A slice of the Budget speech -2022 by the Indian Finance Minister Mrs Nirmala Sitharaman focussed on enriching novelty themes related to technology, digital and start-ups. The government desires to build manifold ecosystems based on technology and innovation. The idea to formulate an expert committee to study the complex interdepartmental and regulatory issues around the PE and VC industry stood highly welcomed. Introducing an iconic thematic FOF with 20% government capital will only upsurge capital accessibility in upcoming sectors such as climate-tech, deep-tech and agro-tech.
Despite focusing on the digital economy and infrastructure per se, the budget slipped out on critical areas of interest to the start-ups, for instance, reforms in foreign direct listings, taxation, and ESOPs.
Start-ups and foreign investors, in particular, had an intense outlook towards the government, allowing them to directly list abroad, thus opening up a new and deeper pool of investors. By and large, investors have complained about a lack of clarity for close to two years, preventing start-ups from exploring listing options. Currently, an Indian company is permitted to list abroad only after it has been listed in India, and that too via depository receipts.
Regarding uniformity of taxation between listed and unlisted securities, the surcharge on the sale of unlisted stocks has been brought down from 37% to 15%. However, Indian investors will still have to cough up 23.92% compared to foreign investors who pay only 10%. Including tax parity in budget 2022 is a step toward enforcing a homogeneous taxation system, which will finally eliminate tax as a factor in allocating domestic capital to start-ups. This applies to founders, ESOP holders, and domestic investors.
ESOPs are issued heavily by start-ups as a talent-attraction strategy. This has become all the more significant in the current competitive talent market. Start-ups have demanded in the past, that, the government could modify the tax structure on ESOPs so that they may be taxed only once. It is now taxed twice — during the time of exercise and at the time of sale, thus neglecting this expanse.
Start-ups have emerged as a growth driver for the economy. Tax incentives for start-ups increased from three years to four years of incorporation, in view of the pandemic. Despite the government extending the tax exemption for start-ups to one more additional year, its impact will probably be limited, as not many start-ups have been able to take advantage of it.
One of the most appreciated areas is a tax on digital assets and crypto because it gives legitimacy and will encourage Web3 companies in becoming domicile in India.
The Economic Survey released recently mentioned that India now has more than 61,400 start-ups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). At least 14,000 recognised start-ups were added in 2021–22 fiscal. The survey said that 555 districts in India had at least one new start-up, highlighting those start-ups in India have grown remarkably over the past six years, with most of them in the IT/knowledge-based sectors.
