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As fund flow dries up, startups look up to Budget with big expectations

Year 2016 budget had a slew of sops for startups involving a three-year tax holiday, presumptive tax scheme for small businesses, increase in 80GG deduction by Rs 33,000 per annum among others. For Budget 2017, the talking point for many startups is taxation on valuation, which has shot up significantly in recent years due to sharp rise in online transactions. This tax on valuation should be done away with, says industry veteran Mohandas Pai.

According to a report in The Economic Times, in December, the I-T department issued orders in about 100 cases to startups. The Income Tax department has been using an amendment introduced in 2013 to the IT Act in Section 56(2)(viib) against startups. The section says that “Any consideration received by a company (startup) from a resident against the issue of shares exceeds the fair market value of such shares, such excess consideration is taxable in the hands of the startup as income.”

The Times of India reported that startups with subsequent rounds of funding with marked down valuations have been ordered to pay tax on the grounds that the first round of investment was made at a premium.

“You cannot harass young people who want to be entrepreneurs. This tax has to go,” says Pai, who is the Chairman of Manipal Global Education Services.

Indian engineers work at a technology start-up company in the southern Indian city of Bangalore in this picture taken on September 10, 2004. Multinationals have trimmed the fat for years by shifting low-value work to India. Now, slim Silicon Valley start-ups are leading a new outsourcing wave, moving cutting-edge product development to Bangalore and beyond. Picture taken on September 10, 2004. TO ACCOMPANY FEATURE TECH-INDIA-OUTSOURCING REUTERS/Jagadeesh Nv AH/CP - RTRATAV

Representational image. Reuters

Next on Pai’s wishlist is the capital gain structure funds. Finance Minister Arun Jaitley, through an amendment to the Finance Bill, provided for capital gains tax exemption if shares of an unlisted company were held for more than two years. However, there is no such tax on share transaction in listed companies if the shares are held for 12 months. Pai wants the capital gains tax exemption to be for one year for startups, too.

Education was listed as one of the nine pillars in Budget 2016. The Finance Minister announced a 4.9 percent increase in the allocation to education sector at Rs 72,394 crore against Rs 68,963 crore for the previous year. In the forthcoming budget, it is hoped that the government will incentivise knowledge centres to create a globally competitive workforce, said Rishi Kapal, CEO & Global Strategist, Edugild - an edtech accelerator, adding this is essential if India’s goal is to become a preferred education hub. With Digital India being the government’s focus, Kapal says the government must invest money to bring out augmented and virtual reality-based content to be made mandatory for few subjects in each term.

The much-discussed Goods and Services Tax (GST) is expected to become a reality in a few months. Ameen Khwaja, Founder and CEO, -  a mobile and tech accessories e-tailer, says that it should be done ‘in a proper manner’ across India. With cashless transactions being the raison d'être of conversations and a way of life with people in India post demonetisation, the need of the hour is for better digital infrastructure and high bandwidth to promote digital payments. The transaction / service fee should be exempted for the next couple of years, suggests Khwaja.

In his inaugural speech at Digital India Week 2016, Prime Minister Narendra Modi while emphasising the importance of design said that Design in Inda is a key catalyst for the Make in India program.  However, what is required for promoting design infrastructure is policy changes that encourages educational institutes, hubs and communities where there are formal and informed collaborations, says Harshit Desai, Chief Operating Officer, DesignGild - a design-led startup ecosystem. "It is time to shift the focus to Tier-2 cities for boosting innovation and creating better design infrastructure,” he added.

In Budget 2016, the government offered tax exemptions for small business units with a turnover of up to Rs 2 crore, which will act as stimulus for these units to expand their business. The threshold limit for the turnover for calculating presumptive taxes for small and medium enterprises (SMEs) was raised to Rs 2 crore from the earlier limit of Rs 1 crore.

Harshvardhan Lunia, Co-Founder and CEO, LendingKart Technologies - a fintech startup in the working capital space, wants the Finance Minister to extend the same to loans disbursed by NBFCs. “To attract large institutional players and create liquidity for SME loans, the government could possibly provide an institutional framework akin to bank in a box system. SME loans – individual and pooled, could be recognised as a separate asset class and listed accordingly,” he said.

For full coverage of Union Budget 2017, click here

Updated Date: Jan 19, 2017 18:48 PM

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