Union Budget 2024: Here's what startups, investors expect from Modi 3.0

Expectations rise for investments, simplified tax norms, and sectoral support

From scrapping the contentious angel tax to launching schemes to boost domestic investments, to simplifying taxation norms, expectations are running high for the country’s startup ecosystem ahead of the Union Budget 2024.

Moreover, startups operating in sectors like deeptech, gaming, fintech, and mobility, among others, are expecting budgetary allocations in their respective sectors.

Investors are hoping that this budget will bring some clarity on the angel tax as it causes “unnecessary scrutiny” of venture capital fund managers by the income tax department, despite the Securities and Exchange Board of India (Sebi) licensing private transactions.

“The angel tax has been a significant deterrent for domestic and international investors, leading to a cautious approach to funding early-stage startups. Removing this tax will create a more attractive investment environment, encouraging the flow of much-needed capital into the startup ecosystem,” said Anirudh A Damani, managing partner, Artha Venture Fund.

Angel tax, also referred to as Section 56(2) VII B of the Income Tax Act, applies to unlisted companies in India when they raise capital by issuing shares to domestic investors at a price exceeding the company's fair market value. The excess amount is treated as income and taxed at a rate above 30 per cent.

Introduced in 2012, this provision aimed to prevent tax avoidance and fund misuse. It is commonly referred to as angel tax because it significantly affects angel investments in startups.

Ahead of the budget, the Department for Promotion of Industry and Internal Trade (DPIIT) has recommended the removal of the contentious tax, in line with the demand from the industry.

“While a complete repeal seems unlikely, the ministry of finance may expand exemptions and simplify some conditions for availing of them…Even incremental reforms could substantially improve the investment landscape for startups,” said Aditya Sarda, senior vice president – investments, BlackSoil – a venture debt platform.

Angel tax aside, startups are also expecting another Fund of Funds scheme to increase the pool of domestic capital for startups, especially at a time when foreign investments have taken a huge hit over the last few years, in line with the funding winter.

"As an early-stage VC fund that originated in India, we feel it's important to incentivise and increase the participation of Indian institutional investors to become significant LPs in local VC funds. This will very much help reduce the time taken by most local funds to raise funds of meaningful size which can then be deployed to catalyse the fast-growing startup ecosystem in the country,” said Shyam Menon, co-founder, and partner, Bharat Innovation Fund.

To improve access to capital for domestic startups, the government had launched the Small Industries Development Bank of India (Sidbi) Fund of Funds in 2016 with a budgetary allocation of Rs 10,000 crore. To foster the next wave of innovation for India’s startups, industry stakeholders have sought an additional boost of Rs 20,000 crore via this scheme.

A common ask among startups, across sectors, has also been the implementation of a more simplified and streamlined tax regime.

“Currently, startups and investors face a labyrinth of tax regulations that complicate compliance and distract from core business activities. Simplifying these processes will save time and resources, making launching and scaling new ventures easier,” said Damani.

Deeptech

A key budget expectation from technology startups is to see the Rs 1 trillion deeptech fund for startups getting in motion. According to industry watchers, this policy is likely to be proposed in the upcoming budget.

“As a fund focused on deeptech, we would also like to see increasing investment in fundamental and applied science research in bleeding-edge areas at the leading academic institutions and research labs across the country,” said Menon.

This, he says, will help lay the groundwork for disruptive tech IP to be created by researchers and academics “which can then be commercialised via deeptech startups that can go global from India."

Gaming

At 442 million gamers, India is the second largest gaming market in the world after China. The industry, which has been grappling with the recent 28 per cent blanket goods and services tax (GST) on online gaming, is seeking long-term clarity and a progressive taxation regime.

“A clarity on the GST will help drive the next phase of growth, provide a conducive business environment, and also revive investor confidence in the sector,” said Roland Landers, chief executive officer, All India Gaming Federation.

Moreover, companies are seeking specific allocations for the Animation, Visual Effects, Gaming, Comics, and Extended Reality (AVGC-XR) segment. In 2022, the government had set up an AVGC task force which, in a report, recommended a National AVGC-XR Mission with a budgetary outlay.

“To make India a game development hub and take “Make in India” games to the world, we look forward to substantial budgetary allocations being made under the AVGC fund which are aligned with the recommendations of the AVGC task force,” Landers added.

Mobility

In the mobility space, startups are awaiting a budgetary outlay for the PM Modi-led government’s flagship electric vehicle incentive programme, faster adoption, and manufacturing of electric vehicles (FAME), which is reportedly gearing up for its third edition with a significant outlay of approximately Rs 10,000 crore.

Industry watchers say that the growth of the electric vehicle industry relies heavily on government support and incentives that encourage innovation and wider adoption.

“We're hoping to see significant funds directed toward expanding EV infrastructure, like more charging stations, and incentives for battery technology research and development. The FAME 3 subsidy should help make EVs more affordable for everyone, promoting a greener future for our nation,” said Jitendra Patil, managing director, ARENQ – a Pune-based EV and solar-tech startup.