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The Indian economy is amongst the world’s fastest-growing economies. This along with government’s continued efforts to improve the ease of business has led to a start-up revolution in India. The year 2017 witnessed funding of $13.7 billion across 820 deals in startups! However, the Indian startup ecosystem still lags behind its peers in Silicon Valley and Israel.
The success of these startups largely depends on government policies, rules and regulations. With budget 2018 just around the corner, there is a lot on every startup’s wish list.
Access to Easy Credit
The government had earlier set up a fund of Rs. 10,000 crore to provide financial assistance to startups. The government had also formulated a credit guarantee fund with a corpus of Rs. 2000 crore to enable startups to raise collateral free loans up to Rs. 500 lakh per case. But these funds aren’t sufficient. At the ground level, securing credit is still not very easy for fresh startups. There is a requirement of the project plan and extensive documentation along with guarantees and sometimes collateral too. Budget 2018 can remedy this situation by:
- Expediting the establishment of credit guarantee fund.
- Establishing banks that specifically cater to disbursal of loans and financial management of startups.
- The government can also authorize some nationalized and few private banks to add verticals that exclusively service requirements of startups.
The firms incorporated after 31st March 2016 can avail a three-year tax holiday in the first seven years of their existence. The issue is that the period of three years is quite less considering a new business takes about five years to settle down and churn profits. Increase in this tax holiday period to 5 years can help budding startups to fortify their business and market position without worrying about the taxes.
Tax on ESOPs
The cash crunch is an everyday reality for most startups. Many startups tend to compensate their high-value employees through ESOPs. The ESOPs are taxed in the hands of an employee at the Fair Market Value. Since the funding is mostly external, the fair market value tends to be very high and the correction comes in much later when the venture is steady. This is why a tax on ESOPs of a startup must be deferred to the date of actual realization or the financial year when startup ceases to be a startup under the definition. This will help new ventures attract and retain the right talent.
Abolition of Angel Tax
Currently, the angel tax in India stands at 30% which is very high compared to other startup ecosystems around the world. There lies a huge difference between the way income tax and angel investors value a startup. These flaws dissuade inflow of investment in the startup sector. Hopefully, Budget 2018 will either reduce the tax limit or completely do away with it.
The government has already made compliance process simpler for startups by exempting them from certain processes and introducing self-certifications in some cases, but there is still a lot of scope for improvement. Special provisions must be introduced to facilitate obtaining of a license, property acquisition and manufacturing permits. All the compliance processes must be standardized and with the completion of registration, startups must be handed over an industry specific list of compliances and guidance notes applicable to them. Special cells should be set up with experts in Company law and related compliances for guiding the startups.
Sanction of Schemes
The present process places a lot of power in the hands of assessing officers who determine the eligibility of startups for various schemes. This has only led to delays and corruption. An online system should be introduced so that there is a minimum intervention of bureaucrats and officers in the process. A form with objective questions must be filled in and supporting documents uploaded. Once approval comes, the applicant should be required to send supporting physical documents to a central authority. All these processes must be time bound so that there is no choking of applications made. An appellate should also be formed in order to hear the grievances of startups whose applications are rejected.
Widen the Definition of Startups
The present definition of startups covers a private company or registered partnership not incorporated for more than five years and has not exceeded 25 crore as turnover in any of the preceding five years. Such venture must be working towards innovation, development, deployment and commercialization of new product or service. The definition of startups is very narrow which leaves out some genuine ventures and has scope for misinterpretation. There is no mention of a sole proprietorship or one person company in this definition. Moreover, the onus of proving to Inter-Ministerial Board of Certification and assessing officer that the venture is working towards a completely new product or service lies with the startup. The government needs to widen the definition and also include “me-too” products and services to a certain extent. This will encourage young entrepreneurs and also increase the chances of success of startups.
Infrastructure plays an important role in the success of business ventures. The establishment of startup parks akin to SEZs and technological parks in tier I and tier II cities of the country can prove to be of immense help to the startup ecosystem in India. The facilities in such zones must specifically cater to requirements of new ventures. For example- provision of co-working facilities, shared infrastructure, banking, concessional rentals and other subsidized facilities.
Ease of Closing down
There is no doubt that establishing a startup has become relatively easy in India. But it is a known fact that there is a high rate of failure amongst startups. According to a study by IBM, 90% of the Indian startups fail within five years. The problem for entrepreneurs is that they find it very difficult to close the shop once and for all. The Companies Act applies to voluntary liquidation and closure of startups as well. The involvement of liquidators makes it a long drawn and tedious process considering that the venture itself is new and small in size. The government must bring simpler laws and processes while exempting startups from certain compliances of winding up. A separate body under the Company Law Board or Tribunal must carry out the closure of a startup and same must be done in a time-bound manner.
Quick Judicial Remedy
Startups tend to struggle with litigations on patents, property disputes and compliance issues. The cases drag on for years and distract the startups from their core objectives. Budget 2018 should introduce an exclusive judicial system to fast-track legal proceedings and preferably set up a separate vertical of courts that deal only with cases about startups.
Concessions on Skill development
While the government has launched several entrepreneurial skill development programmes, they lack in quality and content. The private and foreign programmes are very costly. The government must cater to this need by providing concession, sponsorship and tax benefits for skill development.
The financial year 2016-17 was a year of change as GST became a reality and demonetization brought many changes in the financial system. Both of these events proved to be disruptive for the small and new businesses. This is why budget 2018 is going to be very crucial for the entire startup ecosystem of India.