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Addressing The Achilles Heel Of The Startup Ecosystem – Expectations From Union Budget 2022

Last Stand At The Bridge For Indian Economy

After the detrimental impact of the third wave of COVID-19 on India Inc., recent reports such as the UK aiming to treat COVID-19 like ‘the flu’ are re-instating a sense of belief in a return to “normal” living in the next 2-4 months. 

Therefore, the focus of governments, businesses, and the public is to prepare for a post-COVID-19 world, i.e., tightening the free flow of credit to stop runaway inflation without putting a dampener on the solid economic recovery. It is a delicate dance, but one that businesses should adjust to quickly. 

In India, the focus shifts to the Union Budget 2022-23 to get presented next week. India has been the biggest beneficiary of the COVID-related Quantitative Easing and overall anti-China sentiment. What the hon’ble FM Nirmala Sitharaman offers next week could very well decide whether India will continue to attract the attention of the global investment wallet.  

Therefore, here is my wish list from the 1st February 2022 budget:

The government must acknowledge the tremendous role played by the startup ecosystem in delivering goods & services to the farthest reaches of the country in crippling conditions of the various lockdowns.  

Our startups have empowered India’s global image, and every recognisable Global VC now wants to be associated with the Indian ecosystem. Furthermore, Indian startups created more than 6.50 lakh jobs and indirectly employed lakhs more. 

  1. Reduce tax on selling startup stock: The Finance Minister must reduce the tax burden for founders, employees, and investors when they sell their startup investments. It is unfair for these stakeholders to pay 2x the tax applicable to listed investments – especially since they take an extremely high degree of risk with their career and wealth during each stage of a startup’s journey. 
  2. Provide tax benefits to invest in Indian VC funds: Individuals can set off long-term capital gains by investing in real estate assets. The time has come for similar concessions to be made available to individuals investing in startup funds, significantly boosting investors’ participation in the startup ecosystem’s wealth creation opportunity.    
  3. Simplify fundraising for startups: A startup or its investors are currently required to undertake a myriad of processes to issue, buyback, or sell securities (debt or equity). These processes can be super complicated if the startup grows fast and may require multiple funding rounds quickly. It is about time that the government unlocks this space by providing flexibility and reducing the reliance on merchant bankers and chartered accountants to complete their funding requirements. 
  4. Rationalise GST into 2 slabs: What got ushered in as a Good & Simple Tax should be in reality – what it intended to be in spirit! 1st July 2022 is the 5th anniversary of the landmark tax. The FM should celebrate this landmark moment by bringing in all goods & services into GST – especially petroleum products & alcoholic beverages. Besides, it is time that 4 GST slabs (5%, 12%, 18%, and 28%) get reduced to 2. 
  5.  Creation of a startup stock exchange: Lastly, there is a long-standing demand from the startup ecosystem to develop an exchange to sell a startup’s equity without listing them on exchanges. These exchanges would provide liquidity to investors, employees, and (occasionally) founders when required, and it would encourage more people to take up startup job opportunities. 

The FM could provide a budgetary allowance for creating a startup equity exchange market where clandestine brokerages operate through an opaque and offline process. Not only would this exchange create a secondary market for equities in India, but it would also increase the inflow of foreign and domestic capital into the VC (Venture Capital) industry and increase tax revenues for the government!

All in all – the upcoming budget of FY 2022-23 has the potential to firm up the Indian startup ecosystem’s mark on the global map! 

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