Budget 2021 Countdown: Startups, VCs seek tax parity, easier compliance, access to foreign money

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With nearly 22,000 startups recognised by the government of India, the country is the third largest home to new tech and tech-enabled ventures in the world. With the economy projected to shrink as much as 7.7 percent in the current financial year due to the Covid-19 pandemic, expectations are high among entrepreneurs for the year that starts April 1 and from the upcoming Budget 2021. 

Founders of startups and venture capitalists are looking to the central government to take strong steps to encourage new businesses, which are playing an increasingly important role in the Indian economy. They are building products and services not just for domestic consumption, but also for global customers. 

“Our core expectation from the budget is the creation of a level playing field for Indian technology startups,” Vishesh Rajaram, founder and managing partner of Speciale Invest, said in an email to Forbes India. The VC firm offers seed investments to deep tech startups. 

Today there is a difference between tax rates levied on capital gains arising from the sale of unlisted shares and the rates levied on the sale of listed shares. A tax parity will give startups an equal chance to attract larger amounts of institutional capital based on performance alone. This will also ensure a fair comparison between the two asset classes, Rajaram said.   

In the next wave of Indian startups, many will have deep-technology elements borne out of indigenous R&D and with the potential to serve global markets, Nikhil Ramaswamy, co-founder and CEO of CynLr, said in an email to Forbes India. CynLr makes an AI-driven computer vision module with applications in industrial robotics. Pertinent policy changes to allow startups from India to evolve into multinational brands, including customs exemptions, better access to foreign early-stage capital and easier immigration of foreign nationals with specialised talent to participate in local R&D will be a huge fillip to the startup ecosystem in the country, Ramaswamy said. 

CynLr’s products will have customers worldwide, but there are a lot of core technology components it needs that are so niche that only a few vendors exist in specific countries. In such a situation, the current customs regime in India is not conducive, he said. Most of these components attract customs duty of over 20 percent. Only export-oriented units situated in special economic zones (SEZs) can today claim customs waivers and these zones are inaccessible for startups. The geographical bound of SEZs is a bane. Customs benefits for imports done by startups, where the integrated product is exported will make India’s deep-tech hardware startups much more competitive in the global context, and “this is also fundamental to an Atmanirbhar (self-reliant) India serving the world,” Ramaswamy said. 

Further, Indian deep-tech startups with global ambitions do not attract sufficient foreign investments, as there is a latent trust gap that Indian startups, headquartered in India, cannot serve a global market. Policy changes to address this will benefit the next generation of startups coming up in the country, he said. 

"We build from India for the world and increasingly, more technology startups will be doing this. Currently, there is a very high degree of compliance and paperwork which makes it difficult for technology companies to serve the global audience,” Dhruvil Sanghvi, co-founder and CEO of LogiNext, said in an email to Forbes India. “And this forces companies to shift base outside the country.” 

Urgent steps are needed to encourage such high-growth companies to keep their base in India, he said. They will generate employment, export software products, and help to revive the economy. 

“I think the US government is more supportive of startups in terms of financing, and I would seek the same kind of support in India with respect to access to capital and access to cheaper credit,” Harshit Jain, founder and CEO of Doceree, said in an email to the writer. Doceree offers an advertising exchange to the healthcare sector, and is present in India and the US. 

The cost to capital in India is among the highest compared with other markets and a lot of paperwork and approvals are required that make the process very cumbersome. The government should make the process of raising funds and related procedures easier and less laborious so that startups, especially early age startups, can grow, Jain said. 

The budget should remove the corporate dividend distribution tax or levy it at a low rate to encourage foreign investors, and, secondly, startups should be able to get easy loans at low interest rates, Kushang, co-founder and CEO of SupplyNote, a supply chain automation startup, said in an email. 

"Over the years, the government has taken several measures to minimise and eliminate tax terrorism. However, the concern still remains,” Bhanu Chopra, founder and chairman of RateGain, a travel and hotel management software company, told Forbes India. “India is home to a new age of entrepreneurs, wherein not everyone intends to evade taxes and flee from the country. So the scrutiny needs to end, especially if a company has received foreign funds.” 

Indian startups need a single-window clearance system for taxes, and with the right incentives, the exodus of successful startups can stop. Especially in the software-as-a-service (Saas) segment, India will create about 50 unicorns—startups valued at $1 billion or more—in the next 5 years. The government must find ways to incentivise domestic capital, which can contribute to this growth and benefit from it, Chopra said. 

One of the characteristics of the Indian startup ecosystem is that it depends heavily on foreign investors to fund growth beyond the early stage. Even at the early stage, many venture capital firms of note operating in the country have their limited partners mostly based overseas. For domestic investors to participate in this ecosystem, “the pathways haven’t been created yet,” Gopal Jain, managing partner at private equity firm Gaja Capital, told Forbes India in a recent interview. 

Just as local mutual funds matured and now play a significant role in the public markets, India needs a critical mass of domestic fund of funds that can be an option for investors across the spectrum—from large insurers to individual investors. There are a couple of fund of funds, such as the well-known one created by the Indian government through the Small Industries Development Bank of India, but many more such funds are needed, which can in turn invest in venture capital and private equity, Jain said. 

The previous budget did not completely address the expectations and requirements of the startup ecosystem. There were misses, including working capital crunch and tax parity on capital gains, Neeraj Tyagi, founder and CEO of We Founder Circle, a startup investment platform, told Forbes India. As businesses invest more in tech after the Covid-19 pandemic, the time is right to incentivise startup funding and relax policies to encourage angel investors to invest more, he said. 

The union budget provides two big opportunities—boost economic growth by scaling investment in digitalisation, and enhance technology-enabled rationalisation of the country’s tax infrastructure, Niraj Hutheesing, founder and managing director of Cygnet Infotech, an IT consulting and services provider, said. The former will bring employment and self-employment opportunities for the youth through digital initiatives of startups and MSMEs. The latter will enable businesses to thrive in a simplified indirect-tax compliance regime powered by new technologies like hyper automation, he said. 

India could also relax the public listing rules for startups, Arul Mehra, a partner at Baring Equity Partners India, told Forbes India in a recent interview. “Our strategies are mostly agnostic. I think what we would like to see is if India can open up overseas listing of Indian companies as well, which has been restrictive for a long time,” he said. There is a lot of overseas interest to buy some of the fast growing companies in India and it is an opportunity to list companies on NASDAQ in the US or exchanges in Hong Kong, he said. 

The large unicorns, for example, if listed overseas will create value for local employees and shareholders. It will help improve capital flow to the country as well. And the restriction that an Indian company has to be listed in India before it lists overseas is constraining. In India, the government bars loss-making companies from listing on the exchanges. That restriction helps protect small investors, especially, but also prevents the startups from raising large amounts of capital. 

Even without listing, Indian startups have been establishing legal entities in the US or Singapore or other international financial destinations to tap foreign markets. It is, however, not the most efficient structure—there will be an international company and there will be subsidiaries, and they will have to pay taxes overseas, so India is losing those taxes as well, Mehra says. 

Allowing Indian companies to list overseas will help the country get the best of both worlds—the startups get a simplified holding structure and they get the cheapest capital from the overseas capital markets. It creates an alternative platform to raise capital, while keeping the companies in India, employees in India and taxation in India. “Why restrict overseas exchanges from hosting Indian companies. I think there is better price discovery there,” Mehra said. 

Flipkart can list for sure, because of its Walmart parentage, Mehra said. And large multi-billion unicorns such as Ola, Swiggy, Byju's will find significant interest in overseas markets, he said, adding “it will help the whole VC ecosystem to churn much faster and fund more companies.”