B for Budget: How good is this budget for us startups?

Arun Jaitley’s budget unveiling — or exam day, as Prime Minister Modi called it — finally came, and scored a solid B grade.

The government had done its homework, and identified the announcements that are essential for the ruling party to post a good performance in the upcoming state elections. The budget aimed to satisfy key constituents, and hit all the necessary targets. This is a workhorse budget, without any major fireworks.

The budget came a month after the fanfare around the Startup India announcements, to a much more sober reception. The budget’s macroeconomic announcements will impact startups in terms of overall health, such as the infrastructure commitment Jaitley announced — critical to ensuring growth — which has fallen 12% from last year, from 2.5 lakh crore. Ensuring growth momentum while reducing infrastructure investment will be a tough balancing task for the government, and it looks like Jaitley is instead counting on the easing of approvals for stalled projects and reduced red tape to boost this sector.

The lowered corporate tax for small businesses and one-day registration for companies is a boost to startups, and businesses will be eagerly awaiting details around this — right now, name approvals, certificates of incorporation, the collection of Digital Signatures, issuing of Director Identification Numbers (DINs) and so on can take as much as 30 days.

Keeping tax on income from patents at 10% is another good move, one that will encourage innovative startups to file their patents in India.

What follows however, are some head-scratchers. The much-anticipated announcement of the 3–5 year tax holiday for startups had several asterisks attached. First, the holiday applies only to startups registered from April 2016 onwards. It’s a puzzling exclusion of companies that registered their businesses in previous years, during which startups received record investments. These young companies, already important growth drivers for the country, are now excluded from the exemptions due to an accident in early registration. Second, it would have been more beneficial for startups if this exemption were applied to the first three years of profit for the company, rather than the first 3–5 years since incorporation.

Other tax announcements for startups, if well-intentioned, also do not go the distance. Startups will have to pay minimum alternative tax (MAT), but will be exempt from capital gains if the money is invested by notified startups, in specific funds. This is thirst half-quenched: why one exemption and not the other?

On a larger note, it is also concerning that so many of the startup benefits announced by this government come with terms and conditions. From the requirement that a startup get a certificate for innovation from an inter-ministerial panel, to investments allowed only by certain startups, and in specific vehicles to avail capital gains exemptions — is this government creating a new bureaucracy in the name of giving us sops and exemptions?

There are some broader announcements that are very welcome. The government is clearly making an effort to democratize the entrepreneurship culture across the country. Jaitley announced the approval of the Rs 500 crore “Stand Up India Scheme” to promote entrepreneurship among SC/STs and women. The scheme will facilitate at least two such projects per bank branch, one for each category of entrepreneur. This will benefit at least 2.5 lakh entrepreneurs.

The Pradhan Mantri Mudra Yojana (PMMY), aimed at bottom of the pyramid entrepreneurs, has had its budget enhanced to Rs. 1.8 lakh crore. The government has also announced Entrepreneurship Education and Training, which will give aspiring entrepreneurs access to mentors and credit markets through 2200 colleges, 300 schools, 500 Government ITIs and 50 Vocational Training Centres as well as Massive Open Online Courses.

Jaitley remarked in his budget speech that the support the government provides has a multiplier effect that encourages entrepreneurship and growth. It is hopeful that the government recognizes a crucial truth of the startup space: such support should not come with shackles. The startup sector will give the Indian economy the momentum it needs in creating income and jobs. So let’s not add hurdles to the race while we are equipping ourselves with running shoes.

Devi Yesodharan and Naman Pugalia.

Originally published at www.fourthlion.in on March 16, 2016.

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