Posted on

iSPIRT Foundation’s Official Response to Union Budget 2019

The budget has some relief for startups, but not an outsized role in the $5 Trillion plan
 
In her first budget presented today by the newly-appointed Finance Minister Nirmala Sitharaman started her speech with strong words stating that “We do not look down on legitimate profit-making. Gone are the days of policy paralysis and license-quota-control regime”. Given the resounding mandate of the people, this government has the political capital to execute a bold budget and this is what the country was expecting. While the vision is bold, the recommendations made by the government were a mixed bag – some solid announcements, but also notable for its omissions.

Startups may, at last, see the end of the dreaded “Angel Tax” that has plagued them since 2012. The creation of an e-verification process and “special administrators” whose permission would be required before an Assessing Officer can begin inquiries against start-ups who have already received orders should extend relief to those who were excluded from the February 2019 circular by DPIIT. This can also solve for section 68 – wrt unexplained cash credits – which was the more onerous section by ensuring verification of investors. Extending the exemption of section 56(2)(viib) to Cat II AIFs also brings parity and greater participation between AIFs. The tax deduction for investments into startups saw relaxations in the holding period (5 to 3 years), reduction in the minimum threshold (50% to 25%) and extending the time period.

In this budget, the government recommitted to its ideal of a less-cash economy. By allowing digital payments to the government, they are essentially legitimizing the use of digital payment methods. Further, by disincentivizing cash withdrawals by applying TDS and mandating digital payment acceptance without charges for firms over turnover Rs 50 Crores, they will further “nudge” users into preferring paying digitally. The approach just provides for a reduction in cost and discourage cash expense. This is hardly a definite fiscal measure for incentivizing digital payment. Most importantly, the government is eating its own dogfood, and starting to make digital payments through a dedicated payments platform to its own MSME suppliers and contractors, not only boosting digital payments but providing a critical lifeline to MSMEs by reducing their working capital requirements. In fact, the government has announced a significant boost to improve the availability of credit to the economy.  This includes providing Rs 70,000 Crore to the banking system, as well as a partial credit guarantee for the purchase of Rs 1 Lakh crore of pooled assets from the NBFC system. These measures should improve the availability of credit to the private sector, and boost growth!  The govt has also announced an amendment to enable all NBFCs to lend against invoices through TReDs. These are steps in the right direction and will free up much-needed working capital for the industrial sector.

It is encouraging to see the government adopt technology to improve convenience and simplification for tax-payers. Currently, there are nearly 40 crore citizens in India with a PAN in contrast to 120 crore Indians with Aadhaar. “Interchangeability of PAN and Aadhaar” was announced by Nirmala Sitaraman which has the potential to increase the tax filing base to all Aadhar holders. The details about implementation are specified as follows. Income Tax Department shall allot PAN to every person who will be filing tax with Aadhaar and currently do not have a PAN. The demographic verification will be carried out using data from the Unique Identification Authority of India (UIDAI). Additionally, citizens who have both PAN and Aadhaar can choose to use either of the options to file their returns. While the move of interoperability clearly seems to increase ease of filing taxes, whether it would also increase the number of tax-payers in informal sectors is still a question that needs examination. Further, understanding the implications of increased data linkage includes the discussion of data security.

What was missing was an indication of “Startup India 2.0” – the new phase of Startup India. The Rs 20,000 Cr Startup Seed Fund wasn’t announced, nor were fresh incentives for investments into VC Funds or startups, rationalisation of ESOP taxation, amongst others. Lowering the LTCG ( Long term capital gain) rate on startups shares, which was alluded to in the Economic Survey, also doesn’t find mention in the Budget. Additionally, there have been no measures to help our startups list in Indian exchanges. Overall, this budget has also not delivered on promoting Rupee Capital Formation which would help local startups wean off volatile foreign capital.

Despite the Economic Survey’s focus on Data as a public good, no significant announcement was made to leverage the Data assets of the country. In the speech about soft power, while Yoga and Artisans rightfully got their place, new-age digital platforms like Aadhaar, BHIM-UPI and India Stack, which are truly world-class, did not see a mention. Recognizing these Digital Public Goods as elements of soft power that can be exported to other countries would also give a massive boost to India’s start-ups in markets abroad.

Reach out to Sanjay Jain ([email protected] ) in case you would like to know more details.

Special thanks to our volunteers Saranya Gopinath, Rakshitha Ram, Siddarth Pai, Tanuj Bhojwani, Sudhir Singh, Sanjay Jain, Nakul Saxena, Sharad Sharma, Karthik KS.
Posted on

Sign Startup Bridge Petition and promote Stay-in-India Checklist

Today’s Economic Times carries an article about “The Dark Secret of India’s Start-up Boom”. This implores the Modi Government to make bold moves regarding the onerous regulations that startups face.

iSPIRT is also part of the new Startup Bridge India campaign, which urges the Indian government to adopt best practices from around the globe to help startups start, flourish and exit.  We’ve been working alongside a consortium of lawyers, think tanks, entrepreneurs and venture capital firms from TiE Silicon Valley to put together detailed legal language and fixes in the current policy. Startup Bridge India is hosting an online petition that demands simpler processes for investing in India’s future, a petition intended to show widespread public support for these important initiatives. Every signature matters and timing is critical to help bring about much needed policy change. You can sign the petition on startupbridgeindia.com.

iSPIRT has been involved in nitty-gritty work with the Government in the past 75 days around its Stay-in-India Checklist. Here is what’s been happening…

What is Stay-in-India Checklist?

More and more technology startups are being forced to redomicile to Singapore or US due to a host of policy irritants that disparage the Indian startup ecosystem. After careful consideration, iSPIRT’s Stay-and-List-in-India Policy Team identified 34 key issues that need to be resolved immediately to stop this exodus. The list includes issues covering incorporation, fund raising, operations, taxation, exits, closure, payments, and intellectual property.

How was it created?

We looked at submissions from TiE, NASSCOM, IVCA and FICCI and put them into a single spreadsheet. After de-duplication we had about 120 items. These were then classified into hygiene and incentives categories. Based on consultations with startups, the hygiene set was further refined to create the Stay-in-India Checklist.

What are some of the key items on Stay-in-India Checklist?

The Checklist includes requests for favourable IP tax regime, harmony in taxation of listed and unlisted securities, relaxed external commercial borrowing norms, faster incorporation and liquidation processes, and permitting convertible notes, indemnity escrows, and deferred consideration in foreign investment transactions.

Who manages the Checklist?

iSPIRT Stay-and-List-in-India Policy Expert team managed the Checklist. The team has 7 members – two startup CFOs, two VCs and three tax/legal experts. Mohandas Pai as the mentor to the team.

What’s been the progress on the Checklist?

The Checklist received mixed responses from the regulators. While certain items (like permitting share swap as a valid method of share transfer in FDI transactions) were allowed during the discussion process itself (hence removed from the Checklist), the regulators were hesitant in permitting other items (such as tax exemptions). Largely, the regulators were receptive to the suggestions. We had detailed discussions on each item of the Checklist with the relevant regulators. Wherever the regulators were unable to implement our suggestions, they conveyed to us the concerns that restrained them. We hope these concerns are alleviated in due course, and they are able to implement all suggestions.

What are some of the key meetings that have taken place?

We have a good partnership with Mr. Amitabh Kant, Secretary, DIPP on this. His office has setup about two dozen meetings with the relevant regulators. In these meeting, iSPIRT plays the role of being the subject matter expert on items in the Stay-in-India Checklist.

The whole process kicked into high gear after an intense and productive meeting with Mr. Amitabh Kant on Oct 23rd and with Dr. Raghuram Rajan on Oct 24th. This was followed by a meeting with Principal Secretary, Mr. Nripendra Mishra at PMO on Nov 9th. Subsequently, meetings with Revenue Secretary and MCA Secretary took place. These led to numerous follow-up meetings and calls with relevant officers. Nakul Saxena has coordinated all these meetings.

What are some of the learning’s from this effort?

There is very little awareness about the world of technology startups. So education on the realities faced by the startups is critical. Sometimes one runs into situations where the issue can be closed without much effort. At other times, the dichotomy between regulatory agencies is most frustrating. Also, because of the way liberalisation of regulatory framework has been widely misused in India, the authorities exercise great caution before liberalising any regulation. The approach, therefore, is to not permit any ‘risky’ regulation, rather than punishing those who misuse it. Overall, we find the receptivity of the government agencies is good. Our positioning of being a think tank, focussed on the national agenda, rather than being a tradebody is helping a lot as well.

Guest post by Sanjay Khan, Khaitan & Co