On January 16, 2023, India celebrated National Startup Day to promote startup culture at the grassroots level and encourage an innovation ecosystem. Prime Minister Narendra Modi described startups as the backbone of the ‘new India’ as the startup ecosystem will give wings to growing enterprises and motivate all innovative-oriented youth to start something of their own.
To date, India has seen 108 unicorns, the third most anywhere in the world. The country also has 103 soonicorns, representing Indian startups ready to attain unicorn status. By 2025, India is estimated to have 250 unicorns.
India is fast becoming the fintech hub for the world. The sector is believed to produce the highest number of future unicorns in India having maximum growth potential in segments, including lending tech, insurtech, paytech, and wealthtech.
Additionally, ecommerce, supply chain and logistics, and Internet software and services sectors continue to dominate the arena, but a strong wave of unconventional sectors such as content, gaming, hospitality, data management and analytics, etc., are also making their place on the list.
Easy availability of capital is essential for entrepreneurs in a startup’s early stages of growth, and hence, Budget 2023 should try to make these investments attractive to investors.
This can be achieved by providing parity for capital gains tax treatment between unlisted and listed shares, as investors in unlisted companies bear higher risk. It would help if tax neutrality is provided on outbound mergers.
Financing measures for the startup ecosystem, including encouraging domestic capital in startups through alternate investment funds (AIFs), listing of AIFs on stock exchanges, and rationalisation of pricing guidelines of shares issued under SEBI, the Income Tax Act, Companies Act, and FEMA, could also be considered.
Further, from an income tax perspective, some key expectations of startups include extending the condition of the period of incorporation under Section 80-IAC of the Income Tax Act, 1961, beyond 1 April 2023, so its benefit is availed by new startups.
Also, the tax holiday period of three consecutive years for the deduction could be extended to five years to help startups avail funds for researching and developing better products and competing in global markets. For the remaining period, corporate income tax rates could be reduced to the minimum rate of 15%, which will give considerable savings on their tax payments.
The government can also consider reducing the Minimum Alternate Tax from 15% to 9% to promote startups in India. The weighted deduction should be introduced for carrying on R&D by startups.
The potential of Indian startups to contribute to the structural transformation of economies and to drive inclusive, sustained, and equitable economic growth and employment can be enhanced if startups can access new markets, affordable financing, capacity building, technology, and quality infrastructure services.
Recent Budgets have been focusing inter alia on startups, and we expect Budget 2023, too, will continue to promote innovation, entrepreneurship, and digital transformation.
Further, skill development and digital transformation over the next few years are two game-changing pillars for Indian startups.
