Opinion
A few benefits for startups but no real dismantling of complex regulatory landscape
Summary
- The Union Budget 2025-26 has some sops for the startup ecosystem in relation to funding and extending the period for some tax benefits.
India has the third largest startup ecosystem in the world, which is expected to witness year-on-year growth of 12%-15%. Two or three tech startups are born everyday. The enterprising spirit of Indians, along with some government support, has been important to the development of the startup ecosystem. Equally importantly has been internet penetration and digitization.
The Union Budget 2025-26 has some sops for the startup ecosystem in relation to funding and extending the period for some tax benefits. On the funding part, the finance minister has mentioned that Alternative Investment Funds (AIFs) for startups—presumably referring to AIF Category 1—have received more than ₹91,000 crore of commitment and these are supported by a “fund of funds" set up with a government contribution of ₹10,000 crore. It has now been announced that a new fund of funds with expanded scope and fresh contribution of another ₹10,000 crore will be set up. There is also a reference to a deep-tech fund of funds to catalyze next-gen startups as part of this initiative. Clearly, the latter seems linked to the need for catalyzing innovation in the area of Artificial Intelligence.
There is mention of a scheme to be launched for 5 lakh first-time women entrepreneurs from schedule caste and schedule tribe communities, providing loans upto ₹2 crore over the next 5 years. This is a boost to entrepreneurial initiatives by women entrepreneurs and those from marginalized communities.
Under the Income Tax Act (Section 80-IAC), there is 100% tax deduction of income derived by registered startups, or those that hold certificates from the Inter-Ministerial Board of Certification. There was a condition that the startup should have been incorporated on or before 1 April 2025 and now, this date has been extended by five years to 1 April 2030. In relation to carry-forward and set-off of losses, one of the key conditions for set-off is that at least 51% of the shareholding should be common between the year of loss and year of set-off. For registered startups, this condition is relaxed in the sense that it need not be 51% commonality of holding, but all the shareholders holding shares in the year of loss should continue to hold shares during the year of set-off. This conditionality seems quite impractical since some of the shareholders may decide to drop out and is a dampner in the startup taxation ecosystem, and this provision has not been addressed in this Budget.
New age companies that have elements of startups have not been referred to in this Budget, except that Para 51 of the Budget speech does acknowledge that gig workers of online platforms provide “great dynamism to the new age service economy". Consequently, the government will arrange for their identity cards and registration on the E-shram portal. Additionally, they will be eligible for healthcare under the PM Jan Arogya Yojna. This programme is likely to benefit nearly 1 crore gig workers and clearly this will be a boost to the gig worker community.
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All in all, this Budget provides some boost to the startup ecosystem, but the complexity of the Indian regulatory landscape is a major dampner for Indian entrepreneurship. There is a detailed reference in this Budget to deregulation, but these are mere announcements and to what extent this will be translated into tangible measures remains to be seen. Till then, the Indian startup ecosystem will need to live with the current dispensation and whatever additional sops are provided.
Ketan Dalal is managing director, Katalyst Advisors Pvt. Ltd.
