26/02/2016 7:21 PM IST | Updated 15/07/2016 8:26 AM IST

Budget 2016: Stimulating The Start-Up Ecosystem

business graphs analyzing.
business graphs analyzing.

In 2016, India is projected to grow at 7.7 per cent, overtaking the economic growth rate of China. A feat it has managed to achieve over a relatively short period of time. Growing at such a swift rate, it has spent very little time to fix bottlenecks that have plagued the system since the period before economic liberalization. As a result, it still finds itself ranked at 130 in the ease of doing business rankings by the World Bank.

At this juncture, the Union Budget 2016 offers an opportune moment to pause, reflect and implement the necessary solutions in this steep trajectory of growth. It is an event that defines the nation's economy and sets the expectations of people for the coming financial year. It has an irrevocable impact across different strata of society, including start-up founders, established industrialists and owners of small and medium businesses.

Infrastructure schemes for tier 2 and 3 cities would boost the start-up industry tremendously.

Apart from consolidating his support for the 'Make in India', 'Start-up India, Stand-up India' and 'Digital India' campaigns, Arun Jaitley must implement a clear plan of action in terms of numbers that entrepreneurs can leverage as promised in these schemes. This year, substantial funds must be allocated towards development of infrastructure, improving connectivity via roads or internet, removal of red tapism and bureaucracy in implementation of policy, and greater clarity on a ridiculously large number of taxes.

It must focus on providing a clear timeline for infrastructure programs. Although roads empower business in reaching out to potential customers, internet-powered smartphones are the new backbone on which the start up industry thrives. According to an IAMAI-IMRB survey, only 9% of rural India can access the internet, which is an abysmally low number. Infrastructure schemes for tier 2 and 3 cities would boost the start-up industry tremendously.

Funding and taxation are the primary concerns regarding the budget for this industry. Tier 2 and 3 cities possess very few sources of funds, such as venture capitalists and angel investors, leaving banks as the only viable funding source. These banks in turn consider start-ups as high-risk ventures, leaving few chances for entrepreneurs to fund their dreams. Even though a few start-ups -- such as Faircent and LoanMeet -- are attempting to fill this void, it is equally important to implement credit guarantee mechanisms through the National Credit Guarantee Trust Company (NCGTC)/ SIDBI for debt funding, as was announced under the 'Start-up India, Stand-up India' scheme.

The Budget would do well to revisit the three-year tax break for start-ups... most start-ups do not break even in the first three years of existence.

This year's budget must also provide a better definition of online aggregators and the taxation norms that govern them, as lack of clarity in this regard leads to problems at a later stage. Case in point: In 2014, Amazon was stopped from operating in Karnataka due to lack clarity on taxes to be levied on online retailers. Certain taxes need to be redefined as they are redundant and do not serve their purpose. One such tax is the Angel Tax under Section 56, which taxes start-ups on investments they receive from angels if it is above fair-market value. Another one on this list is the Capital Gains Tax, which has resulted in many Indian startups shifting their registered offices outside India, leading to huge losses in terms of tax revenue for the government.

The Budget would do well to revisit the three-year tax break for start-ups. In order to benefit from this incentive a start-up needs an approval from an inter-ministerial panel, which makes it out of reach for many entrepreneurs. Also, since most start-ups do not break even, let alone make profits, in the first three years of existence this incentive can prove to be of little use to this target segment.

Nidhi Agarwal, Founder and CEO, KAARYAH, states the difficulties entrepreneurs face regarding this incentive and the ambiguity of tax structure:

"It is an irony that on the one hand, the government wants to give a tax holiday in the initial three years, and on the other hand, heavy losses incurred by startups are not allowed to be offset against future profits due to changes in shareholdings.... Service charges paid by e-commerce companies to market places attract service tax as well as sales tax under the current laws. We'd like to see some changes there, especially as marketplaces onboard small, new retailers like us."

The proposed implementation of the Goods and Services Tax (GST) in this year's Budget could remove ambiguity amongst VAT, CST and service tax. It would help in developing a uniform tax structure. Such a decision would favour start-ups as it would bring in greater compliance and efficiency across different states of the country. Along with the GST Bill, the government could use this Budget session to push the new bankruptcy law that is still stuck in the Parliament. This law will make pulling the plug on businesses a lot simpler than before.

The proposed implementation of the Goods and Services Tax (GST) in this year's Budget could remove ambiguity amongst VAT, CST and service tax.

The government must realize that one of the engines of India's rapid economic growth has been the start-up ecosystem, which has three unicorns that are valued at $1 billion. According to the NASSCOM-Zinnov report 2015, India has moved up to rank three amongst global startup ecosystems and has the fastest growing start-up base in the world. These facts, along with the messages of the Finance Minister and PM, have built an aura of positivity around the Indian start-up ecosystem. If the Budget is able to deliver on the aspects highlighted, then it would cement India's position as a global start-up powerhouse.