When the union budget was presented in Lok Sabha on July 05, 2019 by Nirmala Sitharaman, there were several hits and misses for start-ups and VC industry. Here’s the list.
The Indian start-up space is on the up and 2018 has been the epoch-making year for it. India emerged as one of the biggest draws for start-up investments, attracting $4.3 billion in funding. Plus, 8 start-ups achieved the coveted unicorn status, venture capital funding got a significant boost, and the sector generated 40,000 employment opportunities – all in the same year. When Modi 2.0 government came up with its first Union Budget 2019, the start-up community was anticipating favorable policy initiatives to continue unlocking growth opportunities. Were the expectations met? What were the hits and misses from the start-up perspective? Let’s discuss.
Here’s a list of hits that the union budget 2019 raked up for start-ups and VCs.
The issue of Angel Tax
The high hopes that start-ups had from the Modi 2.0 government were dashed in the interim budget with no mention of Angel Tax, the biggest tormentor for start-ups and VC industry. Equally distressing was the sparing use of the term “start-up.” Angel Tax has been persisting through legacy legislation to prevent money laundering via start-ups. Here, 30% tax is applicable on privately-owned companies raising money exceeding the ‘fair valuation’ rates.
Per ETV Bharat, a slight respite for the start-up community came from CBDT and DPIIT via an Angel Tax amendment in February 2019. Now, the budget has taken up the issue of Angel Tax, provisioning for a dedicated committee to look after the challenges faced by start-ups due to this draconian tax. That’s a progressive step but has an innate loophole. The matters put up for consideration to the committee will depend on the assessing officer’s interpretation. For all its peculiarities, the start-up community will find this step quite relieving and endearing.
Besides touching the contentious Angel Tax issue, Nirmala Sitharaman also extended an array of benefits to multiple sectors that receive the bulk of VC investments. The start-ups in these sectors are supposed to stay gainful from the proposed measures. Here’s a brief insight on how.
Electric Vehicles (EVs)
With sustainability being central to the latest union budget, the development and adoption of electric car technology are being incentivized. According to ETV News Delhi, the GST on EVs is now five percent, opposed to twelve percent previously. Provisions to attract investments into EV production and setting up charging infrastructure are also there. The budget categorically ensures investment-linked exemption to help India evolve into an EV manufacturing hub.
Education: The lure of foreign education drains talent as well as foreign exchange. In her budget speech, the finance minister announced incentives for foreign students to study in Indian institutes. It’s a welcome move that will encourage native students to study in India and open up opportunities for start-ups in this sector while retaining talent and valuable foreign exchange.
The budget has been allotted for capitalization of banks and NBFCs to bring them under the first loss guarantee much like their public sector counterparts. NBFCs with good showing and the start-ups associated with them have also being incentivized through certain reliefs.
The budget proposes to up the inflow of FDI into the insurance sector to help it flourish. The insurtech vertical, which attracts heavy investments from VCs, also stands to gain from the proposal. As the ETV Bharat News Today report suggests, the threshold is being depreciated for re-insurers looking to operate in India, which is also good news for the insurance sector.
The union budget could have been a wholesome package if certain aspects weren’t missing. There is an evident failure in reorganizing the GST rates and reducing GST for specific sectors. The issues related to FDI in various verticals have been left unattended.