FM focuses on startups, FDI

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Finance Minster Arun Jaitley reiterated the importance of startups in the country’s growth in his budget speech on Monday. In his bid to facilitate these fledgling firms, the FM proposed a number of initiatives to help them.

“Startups generate employment, bring innovation and are expected to be key partners in the Make in India programme. I propose to assist their propagation through 100 percent deduction of profits for 3 out of 5 years for startups set up during April 2016 to March 2019. MAT will apply in such cases. Capital gains will not be taxed if invested in regulated/notified Fund of Funds and by individuals in notified startups, in which they hold majority shares,” he said.  

This sent a wave of excitement in the startup community.  

Saurabh Srivastava, co-founder, Indian Angel Network, says the three-year tax exemption for startups will reduce compliance burden and cash outflows, allowing ventures to invest in product development and scaling up businesses. “Exemption from capital gains tax is an expected move from this year’s budget and will encourage more high-risk investments into the ecosystem. However, it would have been great if capital gains tax regime for unlisted companies was aligned with that for listed companies at least for investments made by SEBI-registered AIFs (alternative investment funds). This would end the discrimination against domestic venture capital funds as foreign funds anyway pay no capital gains tax by investing from Mauritius and other treaty friendly countries,” Srivastava says.  

By enabling one-day registrations for startups, the government has focussed on bringing in ease of business for the ventures.  
 

The proposals, however, are mostly in line with what was announced in the Start-up India event in January. R Chandrashekhar, president, Nasscom, says the budget could have been an opportunity for the government to take the initiatives forward.   

“For the startup ecosystem, the budget has been a little bit disappointing. For example: Income tax exemption that is announced for three years out of the first five years that was announced on January 16, but we have suggested that MAT and indirect tax should also be exempted. But, the budget didn’t look into that and liability will continue on MAT and indirect tax. We also recommended for exemption on angel tax on investments that has not been addressed,” Chandrashekhar says.  

According to a Nasscom release earlier this month, India now ranks as the third-largest startup base in the world after the US and the UK, with over 4,200 startups (largely technology enabled).       

The FM also undertook several significant changes in the FDI (foreign direct investment) policy to add to capital flow in certain sectors. Hundred percent FDI will be allowed through FIPB (Foreign Investment Promotion Board) route in marketing of food products produced and manufactured in India. This will benefit farmers, give impetus to food processing industry and create vast employment opportunities.

Foreign investment will be allowed in the insurance and pension sectors in the automatic route up to 49 percent subject to the extant guidelines on Indian management and control to be verified by the regulators.

Hundred percent FDI in Asset Reconstruction Companies (ARCs) will be permitted through automatic route.  Foreign Portfolio Investors (FPIs) will be allowed up to 100 percent of each tranche in securities receipts issued by ARCs subject to sectoral caps.

Investment limit for foreign entities in Indian stock exchanges will be enhanced from 5 to 15 percent on par with domestic institutions. This will enhance global competitiveness of Indian stock exchanges and accelerate adoption of best-in-class technology and global market practices.

The existing 24 percent limit for investment by FPIs in Central Public Sector Enterprises, other than banks, listed on stock exchanges, will be increased to 49 percent to obviate the need for prior approval of government for increasing the FPI investment.

The basket of eligible FDI instruments will be expanded to include hybrid instruments subject to certain conditions.  

“Given the enormous debt burden on Indian corporates, measures which help in improving overall credit health of the economy are welcome. This was not a budget with high expectation of drastic reform and many of the announcements have been tactical or to improve efficiencies. There is more sensitivity to entrepreneurship which is a good start but this area needs more attention in the years to come,” says Vinod Murali, managing director, Innoven Capital.  

FDI will be allowed beyond the 18 specified NBFC activities in the automatic route in other activities which are regulated by financial sector regulators.