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Budget almost a non-event for startups; service providers slapped with higher tax

28 February, 2015

The Union Budget was as good as a non-event for the bustling startup ecosystem and the Finance Minister blissfully ignored any mention of the ambitious Rs 10,000 crore startup fund-of-fund he talked about just last July.

Instead he talked about plans to set up an incubation programme called Self-Employment and Talent Utilisation (SETU) mechanism. It will support startups particularly in technology-driven areas and the government has allocated Rs 1,000 crore initially for this.

The only other measure affecting startups positively is the cut in the rate of income tax on royalty and fee for technical services from 25 per cent to 10 per cent.

“Royalty was a big issue that has been taken care of,” said Sunil Goyal, founder of YourNest Angel Fund.

However, he added that the government should have encouraged HNIs investments in startups too, which has not happened.

The move to launch a national skills mission through the skill developments and entrepreneurship ministry and the move to create a Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs 20,000 crore, and credit guarantee corpus of Rs 3,000 crore to support entrepreneurs belonging to the socially backward strata, with loans are more of social affirmative action programmes rather than boosting entrepreneurs.

On the other hand the Budget failed to clarify the position on the tax on startups on soliciting angel investments.

Saurabh Srivastava, co-founder of Indian Angel Network, said this is the one big miss of the Budget for startups as there was no resolution on Section 56 which taxes them on investments they receive from angels beyond fair market value.

This is a big nagging issue for startups and the ecosystem was expecting a resolution as one of their own is closely involved in the Budget formation. Jayant Sinha, former chief of venture investment firm Omidyar, is the Minister of State for Finance.

One factor which would affect most startups, as many of them are providing ‘service’ instead of being product startups, is the move to raise service tax rate from a little over 12.6 per cent to 14 per cent.

“Hiking the service tax to 14 per cent is a dampener for a sector like e-commerce that is predominantly service-oriented,” said Sanjay Sethi, co-founder & CEO, ShopClues. He, however, noted that the assurance to speed up goods & service tax (GST) implementation is a welcome announcement for the industry.

Others too cheered the FM for setting a deadline of April 1, 2016 for implementing GST, especially the e-commerce firms which are expected to benefit from the national tax regime.

Amazon India spokesperson said GST and focus on development of infrastructure are key to ease of doing business by enabling and streamlining the movement of goods and services, adding: “Customers can enjoy quick, easy, convenient access to a wide selection of products from across the country; and sellers, especially small and medium businesses, can grow profitably by serving customers across the country.”

Ashvin Vellody, partner, management consulting, KPMG in India, said, introduction of GST will help e-commerce companies rationalise supply chains by addressing the taxation issues.

The FM also referred to incentivising cashless transactions through debit and credit cards but did not say if the same would go for boosting even card-less payments giving the level of activity in the startup ecosystem for such business.

Naveen Surya, managing director of Itzcash, said, “The Payments Bank revolution, now being spearheaded by the proposed transformation of the Postal Offices will further widen the market for payment solutions.”

(Edited by Joby Puthuparampil Johnson)


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Budget almost a non-event for startups; service providers slapped with higher tax

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