Startups in dire need of regulatory clarity: Economic Survey
The government’s latest Economic Survey has sought the removal of regulatory ambiguities for India’s startup ecosystem to flourish, and called for an “evolved” tax system that stimulates innovation.
“Startups and innovative ventures face significantly greater uncertainty than traditional “brickand-mortar” firms. Yet, policy ambiguities that create collateral damage for genuine risk-takers can affect investments by dampening the animal spirits in the economy,” according to the survey, which is released a day before the Union Budget.
“Continuing the creation of an ecosystem for private investment, especially in the new economy, is therefore critical to enable the virtuous cycle of investment, demand, exports, growth and jobs,” it said.
The survey asked for optimal tax policy, citing studies that, for example, outline the economic consequences on individual investors after the imposition of capital gains tax.
Capital gains tax is imposed on investors at the time of exiting their investments.
“The economic survey hits the nail on the head with respect to lowering the cost of capital and more competitive tax rates to boost investment,” Siddarth Pai, founding partner of 3one4 Capital told ET. “Taxation can be used as a tool to marshal investments into specific sectors and incentivise investment.”
In terms of tax rates, however, unlisted shares are taxed at twice the rate of listed counterparts despite being illiquid and significantly riskier, he added.
The Indian startup ecosystem continues to face a gamut of issues, such as those surrounding the so-called angel tax, which has hit investor sentiment in the world’s third-largest startup ecosystem. Ecommerce and online pharmaceutical companies have also voiced concern over a lack of regulatory clarity in their respective sectors.
“Design of optimal tax policy also aims to raise revenue efficiently and fairly, while encouraging the bona fide taxpayers and punishing the mala fide ones. However, achieving this optimality is not an easy task. Therefore, to foster investment, getting this balance right is extremely critical in the Indian context,” it said.
“The budget should lower the tax rate from the gains from the sale of startup securities as India seems a larger number of exits via mergers or buyouts as opposed to IPOs. This can help galvanise domestic investment, which is a spectator in the Indian startup story,” Pai said.
The number of startup registrations has fallen during fiscal year 2019 in Asia’s third-largest economy, which is a worrying trend.
Separately, equity investments over this period have also dipped to $10.48 billion, according to startup data tracker Tracxn, from $11.19 billion in the previous financial year.
India’s startups are preparing to restart multiple conversations with the new government on a range of issues, including startup listing norms, dual-class share structures, clarity around the draft ecommerce rules and converting the Aadhaar ordinance into law — discussions that had slowed to a trickle over the last two months.
Source: ET Tech