Access to funds, tax incentives and more: Startup industry’s wish list for Budget 2018

One of the most pressing issues startups hope to get relief from post the budget is the levy of Angel Tax.
Access to funds, tax incentives and more: Startup industry’s wish list for Budget 2018
Access to funds, tax incentives and more: Startup industry’s wish list for Budget 2018

With the Union budget around the corner, there is much anticipation on what Finance Minister Arun Jaitley is likely to announce for the startups in the country.

Union budget 2017 brought some tax respite, either in the form of a tax holiday, or reduction of presumptive tax rate for businesses with a turnover of up to Rs 2 crore.

This year, the industry hopes that several requests and queries which went unanswered last year will be addressed in this budget.

Access to capital

Over the past year, the government launched a Rs 10,000 crore fund of funds and a Rs 2,000 crore credit guarantee fund for startups. However, getting access to this capital means first receiving approvals from Department of Industrial Policy and Promotion (DIPP).

Startups believe that while there is no dearth of funds, access to capital is what is turning out to be a nightmare.

“It is important to gain access to the funds. As a startup, if I have to wait 8-10 months for hundred different certifications before I have access to it, that fund is useless to me. We need immediate access to funds with a simplified procedure,” says Raj Neravati, founder of Hyderabad-based startup Hug Innovation.

Tax benefits

There are a number of tax incentives that the startup ecosystem wants from the budget,  starting with abolishment of Angel Tax, something that is on the wish list of startups across industries.

Abolishing Angel Tax

Introduced in 2012, the purpose of Angel tax was to keep money laundering in check. However, this is now turning out to be a bane for startups. When startups receive angel funding at a valuation higher than its fair market value, it is counted as income to the company and 30% of it is charged as tax.

However, with several startups raising angel funding from friends, family and domestic angel networks, which are not registered with SEBI as Alternative Investment Funds (AIFs), startups and angel investors have been receiving notices from the IT department.

Several startups and investors have raised their voice against this and want the government to do away with Angel tax, which according to them, goes against the government’s Startup India dream.

“This tax is applied on angels and founders. When this money is added to their income and one-thirds goes out as tax, it is an unproductive use of angel funds. It is concerning to both founders and investors and discourages not only startups, but also angels from investing in startups,” says Vikrant Varsheny, co-founder, SucSEED Venture Partners.

Tax Holiday:

The budget in 2017 provided startups incorporated after March 31, 2016, a three-year tax holiday in their first seven years. And this is only for profit-making startups and those registered with DIPP.

However, startups feel that three years is a very less period as businesses take time to mature, sometimes undergo several pivots before they start making revenue and clocking in profits.

While some startups want the tax holiday to be extended to five years, a few want it to be extended to seven years.

Tax on ESOPS

Employee Stock Option Plans (ESOPs) have become a common phenomenon in startups as a way to reward early and highly valuable employees for the hard work they put in.

For unlisted companies, the tax on ESOPs is levied on the employee at the startup’s Fair Market Value, which is generally high when it’s a startup funded externally. This makes the tax levied on the ESOP high, which means the employee ends up paying a high income tax when they exercise the option.

Startups want the tax to be deferred as it is done in many other countries such as the US. It could be deferred to a point where they pay taxes only when the real value of the share is realised.

A few other tax incentives on the wish lists of startups include reduction in corporate tax

"We expect a forward-looking Budget that comes good on reducing corporate tax rates to 25%, and effects administrative and tax reforms suggested by Easwar Committee - this will go a long way in ease of doing business in the country,” says Ritesh Agarwal, Founder, Oyo.

GST too, while touted as an important tax, has several implementation challenges, which need to be streamlined, according to Ritesh.

Compliance

The core of several problems faced by startups seem to be related to long-drawn compliance processes. While the government has made compliance processes simpler and introduced self-certification, ease of doing business for startups is still not a reality.

Right from getting a licence, to raising funds, receiving recognition from DIPP, or even with taxation, there are long processes involved, which startups feel take away the time they could otherwise put in building their business.

“The government has introduced things like self-certification, but none of that is practical. Startups are over-worked with a lot of compliance processes especially for hardware startups like ours,” Raj says.

Entrepreneurs are hoping for much more clarity in compliance-related issues, especially them being sector-specific.

To wind up a company as well, while the Startup India initiative provides for shutting shop in 90 days under the Insolvency and Bankruptcy Code of 2016, it involves liquidators and compliance-related issues that make it very difficult for a startup to smoothly shut down, even though their size is very small.

Research and Development

A point raised mostly by startups in the biotechnology and healthcare space, they believe that more funds need to be allocated to set up and equip research centres.

“Why does government spending on healthcare stay only around one per cent of the GDP. It should increase spending on the healthcare sector, allocate more funds to set up new research centres for rare diseases and to equip them adequately,” Dr Arun Shastry of Dystrophy Annihilation Research Trust (DART) says.

As India strives to encourage innovation in the country in line with its ‘Start-up India Stand Up India’ initiative, It remains to be seen if Union Budget 2018 brings the much needed relief to the startup sector.

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