Budget 2020’s push for startups shows that entrepreneurship is serious business in India

Image: AP Photo/Altaf Qadri
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India’s tech entrepreneurs couldn’t be happier. After all, they were the stars of the country’s union budget for financial year 2021.

The word “startup” found at least 15 mentions in Nirmala Sitharaman’s budget speech on Feb. 1, and the finance minister doled out some long-standing wishes of the industry while announcing certain measures that tackle key pain points of the community.

“Budget 2020 and the finance minister’s speech has well-articulated India’s vision on not just being a leading provider of digital solutions, but one where technology is the bedrock of development and growth,” Debjani Ghosh, president of IT industry body NASSCOM said in a statement.

From an infrastructure boost to easing tax burdens, this budget has proposed more benefits for Indian startups than most others in the past, and nobody’s complaining.

The star of the show

Sitharaman’s task this year was not an easy one given the need to stick to financial prudence while trying to boost a slowing economy.

But that did not stop her from pushing for startups and entrepreneurs at length.

“Startups have emerged as engines of growth for our economy,” Sitharaman said. “…entrepreneurship has always been the strength of India. Even today, young men and women have given up greener pastures elsewhere to contribute to India’s growth. They are risk-taking and come up with disruptive solutions to festering challenges…We recognise the knowledge, skills and risk-taking capabilities of our youth. He is no longer the job seeker. He is (a) creator of jobs. Now we wish to create more opportunities and remove road-blocks from his path.”

One of the most significant announcements in the budget was the proposal to bring out a policy to allow private companies to build data-centre parks.

“The government is determined to transform the country into a digitally empowered society,” said Mahesh Ramamoorthy, managing director for banking and payments across Asia Pacific, west Asia and Africa, at fintech solutions firm FIS. This proposed policy could “bring in technology, investment, and employment opportunity in the country while providing (a) platform for structured data storage and security. And, through leveraging economies of scale one can witness (a) lower cost of data ownership, and cost per transaction.”

The hope now is that the government will execute this plan well, too. “We hope that this budget will be majorly focused on protecting the stored data especially of sectors like BFSI and large enterprises that consist major quantity of critical data,” Dipesh Kaura, south Asia general manager at Kaspersky Lab said.

The budget has also proposed a seed fund to support ideation and development of early-stage startups. Additionally, the government is handholding startups on the path of innovation.

Let’s talk tech

Besides the infra boost, the government has proposed an investment of Rs8,000 crore ($1.1 billion) over five years in its national mission on quantum technologies and applications. Entrepreneurs believe this could go a long way in giving a boost to the Indian economy.

“The government’s focus on enhanced digital connectivity, and focus on emerging technologies such as machine learning and artificial intelligence, along with the allocation towards quantum computing are sure to provide a fillip to India’s economy,” Vikas Garg, the deputy chief financial officer at digital payments firm Paytm, said.

In addition, the budget has proposed setting up of a digital platform to facilitate seamless application and capture of intellectual property rights (IPR).

Considering India’s IP protection has been substandard so far, “a seamless digital platform for IP filing and clearances combined with accessible and inclusional knowledge transfer hubs can bring the new dawn to the culture of IP protection and patents in India,” Shailesh Gupta, founder and CEO of Yolo Bus, said.

A nuanced look

In the past, India has often imposed on startups the same policies that govern older companies operating in legacy industries. Budget 2020, though, went a step forward in addressing the pain points of young companies.

For instance, the budget has suggested deferring the tax payment on employee stock option plan (ESOP) by five years or till an employee leaves the company or when he/she sells shares, whichever is earliest.

ESOPs are an important tool for young startups to attract and retain highly talented employees during the early years of business. But until now, employees needed to pay tax whenever they sign up for ESOPs with a vesting schedule and also pay taxes on capital gains whenever they redeem their ESOPs. “This leads to a cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term,” Sitharaman said.

“By reducing the burden of tax on employees, the government has helped startups weaponise ESOPs programme even more,” Gupta of Yolo Bus said. “The change in the tax structure for start-ups is sure to impact India’s position in the “Global Ease of Doing Business” charts next year. It is a very clear sign to start-ups that the government has also invested in their success and would like to remove as many barriers that keep entrepreneurs awake at night.”

Aside from the employees, startups themselves were also served tax reliefs. The budget promoted increasing the turnover limit from existing Rs25 crore to Rs100 crore for startups that are allowed the deduction of 100% of profits for three consecutive assessment years out of seven years.

“The higher time and turnover limits for carrying forward of losses for startups will enable them to optimise growth decisions in formative years,” said Kunal Bahl, co-founder of e-commerce platform Snapdeal. The longer timeline “will allow startups to take more risks, innovate on a larger scale and contribute to the economy in a much more significant manner,” Geetika Dayal, executive director of TiE Delhi-NCR, added.

Mainstreaming entrepreneurship

At a time when India’s unemployment crisis is deepening, the Narendra Modi government has been advocating for entrepreneurship to revive job creation. But the business environment in the country has not been particularly nurturing for businessmen.

In July 2019, India’s entrepreneur community was left baffled when Cafe Coffee Day founder V G Siddhartha was found dead after supposedly being hounded by regulators and the taxman for alleged financial irregularities. There have been several other cases where entrepreneurs in the country have been arm twisted by taxmen.

Sitharaman, in a rather surprising move, took the issue head-on in her budget speech. “Our government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind,” she said. “There has been a debate about building into statutes, criminal liability for acts that are civil in nature. Hence, for Companies Act, certain amendments are proposed to be made that will correct this. Similarly, other laws would also be examined, where such provisions exist and attempts would be made to correct them.”

The budget also proposed setting up an investment clearance cell via a portal that will provide end-to-end facilitation and support, including pre-investment advisory, information related to land banks, and facilitation of clearances at the centre and state level.

“This budget has informed the industry of the empathy the government caters towards Indian enterprises. This positive sentiment is evident in the government’s drive to roll out ‘no tax harassment’ policies along with the establishment of the investment clearance cell for assisting entrepreneurs in India,said Padmaja Ruparel, founding partner of the Indian Angel Network Fund.