The budget this year is critical for the industry and economy and there is clearly a lot riding on it. Representing the startup community , some of the top expectations from this year’s Union Budget are:
- Starting up – An entrepreneur has to run around far too many offices and places when starting up. Various clearances, approvals make starting up a very difficult process. It has been a long standing demand of the sector that Government starts a single window system where all such clearances can be obtained and the process smoothens out. We were quite encouraged when we had the Ministry of Entrepreneurship and I think nationally, we need someone to give a push.There are about 12 different ministries running their own skill development and startup programmes and there is an urgent need to consolidate different schemes, operations and programmes. We need a centralized system that makes it easy for an entrepreneur with a good idea and a solid plan to startup.
- Problems around capital – While things have improved, it is still very hard to raise capital. The Budget must look to make capital affordable and accessible to startups. Venture and angel investment has to be encouraged and issues around angel tax needs to be sorted out. While on one hand we talk about the dearth of capital and funds we have not been able to make it attractive for the investing community. Currently there are three set of Regulations dealing with venture capital activity. These are – SEBI (Venture Capital Regulations) 1996, Guidelines for Overseas Venture Capital Investments issued by the Department of Economic Affairs in the Ministry of Finance in the year 1995 and CBDT Guidelines for Venture Capital Companies in 1995 which was modified in 1999. Each of these regulations has a number of rules and regulation that make it very tough for a VC to follow. This means there is often duplicity in requirements and makes many processes unnecessarily long, and for an investor, time is often money. The need is to consolidate and substitute all these with one single regulation of SEBI to provide for uniformity, hassle free single window clearance.
- Scaling for Growth – One of the biggest concerns for startups is the Minimum Alternate Tax (MAT) that has become a big stumbling block for a company to scale. Unlisted private companies need to pay MAT at 18.5 % if they make a substantial income under the IT Act, but may not be showing profits when income is computed through rules under Companies Act. For startups this is a big stumbling block as taxes are levied on incomes they make when they would have liked to grow their business. What becomes even more punitive as even in cases where startup makes no profit, they end up paying taxes which severely affect their cash flow. In this year’s budget the government needs to make a provision to keep MAT out for startups for a period of say five years or doing a top line of Rs. 25 crore. This would give a startup sufficient breathing space and ensuring the company is not burdened by yet another tax.
- Going beyond India – A big part of the initial success of our IT industry is because of Software Technology Parks of India (STPI) scheme. If we want to encourage startups, we need to come up with and STPI like scheme for startups.While initially the project was all about providing physical spaces to new IT companies, it later on went to provide excellent Infrastructure and statutory support to the tech companies. We need similar schemes for startups of every kind (not just IT) and ring fence them so that they are sanitized from regulatory and infrastructural hurdles. Some states, like Andhra Pradesh and Karnataka are already doing it on an ad-hoc basis and we need to institutionalize it. This will also be in sync with government’s Make in India campaign and promotion of startups and the ecosystem can lead to a more robust business base for the country.
- Ease of doing business – India fares very poorly when it comes to doing business and successive governments have not been able to address this. Most rules and regulation related to running a business is obtuse and archaic and needs an immediate overhaul. Life is particularly tough for startups in manufacturing where the powers of an “Inspector” make the compliance cost very high. Different taxes like excise, service, octroi and VAT only go on to add to the problem as smaller firms and startups struggle to understand and come to grips with the complexities involved. This budget, the government needs to identify all such hurdles and ensure it creates an enabling environment for a startup to operate and grow. Rules and regulation that are simple, easy to identify and comply should be the mantra.
- Exiting / Closing – As a nation it is very important for us to celebrate failure and ensure that if an entrepreneur fails in a venture, he can find his feet and perhaps start a new business all over again. I think it’s a long standing demand of the industry that closing a business in the country is insanely difficult. The process can be made so much easier with this government’s focus on digitization. For example, why can’t an entrepreneur start a company by filling out the forms electronically, get the company up and running and if it does not work should be able to close it electronically with minimum hassle. Given the advances in IT, this is a very easy system to setup. An entrepreneur building a company already has enough to do and regulatory hurdles only make things tougher. Closing a business is tougher than starting one and it is time we seriously address this if we want to get people creating and innovating.
- Risk finance needs encouragement – There is a paradox at play here. Presently, Foreign Institutional Investor (FIIs) operating and registered with SEBI can freely invest and disinvest without taking FIPB/RBI approvals. However, foreign VC firm looking to invest in an Indian startup has to take approval from FIPB or the Reserve Bank of India. This is also the case when a foreign investor wants to sell his stake in a startup to another foreign VC firm. Most VC and PE firms operating in India are from overseas and such lengthy approval process makes it very unappealing to investors. Venture money is investing in risky propositions where the outcome is uncertain, but is most crucial for the startup ecosystem to flourish and grow. The government needs to fix this anomaly and get FIIs and VC investment on par where they do not need RBI and FIPB approval for selling and buying stakes in a company. This will be in line with best international practices and create a vibrant ecosystem for startups to receive funding and raise capital.