By Sridhar R and Koushik Balaji
“Startups are going to be the backbone of new India. When India completes 100 years of independence, startups will have an important role” – Shri Narendra Modi
Grant Thornton Budget Explainer: The Hon’ble finance minister opened her budget speech identifying the next 25 years of India’s independence leading up to [email protected] as India’s “Amrit Kaal”. In line with the Hon’ble Prime Minister’s vision, the budget has also set out certain goals to be achieved during this Amrit Kaal. One of the key goals set out to achieve the vision is the promotion of digital economy and fintech, technology enabled development, energy transition, and climate action.
Having called out the promotion of technology enabled development as a foundational theme, the Budget 2022 has also gone ahead to introduce policy impetus for encouraging the start-up ecosystem. These announcements also align with the government’s “Make in India / Athmanirbhar Bharat” mission.
Initiatives in the past have already given a thrust for the start-up ecosystem, with 42 unicorns (valued at over $1 billion) being created in 2021 alone. The total value of private equity and venture capital deals involving new ventures jumped over 2.3 times, raising USD 10.9 billion, with as many as 1,072 deals, a record in terms of deal values and volumes. The deal volumes were 74% higher than 2020 volumes. The year also witnessed 25 investments valued at and over USD 100 million, totalling to USD 5.2 billion and 22 deals valued between USD 50 million and USD 99 million, totalling to USD 1.5 billion. Further, 63% of total IPO equity in 2021 raised has been raised via SPAC route in the US (majority chunk being start-ups) versus 55% in 2020. All the above have set the benchmark for the next round of mushrooming start-ups across India.
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Policy support, access to funding and tax incentives are, perhaps, the key reasons for creation of a conducive start-up ecosystem. The budget 2022 focuses on increased infrastructure and growth spending in various sectors with specific thrust on involving start-ups to facilitate / promote / collaborate with various stakeholders in certain core sectors. By inference the government is keen to involve start ups to disrupt and improve on traditional ways of doing things across sectors. Specifically, the following announcements have been called out:
- Creation of Fund for Agritech start-ups in a co-investment model that will be facilitated through NABARD. This is aimed to finance startups in agriculture & rural enterprise, relevant for farm produce value chain. The activities for these start-ups will include support for Farmer Producer Organisation (FPO), machinery for farmers on rental basis at farm level, and technology including IT-based support.
- Startup participation in Defence R&D with 25% of defence budget earmarked for such purposes. Such start-up’s will be encouraged to take up design and development of military platforms and equipment in collaboration with DRDO and other organizations through SPV model.
- Start-ups to be promoted to facilitate Drone-As-A-Service (DrAAS) (Drone Shakti scheme) through varied applications. The launch of new drone corridors and by incentivizing local start-ups, the drone industry has the potential to transform various sectors in the country.
- Space Sector and Artificial Intelligence: The government has allocated a sum of INR 13500 crores to give fillip to the space sector. There is a strong emphasis on creating a growth environment for Artificial Intelligence.
The budget also promises to establish a Centre for Processing Accelerated Corporate Exits (C-PACE) recognising the fact that a vibrant ecosystem should allow for a quick exit when failure is at sight. C_PACE is being set up with the objective to re-engineer the process of voluntary winding up. The plan is to reduce the timeline from existing 2 years to 6 months. This is a welcome need for a vibrant startup community where failure is recognised and remedied quickly.
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Further, the government has recognised that the PE – VC communities are significant growth drivers for the start-up ecosystem. Keeping this in mind, it has set up a high-level committee to deal with friction points of PE-VC stakeholders and to suggest ways of improving the start-up ecosystem.
While the budget puts the right emphasis on addressing structural needs in the start-up ecosystem, there are some gaps that need attention. These include the following aspects:
- Review and simplification of regulatory compliances
- Creation of an enabling mechanism for overseas direct listings and creation of a domestic capital markets framework for SPAC listing similar to US, Singapore and UAE
- More deliberations are required on dealing with virtual digital and crypto assets (as the environment is significantly comprising start-ups) to promote the growth of next gen assets while taking into account government concerns.
From a tax perspective, the following notable proposals have been put through. All of them being considered by the government with prudence:
1. Extension of the tax holiday benefit (3 years in a block of 10 years) available for Start-ups by one more year to include companies incorporated on or before 31st March 2023. This would enable new start-ups not only claim the tax holiday benefit but also the following additional relaxations:
- Deferment of taxation of ESOPs to 5 years from exercise or sale of such shares by employees or termination of employment, whichever is earlier; and
- Eligibility to carry forward business loss of an eligible start up despite change in shareholding exceeding 51% (provided existing shareholder continue to hold their shares)
2. Long-term capital gains on equity shares other than listed ones, units etc. are currently liable to a graded surcharge ranging upto 37% for individuals. The finance bill proposes to cap such a graded surcharge on long term capital gains arising on transfer of any type of assets at 15%. This would be a significant boost to Start-ups as individual investors / promoters were subject to the substantially higher taxes on account of the graded surcharge.
3. Extension of one year has been provided for start-ups that are engaged in manufacturing activities to avail a concessional tax rate of 15%. The lower tax rate is available for new companies that commence production on or before 31 March 2024.
Conclusion:
The government has taken a 360-degree view of the start-up community’s requirements and has moved forward with providing further thrust in developing an ecosystem that supports growth of the community. This has been done without raising or reducing any taxes. The above schemes and incentives should set the path for India to be seen as one of the preferred destinations for start-ups. It is the government’s wish to see more unicorns being created in India which will contribute to the PM’s vision of creating a $5trillion economy by 2024-25.
(This post-Budget 2022 analysis has been done by Grant Thornton Bharat. Sridhar R is Partner, Tax and Koushik Balaji is Associate Director, Tax at Grant Thornton Bharat.)
