The startup ecosystem’s growing prominence in India’s growth story was evident in the country’s union budget for 2023-24 presented on Feb. 1 by finance minister Nirmala Sitharaman.
In her budget speech, Sitharaman announced the setting up of an Agriculture Accelerator Fund, which will encourage the growth of agri startups in India. “The Agri Accelerator Fund will be set up to encourage agri startups in rural areas,” the finance minister said, adding that agricultural credit target will be increased to Rs20 lakh crore ($240 billion) in 2023-24 vs Rs18 lakh crore in the previous financial year, up 11.11% YoY.
The move, it is expected, will help discover technology-driven solutions to problems faced by farmers and boost their productivity.
In another bonus for entrepreneurs, Sitharaman proposed to extend by a year the date of incorporation of a startup to avail of income tax benefits. Currently, only startups established on or before March 31, 2023 qualify for tax benefits. The finance minister has now extended the tax holiday to March 31, 2024, agreeing to one of the key demands of the industry.
The budget also extended the time period for carrying forward losses from the current seven years to 10 years. This means startups get an additional three years from the date of incorporation to offset their losses against their taxable income.
“India is now the third-largest ecosystem for startups globally and ranks second in innovation and quality among middle-income countries,” Sitharaman said while presenting the budget in the Lok Sabha, the lower house of India’s Parliament.
Other tax benefits include exemptions on capital gains arising from the sale of residential properties, tax exemptions on profits for a certain number of years, and deductions for investments made in startups.
Additionally, GIFT IFSC (International Financial Services Centres) will receive significant support from the government. The union government also announced several measures to enhance business operations in the global financial hub.
To reduce compliance and promote ease of doing business, Sitharaman indicated that International Financial Services Centres Authority (IFSCA) will be delegated power under the SEZ Act to “avoid dual regulation”.
Making IFSC the supreme authority for all Special Economic Zone (SEZ) compliances is “a big win for the investing community,” said Karthi Reddy, co-founder at Blume Ventures & chairperson of the Indian Venture and Alternate Capital Association (IVCA).
Echoing the same thoughts, Ashley Menezes, partner and COO at private equity firm ChrysCapital & vice-chairperson, IVCA added: “…single window clearances, acquisition financing and arbitration, will elevate GIFT as a true International Financial Services Centre.”
Going forward, the reduced compliance will help in promoting India as an alternative business destination for global companies looking to set up their production house in the country, said experts.
“The announcement of a thorough review of all financial services regulations in the country through public consultation is welcomed. The existing restrictions must be rationalised and modernised for Indian investors to become globally competitive,” said Siddarth Pai, Co-Founder 3one4 Capital & Co-Chair, Regulatory Affairs Committee at IVCA.
“Missed opportunity”
“One missed opportunity was that the rationalisation of capital gains taxation, especially for startups, was not announced. This would have made this budget a game-changer for Indian entrepreneurs and investors,” Pai said.
The budget also did not mention taxes related to cryptocurrency, the perception about which remains mixed in India. Last year, the Indian government stipulated a flat 30% tax on income from crypto investments including a 1% tax deducted at source (TDS) for each trade. The high tax rate had sparked criticism from crypto supporters.
Anurag Dixit, founder at Kunji, a crypto asset management platform, said: “To summarise the budget in the context of cryptocurrency and digital assets, we believe that no bad news is good news. Digital asset infrastructure and business need enough time for policies and regulatory decisions and the government taking its time to share developments in the same are good for the overall industry in the medium to long term.”
India has over 100 unicorns and over 80,000 startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).
Going forward, the startup ecosystem is expected to contribute about 4-5% to India’s gross domestic product (GDP) over the next 3-5 years, stated a report by StrideOne in December 2022.