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The number of recognised startups has increased to 84,012 in 2022, up from 452 in 2016, because of investment incentives and easing business compliances, according to the Economic Survey 2022-23. 

The country could become home to many more startups as the survey noted that new-age tech firms are considering shifting their domicile back to India. 

Tabled by finance minister Nirmala Sitharaman in Parliament at the commencement of the Budget session on Tuesday, the survey pointed out how the Indian startup ecosystem has grown so far and what more can be done by the government for its growth. 

Here are the key highlights related to India’s startup ecosystem from the Economic Survey 2023: 

1. Will ‘Reverse Flipping Become A Trend? 

Indian startups are considering “reverse-flipping" or shifting their domicile back to India, said the Economic Survey 2023. The remarks come on the heels of fintech unicorn PhonePe relocating its base from Singapore to India, with the move costing its investors about 8,000 crore in taxes. 

Flipping is the process of transferring the entire ownership of an Indian company to an overseas entity. Typically, it happens at the early stage of the startups, driven by commercial, taxation and personal preferences of founders and investors, the survey noted. 

“However, of late, with relatively easy access to capital through a vibrant private equity/venture capital ecosystem, changes in rules regarding roundtripping, and the growing maturity of India’s capital markets have not only slowed down the flipping, but companies are also exploring reverse flipping," said the Economic Survey. 

2. Simplification of ESOP Policy

The Economic Survey weighed the importance of a change in the taxation of employee stock options plans (Esops) to support reverse flipping. At present, the fair market value (FMV) of ESOPs is taxed as salary in the hands of the employee in India at the point of allotment or transfer of the shares. The industry has long been demanding that Esops should be only taxed at the point of sale and not at the time of vesting. 

3. Easing Capital Gains Taxation 

Another crucial point brought forward by the Economic Survey 2023 to promote investments in India as well as reverse flipping is the need for simplifying capital gains taxation. 

Investors of Indian startups have been demanding a tax parity between listed and unlisted shares. Currently, gains on listed shares are considered long-term if held for more than 12 months and are taxed at a lower rate of 11.96%. Short-term capital gains for listed shares are taxed at 15%. 

4. Simplifying Compliance For Capital Flows

The survey highlighted the need for simplifying the process of capital flows and pointed out that many countries, including the US, UAE, Netherlands, and Singapore, have easier corporate laws, with lesser restrictions on the inflow and outflow of capital and the treatment of hybrid securities. 

For instance, in Singapore, dividends received from a Singaporean company/subsidiary are not taxed at the holding level. There are no withholding taxes when distributing dividends to residents or non-resident shareholders. “This is a critical component since the dividend is one of the most popular repatriation tools," said the survey. 

Also, there are no withholding taxes in the UAE under current legislation while European jurisdictions like the Netherlands charge lower taxes on capital gains based on certain shareholding thresholds. 

“These exemptions are currently unavailable in India, and any migration of existing structures to India triggers capital gains tax," said the Economic Survey. 

5. The spine of New India

DPIIT recognised startups created more than 9 lakh direct jobs, thus supporting the overall economy. The number of jobs created by these startups surged by 64% in 2022 to 269,000, over the average number of new jobs created in the last three years, the survey pointed out. “Startups are being envisioned as the ‘spine of new India’, as they encourage the youth to become job creators rather than job seekers." 

6. Scaling the hyper local 

India is seeing a sharp rise in the number of startup hubs from India’s Tier-2 and Tier-3 cities. Startups there are solving local problems at scale, primarily those related to healthcare, education, agriculture, and financial services. About 48% of Indian startups are now from Tier II and beyond cities. The Economic Survey called it a testimony of India’s grassroots’ tremendous potential. 

7. Solving For the Agrarian Economy 

India, being an agrarian economy, requires lots of innovation in space, particularly around sustainability and commerce. Indian startups are now rising to the challenge. The Economic Survey 2023 noted that the country has over 1,000 agritech startups assisting farmers in improving farming techniques. 

Over 500 startups are working in the millet value chains, while the Indian Institute of Millets Research has incubated 250 startups under Rashtriya Krishi Vikas Yojana – Remunerative Approaches for Agriculture and Allied Sectors Rejuvenation programme, the survey added. 

The private equity investments in agritech space have skyrocketed over the past four years – witnessing an increase of more than 50 per cent per annum to aggregate approximately 6600 crore, it said. 

8. Modernising the IPR Process

With the government strengthening Intellectual Property Rights (IPR) by modernising the IP office, reducing legal compliances, and facilitating IP filing, there has been a 46% growth in the domestic filing of patents over 2016-2021, signalling India’s transition towards a knowledge-based economy, said Economic Survey. These patents were largely filed by startups. 

9. Flying High 

India is strengthening its drone industry under the ‘Drone Shakti’ mission. Drone startups and drone-as-a-service (DrAAS) are being promoted, with almost 90% of the airspace now being opened as a green zone for flying drones up to 400 feet, said the survey. 

10. Hiccups For Startups 

The Economic Survey 2023 listed ever-elusive funding, revenue generation struggles, lack of easy access to supportive infrastructure, or wading through the regulatory environment and tax structures as the top-most challenges faced by Indian startups.

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