Union Budget 2023: Startups, VCs Expect Ease of Investing, Tax Rationalisation

Going forward, the attention towards building a brand on strong fundamentals, balanced unit economics and a profitable business model would be extensive. 2022 has not been the best year, and now because of the rise in Covid-19 cases in India, investors will continue to tighten their pockets despite the cash reserves.

Tech startups witnessed a bloodbath in the stock exchanges. Ongoing negative market sentiment, global macroeconomic instability and the fears of an anticipated recession are some of the major factors that held back many unlisted startups to go public such as Oyo, BoAt, PharmEasy and more.

Even with the contemporary heightened volatility the industry leaders, young entrepreneurs and investors are expecting worthy announcements from Union Budget 2023.

Alternate Investment Space: Possibilities and Pressure

Against the traditional investment routes, many HNIs or Ultra-HNIs (Ultra-high-net-worth-individuals) are stepping into the startup world. Witnessing the upsurge in disposable incomes, the Securities and Exchange Board of India (SEBI) is in the early-stage planning to increase the minimum ticket size for any Limited Partner (LP) in Alternate Investment Funds (AIFs) from the existing threshold of Rs 1 crore to Rs 5 crore.

Before this development private equity and venture capital funds approached the stock exchange regulatory body to seek relaxations and ease in the norms in alternate investment funds. Ankit Kedia, Capital A while commenting on the same said, “The government is trying to balance the private and the public listed companies. But if the ticket size can be gradually increased, it would create lesser pressure on investors.”

Regulatory Norms For ESOPs

Under Budget 2022, the surcharge on capital gains such as ESOPs was supposed to be capped at 15 per cent. Padmaja Ruparel Co-founder, IAN and Founding Partner of IAN Alpha Fund states, “Employees with these options (ESOPs) should be taxed only when they sell the shares and make money. Any taxation before that does not stand up to logic.”

The demands include the deferment of the time of payment of tax on the Employee Stock Option Plan (ESOP) available to the employees of more startups. The facility of deferment should be made available to more startups (not limited to the 635 startups with an Inter-Ministerial Board Certificate).

National Association of Software and Service Companies (Nasscom) further suggests the criteria to make it available only to employees of DPIIT-registered startups. Eligible ESOPs to be offered only to Indian residents and taxpayers. The terms of the ESOP should be same for the all the employees to whom these are offered.

LTCG (long-term capital gain): The Parity And Potential

The expectation is to introduce a new and simplified tax and regulatory framework for Private Equity/Venture Capitalists and startups. IAN’s Padmaja Ruparel says that unlisted companies are at a much higher risk for investors. As a result, investors in unlisted companies take a much higher risk and pay a much higher tax than investors in listed companies.

To this effect, a separate tax and regulatory framework for Foreign Portfolio Investments may be introduced. Sanjoy Datta, Partner and Financial Services Industry Leader, Deloitte shares the key areas that need to be addressed;

– Provide parity for capital gains tax treatment between unlisted and listed securities.

– Define and clarify direct and indirect tax treatment on carry structures/payments.

– Allow listing by Indian companies overseas and/or provide light-touch regulations for listing on Indian stock exchanges

GST And Taxation: Rationalise taxation of contingent consideration

India is an attractive market for international investors. With a focus on balancing profitable exits and correct valuations, most private equity players plan to introduce a combination of clauses in the shareholders' agreement. This includes consideration payable in a contingent manner based on certain performance milestones that the promoters achieved.

Amrish Shah, Partner, Deloitte describes that such clauses incentivise promoters for their good performance. There is no clarity on whether such contingent consideration is to be taxed in the year of transfer or receipt after the consideration crystallises. It may be clarified by an explanation; the contingent portion should be chargeable to tax as capital gains in the year irrespective of the year in which the transfer takes place.

The centre is likely to target nominal GDP growth of about 11-12 per cent in the FY23 budget. To consolidate and augment the growth, cohesive steps are required.

Brijesh Damodaran, Co-founder, Auxano Capital asserts, “To encourage the growing interest and contribution of Indian investors, a parity in LTCG should be considered. Making the taxes and keeping the compliance simple to follow, should be the endeavour.”

India has the potential to reach 10 million apprentices in ten years. The key to achieving this vision requires budgetary provisions. Rituparna Chakraborty, Co-founder and Executive Director, TeamLease Services while sharing the expectations said, “Incentives and reforms to launch skill universities, extended tax standard operating procedures /higher subsidies to Micro and Small Medium Enterprises to adopt apprenticeship, separate regulations in the current University Grants Commission Act and Apprentices Act to scale work-integrated programs.”

Sector-Agnostic: Transparency in Government Schemes

With India being a pioneer of the Unified Payments Interface (UPI), hopes are cast on India. The International Financial Services Authority (IFSCA) also introduced the IFSCA (FinTech Incentive) Scheme to promote the establishment of a world-class Fintech hub.

2022 has seen some successful and noteworthy initiatives undertaken by the government including 123 Pay, and the launch of 75 Digital Banking Units (DBUs) in 75 districts. As we step into 2023, rural fintech is bound to grow by leaps and bounds. Dilip Modi, Founder of Spice Money points out that some features that will continue to be important for the rural population are customisation, sachetization, and assisted journey of banking and payment services.

To emerge stronger in the ongoing electric mobility revolution, it is imperative to make manufacturing capacities stronger and fortify its localised supply chains.

“To ensure that commercial or cargo EV adoption, the Budget must incentivise small businesses and MSMEs to join the bandwagon as well. Furthermore, we would like to see the ease of investing, tax rationalisation and EV skilling as the guiding principles for the sectoral announcements in Budget 2023,” Kalyan C Korimerla, MD and Co-Promoter, Etrio Automobiles.

Towards New Year

2023 is going to be a game-changing year for the Indian startup ecosystem. These gradual developments will take India towards the benchmark of a $5 trillion economy size by the turn of this decade or sooner