Acknowledging the contribution of start-ups in growth of the economy and job creation, the Economic Survey batted for a “rationalised” tax regime and “predictability of policy action” for them in order to spur innovation and attract private investment.
The policy document, which was tabled in Parliament on Thursday, said the “outlook of the Indian economy appears bright with prospects of a pick-up in growth in 2019-20 on back of the pick up in private investment and robust consumption growth". It said the government is playing a proactive role in investment promotion through a liberal foreign direct investment (FDI) policy. During 2018-19, total FDI equity inflow stood at $44.36 billion as compared to $44.85 billion during 2017-18. According to government data, start-ups raised $7.5 billion in 2018, a majority of which was foreign capital, an increase of 74 per cent over the previous year. India now has 10 unicorn start-ups, collectively valued at over $35 billion, it said.
The Survey said that in order to further catalyse the growing ecosystem, taxation for start-ups must be rationalised. “Tax policy and its implementation for start-ups must be rationalised to foster innovative investments in the Indian economy. Countries across the world recognise the need to evolve a tax system that can foster innovation.”
It also suggested a re-look at capital gains tax, levied on profits from the sale of shares in unlisted companies. The high rate of capital gains tax in India — 30 per cent (for short-term holding) and 20 per cent (long-term holding) — has pushed some Indian start-ups to shift their headquarters abroad, mainly in Singapore where capital gains tax is nil. In this case, investors and promoters of these start-ups skip paying capital gains to India, resulting in a loss to the exchequer. It is also a deterrent to local M&As.
“Several studies have also suggested that capital gains tax can have significant economic consequences for individual investors in terms of its lock-in effects and associated deterring incentives to use capital gains into riskier investments,” the Survey noted, without providing a recommendation in this regard.
Industry experts have unanimously called for lowering of the tax rate or at least lowering it in the case of companies under a certain age or turnover. Experts have also called for lowering of minimum alternate tax paid by start-ups which is levied at 18.5 per cent on book profits.
Beyond taxes, which have a direct material impact, the Survey said, a consistent and predictable policy framework is required to maintain the confidence of investors. Recently, draft policies for the e-commerce sector and handling of consumer data by enterprises have received backlash from major corporates on certain points, while e-commerce firms Amazon and Flipkart have expressed discontent over frequent changes to the e-commerce policy.
“Such uncertainty in economic policy can be avoided,” the Survey noted.
“In contrast, a nation state that ensures predictability of policy action provides forward guidance on policy action, maintains broad consistency in actual policy with the forward guidance, reduces ambiguity and arbitrariness in policy implementation creates economic policy certainty. Investors may enjoy the certainty provided by such an environment and flock to invest in this environment,” it added.
Alluding to the policy environment for American businesses in India, US Secretary of State Mike Pompeo, on his visit to New Delhi last week, had said that both countries should work together to form coherent laws and aim for coordinated investments in each other’s countries. Pompeo had said that the US is on the heels of deploying close to a trillion dollars in the Indo-Pacific region.