India's startup segment, after facing setbacks during the COVID-19 pandemic and lockdown, will now get a boost from the Union Budget 2021.
The startup ecosystem will benefit from many of this budget's announcements, including the allowing of one-person companies, the encouragement for non-resident Indians to start up in India, and the changes in the definition of small companies. The extension of time limit for exemption of capital gains is another welcome move.
Startups can also make use of the extension of the tax holiday by one more year as they recover from the cash flow challenges imposed by the COVID-19 pandemic.
“Allowing one-person companies will unlock entrepreneurship and innovation. This brings India at par with the US and the UK to stir the startup ecosystem as well as the SMEs. This move removes expectations that companies in India must have two shareholders, which have often resulted in bringing in family members, who are not professionals, into the company. The NRI’s tax relief is another welcome move and should definitely spur greater investments by NRIs into India. Moreover, investors will appreciate extending capital gains tax exemption for investment into start-ups by another year, spurring more investment into the early stages,” pointed out Swastik Nigam, Founder and CEO, Winvesta.
The government had launched the Startup India initiative back in 2016 with the idea to increase wealth and employability and to help the startup ecosystem in India. Experts say that, for the old startups, another year of tax holiday may not be very relevant as they would be well-funded currently and paying tax may not be challenging for them. “The startups that have not been well-funded have crossed the time-limit of tax holiday. For new and budding startups it can definitely act as a confidence-boosting attribute but as a good entrepreneur and citizen, I would still want to focus on reducing operational costs and enhancing profits rather than saving taxes,” remarked Nitesh Salvi, Founder and CEO, Pocket52.
Analysts believe that the announcement to introduce the scheme of allowing one person company(s) for startups and innovators to be exempted from paid-up capitals and turnover norms will also help generate more employment.
“The tax holiday given to startups for an additional one year brings relief to enabling the sector to sustain and grow, as we recover from the pandemic. Furthermore, the move to encourage one person companies without any restrictions is a step in the right direction. This will go a long way in encouraging more people to come forward to set up innovative businesses that solve the challenge of the day, and grow the high-potential startup ecosystem within the country,” said Kunal Lakhara, VP of Finance and Operations, Pocket Aces.
Many experts also feel that the budget touched some, but missed many aspects which were crucial for the growth of the Indian start-up ecosystem, which is the world's third most robust ecosystem.
“From a tax perspective, introducing a more long-term exemption structure on capital gains would have been more helpful. The budget could have looked at introducing a no dividend and no capital tax mechanism’ which can help companies funded by Venture Capitalists to infuse more working capital into their operations,” pointed out Sourjyendu Medda, Founder, CBO and CFO, DealShare.
He further adds that from a regulatory perspective, the budget should have looked at creating a single-window clearance framework for start-ups and small businesses for aspects like company registration, GST registration, company incorporation, shop establishment, etc. which would have helped to reduce the compliance burden on companies.
“One of the other rewarding moves by the government is to extend social security benefits to gig and platforms workers which will now add a much-needed safety net for them and will also help the sector grow in a sustainable way,” added Medda.