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Budget 2019 | For startups, the angel is in the details

The announcement that probably brought the biggest relief to the sector was that startups and their investors who provide requisite documents will not be subject to angel tax assessment (Mint)Premium
The announcement that probably brought the biggest relief to the sector was that startups and their investors who provide requisite documents will not be subject to angel tax assessment (Mint)

  • Relaxation of angel tax, FDI norms and support for EV startups are welcome steps—but are they enough?
  • Entrepreneurs who run startups ranging from fintech to EV manufacturing said they require govt support in the form of startup-friendly policy or clear regulation

Saket Modi faced a hard choice: Pitch for lucrative government contracts, or pass on the opportunity. The 28-year-old co-founder of a cybersecurity startup decided on the latter. One government tender could change the fortunes of a startup like his seven-year-old Lucideus Technologies, but the cost of setting up a new team to bid for and track the tenders would be too high.

“Further, rejection is almost certain when it comes to large tenders though we’re eminently qualified for the job," said the Delhi-based Modi. “Despite campaigns such as Startup India, the reality is that most government tenders are viewed in old ways. A company has to be in existence for 10 years, its revenue has to be more than 500 crore, and so on," Modi said.

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It’s this gap between what the government says and what it does that startup founders would like to be addressed by policy. “If the budget stipulated that every department has to use 2-3% of its allocation to send work to startups registered with the Department of Industrial Policy and Promotion [now the Department for Promotion of Industry and Internal Trade] , it could be game-changing," said Modi, whose company is backed by Cisco chairman emeritus John Chambers and counts ICICI Bank, HDFC Bank, Pizza Hut, KFC, IndiGo, and SpiceJet among its clients.

Modi’s expectations may not have been fulfilled in the Union budget, but finance minister Nirmala Sitharaman announced several incentives to unleash the “entrepreneurial spirit" among startups.

The announcement that probably brought the biggest relief to the sector was that startups and their investors who provide requisite documents will not be subject to angel tax assessment. “Funds raised by startups will not require any kind of scrutiny from the income tax department," Sitharaman said.

“For angel tax, the finance minister said existing cases would be disposed of. Assessing officers will need their supervisor’s okay for issuing demands and valuation is outside the scope of income tax. If these are implemented in spirit, we may finally see the end of this unholy tax," said Rehan Yar Khan, managing partner, Orios Venture Partners.

Other announcements include a TV programme for startups, focusing on matching startups with venture capital investors for fund raise and tax planning, and easing foreign direct investment rules for startups in segments such as grocery, e-commerce, and food delivery. Sitharaman also proposed enhancements to the digital payments ecosystem to help fintech startups, incentives for electric vehicles (EV) that would help EV startups, and easing the pressure from tax authorities.

Clearer Policy Needed

Close to half-a-dozen entrepreneurs, who run startups in fields as diverse as EV manufacturing and fintech, said they require government support either in the form of startup-friendly policies or clear regulation.

Another example is Quick Ride, a carpooling platform in eight cities, founded in 2014 and run by iDisha Info Labs. It started with 40 carpools in the first month and has 1.5 million carpools per month now; 57% of its users are women. However, there are still no clear rules on car and bike-pooling ventures. “We need the central and state governments to work together to support innovation and fast-track key policies. We hope the government sees the benefits of car-pooling for last-mile connectivity. While futuristic mobility solutions for urban India are in the works, optimisation of current modes such as ride sharing is essential," said K.N.M. Rao, founder and chief executive, Quick Ride.

The global carpooling market is estimated at $15 billion and is expected to reach $335 billion by 2025, according to a research paper from PwC. India has about 70 million cars on the road. If carpooling gets regulatory approval, it can become a fast-growing business.

For Oyo Hotels and Homes, the world’s sixth-largest chain of leased and franchised hotels, and living spaces, India is a critical market from both a growth and regulatory perspective. Its founder and CEO Ritesh Agarwal expects an increased focus on skill development which could lead to higher employability. “By building on technology and talent through skill development and the application of global business insights, we can take advantage of the demographic dividend that India is blessed with and supplement existing pipelines of direct and indirect employment opportunities," he said.

Emerging Sectors

Startups in the healthcare space were rooting for a clearer regulatory framework, particularly for online pharmacies, and greater awareness for generics. “We believe that generic drug substitution will play a pivotal role in lowering the public healthcare cost, making quality healthcare accessible to the remotest corners of the country. The government should support initiatives to fight the public perception of generic drugs and increase awareness among people," said Pradeep Dadha, founder and CEO, Netmeds.com.

The government’s push for EVs envisions a quick transition to cleaner forms of transportation. “Policymakers need to focus on enabling local intellectual property creation. If we don’t, electric players from abroad will wipe out the local play," said Tarun Mehta, co-founder, Ather Energy, adding that the budget needed to incentivize local engineering capabilities. “Just looking at Make in India is not enough; you don’t have to stop there. We have to focus on Design in India as well," Mehta said.

The Centre is pushing for a full transition to electric for two- and three-wheelers with engine capacities of less than 150cc by 2025 and 2023, respectively. Mehta said India needs a separate policy around home charging to enable charging in garages, and guidelines that require buildings to have charging points for EVs.

Ather’s expectations did find resonance in the budget. The finance minister announced the start of the second phase of the Faster Adoption and Manufacturing of Electric Vehicles scheme with an outlay of 10,000 crore for three years from 1 April 2019.

The main aim of the scheme is to encourage faster adoption of EVs by offering incentives on their purchase and setting up necessary charging infrastructure for them.

The path of entrepreneurship is not easy, but the budget indicates the government’s intent to boost ease of doing business for startups.

Salman SH contributed to this story.

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