Creating the right environment to boost India's startup ecosystem

A streamlined tax regime can remove hurdles which impact startups and small businesses in India, says Ravi Narayan

A robust regulatory environment can enable a conducive macro-economic environment to nurture the growth and development of technology-based startups. India has an abundance of talent and has seen a rapidly growing number of entrepreneurs. The government has also taken note of this trend and we hope that 'Startup India' will further facilitate this growth and development by putting in place the right steps towards creating a nurturing ecosystem for startups.

Industry sources estimate that seven of India’s eight ‘Unicorns’ accounted for a third of the $8 billion invested in 2015. Late stage startups – by virtue of their maturity and relatively proven business models have much easier access to funds. However, the current uncertainty in the Indian market means that early stage startups are finding it difficult to raise funds at a stage where they need the maximum financial support. 

In this scenario a government backed fund such as SETU (Self Employment and Talent Utilisation) Fund can prove to be a reliable resource, desperately needed for these startups to get started. Such a fund can make a real difference to the ecosystem and provide momentum to the wave of innovation that has begun in India.

There is a tremendous opportunity for startups to participate in Government of India programmes. India is perhaps the first country in the world to offer such an open and secure API access for participation in its citizen services schemes. This policy provides programmers with access to what was hitherto propriety government data and is known as ‘India Stack’. Encouraging startups to make use of this would help integrate citizen service applications with the data securely stored and provided by the government to authenticated apps. In its new policy, the government should make special provisions for the startups who are embracing India Stack. By combining this opportunity with an assured supply of funds – the Government of India can truly provide the boost to India’s startup revolution and perhaps create the next set of Unicorns.

A streamlined tax regime can remove hurdles which impact startups and small businesses in India, including venture investment, technology, and mergers and acquisitions. The government can reclassify what constitutes ‘services’ for tax purposes, to help clarify the application of the term to software product businesses, including startups. Startups will also benefit from an exemption of income and sales tax, to facilitate their growth and development by making operations more viable. There should be tax breaks/ depreciation for startups procuring items essential for businesses like hardware, software and communication equipment among others.

Further, we look forward to action by the government on making any gains through successful exits, exempt from taxes. Taxation on investments that are made in startup enterprises must adequately reflect associated risks of such enterprises, especially as gains made out of successful exits are redeployed for investment. This principle is currently reflected in the pass-through status accorded to venture capitalist funds. We also believe incubators should be encouraged to approve and notify incubated companies to avail of the benefits extended from time to time, and for them to be considered SEBI-approved investors.

To encourage the sector’s long-term growth the government can look at an enhanced taxation regime for incubators, including rendering them exempted from taxes as well as the customs duty which is levied on the purchase and import of goods needed for the incubators. Given their role in mentoring and connecting innovators to business growth opportunities, we believe that funds contributed to incubators should be treated at par with investments in research and development (R&D) activities for businesses, and proportionally we believe that the entities that contribute funds to incubators should also be eligible for the 200% tax benefit that is currently applicable to R&D investments. 

Ravi Narayan is the Director at Microsoft Ventures