Budget 2024: Startup Founders, Investors Seek Tax Reductions, Reduced Regulations & Paperwork We hope that the long-term capital gains tax will be reduced from the current 20% to 10% and that ESOP taxation at the time of sale will be implemented, says Vineeta Singh, co-founder and CEO, SUGAR Cosmetics

In the backdrop of prolonged funding winter, layoffs and delays in deal closures, startup founders anticipate an array of measures to boost the ecosystem from the upcoming interim budget on February 1, 2024 by Union Finance Minister Nirmala Sitharaman. Reduced regulations, the introduction of specialized funds, investment in digital public infrastructure, and supportive tax policies are some of the expectations that they have from the government.

ESOP taxation at the time of sale

"We are eagerly anticipating positive tax reforms, particularly those that pertain to employee stock options and carry-forward losses, which are critical for a thriving startup sector. We hope that the long-term capital gains tax will be reduced from the current 20% to 10%, and that ESOP taxation at the time of sale will be implemented. In general, we expect a budget that promotes innovation through targeted incentives, tax reductions, and reduced regulations, empowering entrepreneurs to make significant contributions to India's economic growth," said Vineeta Singh, co-founder and CEO, SUGAR Cosmetics.

She also added that if some of the larger economic issues are reversed, we can anticipate a gradual improvement in the funding environment for startups. "The government has demonstrated a strong commitment to supporting startups through regulatory reforms, tax incentives, and funding programs. These initiatives are expected to create an environment advantageous to entrepreneurial growth and have a significant impact," she said.

Favorable regulatory environment

India is ranked as the third-largest startup ecosystem globally. While we celebrate our achievements, there's room for improvement, particularly in regulatory aspects, say founders and investors. "As we navigate this interim phase, I believe we need to keep an eye on the bigger picture – encouraging more domestic capital, fostering a favorable regulatory environment, and ensuring that our startup economy continues to thrive. The future full budget will play a crucial role in shaping this trajectory, post the general elections. Currently, the capital ratio is tilted heavily, with 85% Dollar Capital and only 15% Domestic Capital. We expect to witness this domestic share increase to 25%, infusing additional vitality into the startup ecosystem. Achieving these demands proactive steps from the government to channel capital through different sources," said Vikram Gupta, Founder and Managing Partner, IvyCap Ventures.

He also added that this shift demands proactive measures like– encouraging banks to invest in Venture Capital funds, IRDA's role in incentivizing more insurance companies to invest in funds through favorable rule adjustments, incentivizing pension funds to actively contribute to the startup ecosystem and providing tax benefits to family offices, and emulating successful models like those in the UK.

Focus on total factor productivity

While India's capital expenditure-driven growth has reaped large benefits for the economy, it poses the risk of India falling into the middle-income trap, feel some. " The only way to escape it is through growth in total factor productivity (TFP) which is led by an inclusive and skilled workforce. Data shows that while capital expenditure in terms of actuals has grown by 39.06% between 2020-21 and 2021-22, TFP growth has been -0.9%. Moreover, a recent RBI report states that the sectors that saw the highest growth in TFP were labor-intensive sectors as opposed to capital-intensive sectors. Hence, our people are our key to a pole-vaulting economy," said Pravin Agarwala, co-founder and group CEO, BetterPlace.

Investment in digital public infrastructure

Since the interim budget needs to be prudent while still creating a large-scale impact before the elections, investing in digital public infrastructure (DPIs) and Generative AI geared towards creating a more inclusive and skilled workforce is also a way forward, according to them. "The first investment the budget must make is to strengthen existing workforce DPIs like National Career Service and e-Shram portal to make a robust infrastructure like ONDC and UPI which can be leveraged by the private sectors to train, recruit and retain workers. The second investment must be to integrate GenAI into these DPIs and also creating funds for more innovation in GenAI for workforce development," he added.

Solutions for cyberattacks

Cyberattacks have become a massive hindrance to the growth of startups. Founders and investors would thus like to see the upcoming budget carry a strong focus on helping businesses overcome the threats of cyberattacks and other digital risks. "Indian businesses are adopting digital solutions at an accelerated pace but yet their cybersecurity maturity remains low. A budget that supports SMEs and startups' growth while ensuring their cybersecurity needs are taken care of is much needed in the current AI and digital age. The government's approach needs to move beyond building compliance frameworks to providing tangible subsidies for cybersecurity protection solutions," said Kumar Ritesh, founder, Cyfirma.

Reduced paperwork

The budget is expected to be very interim this year but from the perspective of investors and startups, Anil Joshi, managing partner, Unicorn India Ventures has two specific requests. "Numerous investors, including venture capitalists, are receiving IT notices for their investments in startups, leading to increased paperwork, even when the investment is made in a DIPP-registered startup by SEBI-registered funds. We hope this can be addressed."

He added that his second request is regarding the recent guidelines from the RBI to banks, mandating a 100% provision for the investment amount in an Alternate Investment Fund (AIF) if they have exposure to any portfolio company. "This poses a challenge for the industry. We believe there is a need for simplification of this policy, as it may make banks hesitant to invest in AIF due to the potential loss of business opportunities if they comply with the RBI guidelines," he said

Introduction of dedicated funds

Experts also feel that there is a need for the introduction of dedicated funds for emerging sectors like electric vehicles, renewable energy, green hydrogen, over and above the existing Startup India Seed Fund Scheme. "This could also uplift investor confidence and positivity. Overall, this budget is a chance to implement focused measures that promote innovation, encourage entrepreneurship and unlock the potential of Indian startups to drive economic growth. Proactive steps on taxation, R&D spending, easing regulatory burdens and supporting access to capital can go a long way," said Mayuresh Raut, Managing Partner, Seafund.

Easier access to credit for fintechs

A budget that prioritizes financial inclusion for MSMEs, which contribute over 30% to India's GDP, is paramount, say founders. "We anticipate initiatives that include targeted schemes for promoting MSME credit, incentives and policies that encourage fintech NBFCs to extend their reach to underserved MSMEs, fostering economic resilience and vitality. Facilitating easier access to credit for fintechs, potentially through collaborative efforts with traditional financial institutions or dedicated government-backed schemes will go a long way in disseminating credit to required sections," said Manish Lunia, co-founder of Flexiloans.

Support for AI startups

Indian startups at the forefront of AI innovation need support and incentives to maximize this opportunity, say startup founders. "The upcoming budget should include measurable commitments and initiatives that nurture AI startups. Allocating funds for research grants, incubation centres, and skill development programs will help build an AI-ready workforce. Tax incentives for companies adopting AI solutions will accelerate adoption. Prioritising AI and backing startups in this space through the budget will showcase India's vision to lead the AI revolution globally. The budget should reflect long-term thinking and investment for India to reap the benefits of AI and related technologies," said Raut.