This year’s Union Budget is a test by fire for the Indian Finance Minister Nirmala Sitharaman. The previous year was an economic disaster induced by the Covid-19 crisis. The second quarter of 2020 marked an unprecedented pause in economic activity, resulting in GDP contraction by more than 23%.
Despite providing economic stimulus through the Covid-19 relief package worth Rs. 20 lakh crores, declared in May 2020, the country’s GDP is projected to contract by 7.7% during the fiscal year 2020-21, states the National Statistical Office (NSO).
Despite collecting lower taxes in 2020, the expectations are high from this historical budget, which will be the first paperless, digital Budget of India. Being home to world’s third largest startup ecosystem, India’s economic growth is dependent on the startups to a large extent. With the government’s focus on “Atmanirbhar Bharat”, Indian startups too have high hopes from Budget 2021. Here are a few key areas that this historical budget can address to boost the startup ecosystem.
Easing compliance requirements and enhancing ease-of-doing-business
India is a large country with outdated and overtly complex processes and systems involving a lot of paperwork. Fulfilling regulatory and compliance related requirements are a time-consuming hurdle for the startups. Indian government has admitted the need of increasing ease-of-doing-business through simplified process formulation. The government has also recognized the need to reduce burdens for startups and enhancing the time for tax compliance. Startups hope these acknowledgements are reflected in Budget 2021 announcements.
Relaxing withholding taxes to boost liquidity
Several companies in the startup ecosystem are loss-making or high cash-burn ventures with minimal tax liabilities. Withholding taxes on payouts made to such young startups increase their hardships. Easing of these withholding tax obligations will bring great relief to the companies and solve their cash-crunch problems.
Many Indian startups are flourishing well, and many leaders are ready to hit the public markets. While the Indian government indicated that direct overseas listing might be permitted, nothing concrete has materialized yet. If this budget brings investor-friendly and liberal guidelines, it would help startups to access new investment channels.
Encouraging domestic investors
Indian startups are primarily funded by overseas investors, especially in the initial phase. Domestic investors need a little push to open up their purses for upcoming startups. The government can consider bringing new policies and offer some incentives to encourage investors. It can be something like increased surcharge on capital gains made from unlisted shares, exclusively for domestic residents.
Currently, to be considered a startup in India, a company’s annual turnover should be below Rs. 100 crores. Due to this low threshold, many startups are unable to claim startup benefits. If this threshold is increased by the government, it would boost the startup ecosystem and encourage necessary expansion without being worried about forfeiting the exemptions allowed by the “startup” tag.
Reviewing tax provisions
Shilpa Ambre, the CFO of SARVA, while speaking with Yourstory, said she expected high taxes like 18% GST to be corrected and also that a “tax holiday could be a good move by the government. Relaxation in tax structures could be very helpful for young startups. Easing gift-tax provisions for investors who acquire company shares at a discounted rate will also help startups gain more investment.
Apart from this, many startup leaders are also hoping for the government to introduce some tax relief to boost company initiatives aimed at uplifting employee wellbeing like free fitness classes, mental health camps, etc. Such incentives will encourage startups to give back to the community and create a more positive corporate culture.