The recently announced Budget 2024 has brought a wave of optimism for India's startup ecosystem and its investors. Siddarth Pai, Founding Partner at 3one4 Capital and Co-Chair of the Regulatory Affairs Committee at IVCA, has highlighted several pivotal changes that promise to reshape the landscape for startups and investment in the country.
"IVCA's tireless advocacy efforts have been recognised in this Budget," Pai stated, reflecting the sentiment of many industry insiders. Among the significant announcements, the removal of the angel tax stands out. "The removal of angel tax sans conditions must be celebrated as a major win. Companies raising capital from April 1, 2024 onwards won’t have to suffer the threat of angel tax," he noted. This change addresses a long-standing issue that had deterred funding, particularly from foreign investors, causing a notable decline in investments.
Another notable reform is the alignment of capital gains rates between listed and unlisted equity. "Aligning capital gains rates between listed and unlisted equity is a major win for the Startup ecosystem," Pai remarked.
The differential tax rates had previously been a deterrent, pushing investments towards listed companies. This alignment acknowledges the critical role of investments in unlisted companies, which contribute to asset creation, employment, and sales, thereby fostering more robust funding for Indian startups.
Pai also pointed out changes in the tax treatment of buybacks: "The buyback changes seek to tax buybacks in the hands of the shareholders as dividends, with the original cost becoming a capital loss." This move eliminates buybacks as a tax-free income source, aligning with global trends.
The introduction of the Variable Capital Company (VCC) structure for AIFs in GIFT IFSC is another forward-looking measure. "AIFs in GIFT IFSC can look forward to a Variable Capital Company (VCC) Structure, a globally recognised and accepted vehicle for investment funds," said Pai. Trusts were inadequate for the complex operations of VC/PE funds, and the VCC structure will enhance GIFT IFSC's attractiveness. Furthermore, the Section 68 exemption for GIFT IFSC AIFs aligns them with SEBI AIFs, rectifying a previous oversight.
"Budget 2024 has delivered fundamental changes to Startups and Capital Gains regime," Pai concluded, emphasising the Finance Minister's commitment to revamping the Income Tax Act of 1961. These changes are a significant first step towards making the tax code "more concise, lucid, easy to read and understand."
In essence, Budget 2024 marks a pivotal moment for India's startup and investment landscape. The comprehensive reforms promise to stimulate growth, attract investments, and simplify the regulatory framework, positioning India as a more competitive and attractive destination for global investors. As these changes take effect, the Indian startup ecosystem stands on the cusp of a golden era.
