Start-ups: does the budget stand out?

One of the Modi government’s pet projects—Start-up India, Stand up India—has been recognized as a key policy initiative to stimulate entrepreneurial activity. The project was launched on 16 January amid much fanfare. During his speech, Prime Minister Narendra Modi addressed virtually every aspect of the start-up ecosystem holistically—from tax to funding to ease of doing business.

Fast-growing Indian start-ups, hungry for success, are run by a breed of entrepreneurs who are risk-loving, instinctive and disruptive. They are looking for an environment conducive for them to focus on the business (and not the paperwork), build businesses (and valuations!) overnight, or exit even faster. They are mobile and while patriotic, impatient when it comes to confronting some of the typical problems that the Indian environment throws up for businesses—problems that we have all become accustomed to accept. They like to change the way things are done, often dramatically, and do not build businesses based on licences or allocations.

So what did Budget 2016 bring for them?

Firstly, the Action Plan had provided for a three-year tax holiday for start-ups, prompting a question on the real utility of this for start-ups, which in any event do not make money early on. The Finance Bill has responded to this question in some way by providing greater flexibility i.e. three out of five years. Of course, with the minimum alternative tax (MAT) still applicable, this is a limited 10% arbitrage, and that, if a start-up gets profitable quickly. The budget also provides exemption to capital gains to the extent investment is made in funds that invest in the start-up ecosystem and by individuals in owned start-ups.

Secondly, it is encouraging that a bill in relation to ease of doing business will be taken up to amend the Companies Act, 2013 as quickly as in the current budget session of Parliament. While this remains one of the most critical items from the Action Plan, the execution of this item through the efficacy of a mobile app as well as integration of various state governments will need to be assessed in times to come.

Thirdly, keeping in line with the theme of the Finance Bill 2016, ₹ 500 crore has been allocated toward the Stand Up India scheme to promote entrepreneurship among prospective scheduled castes, scheduled tribes and women entrepreneurs.

And lastly, while not directly applicable only to start-ups, there are two things that particularly offer hope. One, that the government has signalled a direction for less regulatory interference and use of e-communication between bodies such as the tax authorities and the taxpayers. For start-ups that lack the giant compliance functions that large corporates build up, this directionally may be a huge blessing—perhaps even more than some of the specific steps. And second, that the government has recognized the role of disruptive players even in areas such as public transport with a small suggestion in the finance minister’s speech that it must influence state governments to permit more freedom for business operations.

While the fine print needs to be examined, there seem to be a few misses too. The finance minister could have gone a bit further and provided explicit clarity on certain other areas. To illustrate, while the Action Plan provided for exemption of tax on investments made above fair market value by incubators (earlier applicable to venture capital funds only) in start-ups, the Finance Bill has been silent on the subject. Both the Action Plan and the Finance Bill also did not seem to provide any specific indirect tax incentives for start-ups. Another area of concern is the taxability on stock options, which is currently a huge cash flow issue for companies and founders.

So, did the budget live up to promises to the start-up community? For it to be a box office hit, it will be important that the government continues to walk the talk. For now, it has definitely made start-ups mainstream. And hopefully, it will deliver, so long as it continues to work on the realization that it must stay out as much as it can and allow start-ups the freedom to disrupt and build tomorrow’s giants.

Vivek Gupta is a partner with BMR Advisors

With inputs from Harshdeep Chowdhary, senior vice-president, BMR Advisors