Budget 2019: Key Measures FM Nirmala Sitharaman Should Consider To Boost Startup Ecosystem In India

As Finance Minister Nirmala Sitharaman is all set to table her maiden Budget for 2019-20 fiscal, here are some key expectations from Indian start-up ecosystem.

Finance Minister Nirmala Sitharaman with PM Narendra Modi and BJP leader Arun Jaitley. (File Photo/ Getty)

Budget 2019: Start-ups are disrupting traditional industries like never before and are poised to be one of the key pillars of growth for the economy. In the backdrop of Budget 2019 exercise underway, here is a look at some key expectations of the sector. Angel tax: An issue that grabbed headlines at the start of the year and caused anxiety to a number of entrepreneurs and investors alike and is a crucial area where provisions need to revisited and further relaxed to ease the anxiety of entrepreneurs and boost investments. Few expectations in this regard are - An ‘exception based’ approach needs to be adopted for applicability of angel tax; Immunity to be granted from angel tax on past tax orders (provided start-ups fulfil requisite criteria/conditions); Current regulations impose many conditions (such as investment restrictions, etc.) leading to operational hazards for start-ups to claim exemption from start-ups – these conditions need a relook and further relaxed; Blanket exemption to be provided for all investments by Category II and Category III AIFs. Taxation on consolidation: The start-up sector is witnessing quite a few consolidations and the selling promoters/ investors often face liquidity challenges for making tax payments since at the time of consolidation, consideration is typically received in the form of shares of the acquiring entity.  Similarly, on exercise of ESOPs, employees are required to pay tax based on the FMV without having any liquidity.  These issues can be tackled by deferring such taxes to the time of liquidity event or actual receipt of cash consideration. Gift tax on share transfer: ‘Gift tax’ provisions (more anti-abuse in nature) which tax the incoming investor when shares are acquired at less than the FMV, should exempt genuine secondary transactions which may happen at discounted price.  The government should also clarify that the provision does not apply on issue of shares and may also consider prescribing a more objective valuation mechanism for convertible instruments i.e., based on book value (like equity). Carry forward of tax losses: Currently, benefit of carry forward of tax losses may not be available to start-ups even in cases where there is a small exit by the promoters or other investors.  The provisions should aim to allow benefit of losses so long as such losses are used to offset profits from the same business.  Alternatively, the provisions should allow for carry forward of losses to the extent where the promoters or investors continue to hold a prescribed stake (say, 26% of their holding). Further, the benefit should also be extended in case of a merger of start-up entities. Capital gain tax exemption: To further boost investment in start-ups, government should exempt capital gains arising on sale of shares of start-up companies by investors either on a blanket basis or conditional basis upon redeployment of funds. Withholding tax costs: Withholding tax deducted (at 10% in most cases) at the time of making payment to start-ups cause hardships in cases where the start-up is a loss-making entity and would have to wait until its tax assessment to claim its refund. This can be suitably addressed by granting an exemption to the start-ups or alternatively reducing the rate of tax considerably. GST: An ‘e-commerce operator’ is obligated to collect tax at source (TCS) at 1% on the value of sales made through it by vendors leading to additional compliance burden on the e-commerce operator as well as complexities of claiming tax credit and cash flow issues for the vendor. The government should consider abolishing the TCS provision for this sector.  Further, for all start-ups, the government should consider reduction of GST rate – which will further help in boosting the start-up economy in India. Startup Fund: The government announced the setup of 'fund of funds' as part of it's Start-up India initiative to be managed by SIDBI to act as a catalyse 10k start-ups by 2028 aimed at creating 18 lac jobs in the country, however the uptake of this investment fund has not been off to a great start. SIDBI needs to accelerate disbursement by reducing bottlenecks and automating the disbursal process, along with simplifying and clarifying of rules and laws for start-ups. It is also important to sensitise Income Tax and Regulatory environment in dealing with start-ups as they have a different barometer in comparison to regular SMEs. While there have been teething troubles in the approach to the segment, there is no doubt that the government recognises start-ups and their ability to be game changers. (Ankur Pahwa is Partner and National Leader – E-Commerce and Consumer Internet, EY India) Disclaimer: The opinions, beliefs and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs and views of ABP News Network Pvt Ltd.