Start-ups laud tax holiday, fintech boost; big reforms still missing

Investors and entrepreneurs welcome positive moves, but opine that the finance minister failed to address long-pending issues

In a boost to the startup ecosystem, Finance Minister Nirmala Sitharaman, who presented her third Union Budget on Monday, extended the tax holiday, and capital gain exemption for investment in startups for one more year (till March 31, 2022).

Besides, to help innovators and small investors, the FM proposed to incentivice the incorporation of One Person Companies (OPCs), without any restrictions on paid-up capital and turnover.

She also said non-resident Indians to incorporate OPCs in India. The move has also permitted conversion of one-person companies to any other kind, reducing the residency limit from 182 days to 120 days.

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Investors and entrepreneurs see this as a positive move that could boost investment activity and encourage more people to set up innovative businesses to solve complex problems.

But they opine that the minister failed to address the long-pending issues and big-ticket reforms needed to boost the ecosystem.

“Start-ups will certainly benefit from measures enabling the incorporation of OPCs, increased FDI limits in insurance companies, which should help penetration of insurance tech start-ups and measures enabling ease in compliance requirements,” said Ankur Pahwa, partner and national leader, e-commerce and consumer internet, EY India.

Pahwa said the budget overall was a balanced one with a focus on capital expenditure on healthcare, education and infrastructure, but it is yet to be seen how start-ups in the segment can capitalise on these outlays. Many of the startups in these sectors played a significant role in these segments during the lockdown.

Pahwa said many questions of the start-up ecosystem and sub-segments within the e-commerce industry are yet to be fully addressed, such as clarity on public listing (in India, or direct listing mechanisms offshore), deferral of taxability on share swap transactions (absent cash liquidity), reducing the burden of tax withholding blockage and GST levy in early stages, easing approval process on licences from the RBI, among others.

“The industry is hopeful that these will be covered in future announcements,” he added.

Siddharth Pai, founding partner at venture capital firm 3one4 Capital, was of a similar view. While he lauded the government effort not to change (direct) taxes and said it could boost confidence and ensure business continuity without much hindrance, he, however, felt the government should have addressed underlying tax issues that have been long pending.

With countries such as Singapore actively poaching Indian entrepreneurs with ease of regulations and simpler tax initiatives, a reform in this regard could have helped startups in the long run.

While the budget announcements tried to ease the flow of capital to India and hiked the FDI cap in insurance from 49 per cent to 74 per cent, venture capital firms and fintech companies were hopeful that it would work in favour of them.

“Since insurance companies also serve as limited partners to several private equity and VC firms, we can also expect a positive impact on the levels of private investments down the road,” said Utkarsh Sinha, managing director at Bexley Advisors.

Meanwhile, with multifold rise in digital payment in the recent past, the government also earmarked Rs 1,500 crore to provide financial incentive to promote digital payment. It also increased the limit for tax audit to 10 crore (from 5 crore) for those who carry out 96 per cent of their transactions digitally.

Also, during the coming fiscal the government proposed to widen the use of digital technologies and launch data analytics, artificial Intelligence and machine learning-driven e-governance initiative under the Ministry of Corporate Affairs.

“The 1,500 crore boost will further support migration of more people towards digital payments and will have a positive impact on the mobile skill gaming industry,” said Sai Srinivas, co-founder and CEO, Mobile Premier League. “India is at the cusp of creating a wave of mobile gaming unicorns. These measures only support that momentum.”

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