, especially the fintech and e-commerce sectors. Incentivising and giving wider tax breaks to early stage startups will pave the way for a new breed of entrepreneurs. The budget will be special because it follows the historic move of demonetisation, which was welcomed but largely criticised for its manner of execution. It will also be the budget that will determine the success of the 'Startup India' initiative that was unveiled on 16 January 2016. Though 2016 was a tough year for startups due to a slump in investments as compared to 2015, the budget may bring good news for emerging companies.
With the proliferation of digital wallets, payment firms are having a major impact on financial inclusion in India. Hence, fintech startups have high expectations from Budget 2017 for improved digital payments at the grassroots level in India. The Department of Industrial Policy and Promotion (DIPP), the primary department on startup policy, is also in discussions with the Finance Ministry to exempt startups from service tax, besides providing them relief on income tax-related issues. Below are some beneficial implications the upcoming budget may have for startups:
â€¢ Taxation of ESOPs during sale
The DIPP has proposed that the employee stock option plans (ESOPs) for startups should be taxed at the time of sale of these stocks. Larger startups can now rejoice since this would provide them with transparency from a valuation perspective as well as further boost their liquidity from a tax outflow perspective.
â€¢ Lower holding period for long-term capital gains
The primary matter of concern for startups in India has been taxation. The DIPP has proposed that the period for long-term capital gains for unlisted securities should be reduced from the current limit of 24 months. This suggestion, if incorporated in the budget, would lead to increased investments in startups.
â€¢ Credit guarantee mechanism
The government seems to be quite spirited in allocating funds for startups. The credit guarantee mechanism through the National Credit Guarantee Trust Company or the Small Industries Development Bank of India (SIDBI) had been made compulsory last year in the startup plan by Prime Minister Narendra Modi. The plan also proposed allocating Rs 500 crore as funds for the next four years to all new businesses under the programme. The finalised guidelines for the credit guarantee fund scheme to increase the availability of funds and the allocation modalities are estimated.
â€¢ Tax holiday period
The tax concession period currently spans three years and there is a demand to increase this to between five and seven. We estimate this demand to be factored in the budget. In the event this suggestion is included in the budget, we could see a rise in the number of startups.
â€¢ Effect of demonetisation
Taking into account the government's demonetisation move and its success in curbing black money, Budget 2017 is also expected to promote cashless transactions. It may also make provisions for payment bank services targeted mainly at the unbanked and under-banked sections of society. Promoting cashless transactions will further prevent black money from being generated.
Startups need tangible support from the government and look to Budget 2017 with optimism and hope. At a time when emerging companies in India are burgeoning, the budget should aggressively focus on innovation-led businesses and some encouraging fiscal policies. We propose and hope to see the budget make provisions to promote foreign investments and flexibility in various sectors. The budget should also make provisions to enable India to improve its Ease of Doing Business ranking by encouraging investments in startups.
Archana Khosla is founder partner at Vertices Partners, a Mumbai-based law firm. Her expertise lies in private equity, venture capital, public private partnerships and many other areas.
Vishal Mehta, associate manager and Hamraj Singh, associate at Vertices Partners also contributed to this article.