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Union Budget 2020: A Good Start That Needs Swift and Decisive Action


 “Words can inspire but only action creates real change.” 

Presenting the second Union Budget, the Finance Minister asserted that entrepreneurship has always been the strength of India and proposed a number of measures and policy changes to help boost the Indian startups. The Budget was a step in the right direction, but these are just baby steps for an economy that needs giant leaps to become an innovation hub. 

We are also hopeful that the investment clearance and advisory cell will go a long way in strengthening the startup environment and improve the ease of doing business within our community. The proposed 5-year deferment of tax payments on ESOPs by startup employees in the Union Budget, we believe, is a step in the right direction. However, it does not satisfactorily address the complete concerns and other pain points that have been plaguing the startup ecosystem. 

Firstly, the ESOP taxation change, in its current form, applies only to around 200 startups recognised by the IMB (Inter-Ministerial Board), thereby, severely restricting its scope. It is only fair that all DPIIT-registered startups enjoy the benefits of the proposed changes equally. Secondly, we strongly believe that ESOP taxation must be revised as per global norms, else, it would become an ineffective tool of talent acquisition and retention. 

We also require cohesive measures towards improving the ease of doing business and strengthening the overall ecosystem. To ease the working capital crunch faced by startups, a lowering of TDS rates on payments to DPIIT registered startups and MSMEs is necessary. To enable greater rupee capital participation, allowing universities and public trusts to invest in Alternative Investment Funds (AIF) will make a considerable impact. Achieving tax parity between listed and unlisted securities, which at present vary significantly, will enable startups to attract greater investments. The provision of R&D benefits for companies will help spur innovation and startup activity in India, enabling a structural shift in the economy towards building high-value capabilities. 

We believe that more cross-cutting measures across industries are necessary and so is the reduction of frictions between the businesses and government players. This will help us to cover more ground in fulfilling the mission of making India a high-value, innovation economy. 

Overall, Union Budget 2020 does reflect the Government’s keenness in improving the ease of doing business but considering that the lofty goals we have set out to achieve, good intentions and keenness do not suffice. These must be augmented with robust policy changes, as well as, swift and decisive action to strengthen and accelerate the startup ecosystem. 

India is at a crossroads and must decide how she is going to traverse the next decade and champion the change the world needs. It reminds one of Robert Frost, “Somewhere ages and ages hence:

Two roads diverged in a wood, and I—I took the one less travelled by,

And that has made all the difference”

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Union Budget 2020 – iSPIRT Recommendations

India is among the top startup ecosystems in the world with home to 50,000+ startups and 3,500+ funded startups growing at a rapid pace at 30 per cent. While the future outlook of the Indian startup ecosystem is definitely promising, further accelerated growth can happen only if the government introduces more startup-friendly policies, other than the existing support under ‘Startup India’.

With Budget 2020 less than two months away, the startup ecosystem is hoping to get a major boost with respect to the following measures:

  • Improve ease of doing business for startups.
  • Attract domestic and foreign investors.
  • Increase working capital flow for startups.

iSPIRT has made a 13-point recommendation list for Budget 2020 with respect to the above-mentioned measures:

1. Remove the TDS payment for DPIT registered Startups

Currently, payments to DPIT registered startups are subject to Tax Deduction at Source (TDS) of 10% under section 194J. It takes at least 1-2 years for startups to get refunds after filing of their returns, which blocks their working capital for that time period. 

2. Harmonise the Tax Rate and Holding Period between Listed and Unlisted Securities of Startups 

The higher holding period and higher tax rate disincentivise investments into startups from Indian sources. Globally, no such differentiation exists.

This recommendation seeks:

  • Reduction of the holding period for unlisted securities to 12 months from the current 24 months.
  • Levy of a lower tax rate of 10% on the sale of unlisted securities.
  • Removal of the “superrich” surcharge of 25%/37% on the sale of unlisted securities.

3. Change in the taxation of ESOPs for Startups:

The existing definition of Rule 3(8)(iii) of the Income Tax Rules, 1962 does not take into consideration the discrepancies in the determination of ‘Fair Market Value’.

The new recommendation seeks amendment to this rule as as per Rule 11UA(1)(c)(b), provided such fair market value shall not be less than the exercise price.”

4. Clarification on the February 19th, 2019 DPIIT circular on “Angel Tax” with regard to Form 2

This circular states that the exemption lapses in the case the startup has or will invest or conduct any of the activities below for a period of 7 years after investment, inter alia:

  • Make capital contributions to other entities, 
  • Make investments in shares and securities, 
  • Give loans and advances (except in the case of lending startups

The recommendation seeks an amendment to this notification

  • Extend the “business model” test applicable to all the other investments mentioned in Form 2 to all points mentioned therein
  • Allow Startups to make Loans and Advances in the ordinary course of business provided that the PAN of the recipient is reported
  • Allow startups to invest into shares and securities and make capital contributions provided that such downstream investments do not make further investments into any of the other points listed in Form 2

5. Allow for AIF expenses to be capitalised/passed-through

Expenses of an AIF can add up to up to 25%-30% of its corpus during the lifetime of a scheme, making a large chunk of the fund is a “dead-loss”.

The new recommendation seeks AIF expenses to be capitalised as the Cost of Acquisition or allowed to be set off against the income.

6. Classification of securities held by AIFs as Capital Assets by amending section 2(14) of the Income Tax Act, 1961.

There is still friction between the startups, investors and income tax department with respect to taxation of short-term gain from the sale of securities under AIF.

The new recommendation seeks an amendment to Section 2(14) as “any securities held by a Foreign Institutional Investor or AIF which has invested in such securities in accordance with the regulations made under the SEBI. 

7. Pass-Through Status for CAT III AIFs

Unlike CAT I and CAT II AIFs, CAT III AIFs do not have pass-through tax status, rendering their income to be taxed at the maximum marginal rate for their income earned, regardless of the tax status of the underlying investor.

The new recommendation seeks an amendment to Section 115UB and Section 10(23FBA) by including CAT III AIFs.

8. Allow Universities and Public Trusts to invest in AIFs

Currently, investments are allowed in SEBI registered Mutual Funds or notified Mutual Funds set up by a public sector bank or a public sector financial institution.

The new recommendation seeks an amendment to this section to include ‘Units of an Alternative Investment Fund registered with the Securities and Exchange Board of India”

9. Notify all SEBI registered AIFs as “long-term specified assets” under section 54EE

Section 54EE was introduced on April 1, 2016, to give capital gains exemption of Rs 50 lakhs for any gains invested into “long-term specified assets”, defined as “a unit or units, issued before the 1st day of April 2019, of such fund as may be notified by the Central Government in this behalf”

So far, the Central Government hasn’t notified any such funds, so no tax-payer has been able to avail of this benefit.

The new recommendation seeks issuance of a Central Government notification to notify all SEBI registered AIFs as “long-term specified assets” under section 54EE and announce measures to extend this to April 1, 2025.

10. Time-bound response from the Inter-Ministerial Board (IMB) and allowing all startups to reapply

The IMB has not been effective yet in timely responses to startups.

The new recommendation proposes DPIIT to issue a notification stating that:

  • IMB will respond in 60 days from the date of submission by the Startup.
  • Startups who were denied IMB recognition prior to February 19th, 2019 can re-apply for IMB recognition once again under the new criteria.

11. Exempt Software product Companies from Softex

Software product exporters are required to file SOftex form to report the inward remittance on export invoices in convertible foreign currency. However, Software products have a publicly listed MRP/List price and hence do not require any valuation.

The new recommendation seeks RBI to exempt software product companies from filing Softex and create a separate category of Purpose code for disposal of inward remittances by authorised dealers.

12. Creation of aHSN code for Software Product Startups

Under the GST regime, all IT Software has been treated as “Service”.  Yet, there exists HSN codes and SAC codes both. 

It is recommended that an HS code classification for specific categories can be issued using the last 2 digits (first 6 Digits being defined under international system). 

13. R&D Credits for Software Product Companies 

As startups and young software product companies don’t have taxable profits, they are unable to take advantage of current R&D tax benefits that involve setting off R&D expenses against taxable profits. To overcome this limitation, they should be allowed a deferred tax credit for up to 7 years after the R&D investment.

You can read about Budget Representation 2020 in detail here.

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Explara – The new journey begins…

There are some companies which start their business with a bang but can’t sustain their growth. Then there are other firms who seize market opportunities and add value to it. These companies succeed in the Indian Market and then get ready to go Global, including taking on the hard to penetrate Asian Markets. The following Interview is of a company that has reached a turning point and  is ready to leave their footprint on the world markets. With new products in the making and a new brand name,they are ready to take Asia by storm. In discussion with Product Nation, Santosh Panda Founder Explara (formerly Ayojak) shares his strategy on the company’s plans ahead.

What was the vision with which you launched the company and how has the journey been so far? 

We saw a need in the small to medium event organizers to streamline their businesses. These organizers did not have any technology input/help and we thought we could provide the same through this platform. We launched Ayojak in September 2008 and after adding ticketing and other features to the product we upgraded it the following year. In 2008 we started with listing of events with 4-5 customers. At that time event organizers were using handouts etc. to reach out to their customers and could not anticipate how many customers would come for the event. In 2009 our turnover was 1.5 Lakhs with 5 customers that went up to Rs.30 Lakhs in 2010, clearly establishing that there was a need in the market for the product which we were offering. In 2011 we clocked revenues of Rs. 1.69 crores and since then have been growing at over 75% year on year and today we handle over 300 events per month.

What was the competition like in 2009?

There was hardly any competition, the infrastructure was getting built, we had to call customers and tell them how to use it. There were people who sold only a particular event and nobody was looking at the platform as a one stop solution for all event needs.

Ayojak has gone in for a rebranding exercise; do tell us about the same. What prompted you to choose a different name? 

Initially we were looking at solving a B to B problem, as in how to run an event, get details of people who are coming, collection of entry fee etc. We chose to address these problems for the event organizers. Therefore the focus was event organizers. But after some time the name which we had  chosen – Ayojak, was perceived to be more of a name for an event management company and thus called for rebranding. Also since we were operating only in India, even then people had problems pronouncing the name clearly.

We thought, that if we need to target B to C customers and look international we should have a name which will be easy to pronounce and at the same time clearly be able to define to the customers what we were all about.

We want to be known as the go to site for any event organizer. Hence an opportunity to all event organizers and customer to Explore hence – Explara

Which other markets other than India are you looking at operating in and why?

We are looking at Singapore, South Africa, Philippines, to begin with, since we have already operated in a tough market like India, the learning has been immense and we feel that we will be able to apply the same in other developing markets, which are equally challenging. Our foray into international arena would be by end July.

What are the new features which you are planning to launch to supplement your existing product lines?

In our view the next two features could very well be the game changers. Any event organizer today still has two problems, Firstly, to identify who all have come for an event and who are yet to come. Through a new product  – Entry Management, we will enable organizers through a smart phone to read the bar code/QR Code/NFC for every visitor attending the event, thus will at all times know the details of people who are in the event, yet to come or are outside the event.

Secondly, In India 30-40% of the attendees still come directly at the event. To help the organizers with this problem, we will give them an app based Box Office application which they can use to scan credit cards, debit cards etc, at the venue itself, thus ensuring that end moment gate collections are just as easy.

What advice would you give to product startups based on your early experience in the last few years?

Communicate clearly too all employees that you are there to stay, thereby keep reiterating to your employees the same message amplifying the fact that you are there for the long term.