Letting the Angel Free

INDIA IS ON THE trajectory of becoming a $10 trillion economy in the near future. But pulling this populous country along is a humongous task. In the past decade, startup innovation has borne fruit as the country’s aspirational youth have become job creators from mere jobseekers. The last decade has witnessed a spurt in multiple new business ideas and models that have managed to create more work opportunities. On its part, the government has recognised this and has begun to support these initiatives through enabling programmes.

Different sectors of the startup ecosystem viewed Budget 2024 with great expectations. After all, over time, startups have had multiple wishlists, including relief from certain taxes as well as regulations.

Finance Minister Nirmala Sitharaman presented her seventh Budget and it was clear that the aim was to address the primary issue of jobs. The focus was also on startups, MSMEs, education and skills Through the introduction of new schemes and increas­ing allocation, the new focus on concepts of internships and upskilling are steps intended to address the ever-increasing growth of the working population and their livelihood.

The most significant announcement in this Budget was the abolition of the “angel tax” that was introduced in 2012 by Pranab Mukherjee as part of measures to curb the creation and circulation of unaccounted funds. Under Sec­tion 56(2)(viib), the difference between the issue price of unlisted shares and their fair market value was taxed as income for the company. This tax was aimed at pre­venting money laundering by foreign investors in overvalued unlisted firms. Over the years, numerous changes and exemptions were made to this section. However, it unintentionally imposed a tax burden on startups during their early funding stages, hindering their growth significantly, forcing many to go abroad to set up holding companies.

In 2022, the tax’s extension to non-resident investments led to a decline in startup funding. Angel tax abolition is a significant step. Angel tax used to apply to unlisted companies in India whenever they raised capital by issuing shares to investors at a price exceeding a company’s fair market value, and such difference was taxed at a rate of above 30 per cent. Its prevalence also created a significant burden as several cases were slapped on startups. Now, considering angel tax has been abolished, the government should also relax the ongoing cases where genuine startups may have suffered.

Another change, that was a longstanding demand from the startup ecosys­tem, was the capital gains differential that existed between listed and unlisted securities. Unlisted securities are fundamental to infuse capital but taxation here was twice that of listed securities. By bringing parity here, startup funding will see a major boost.

For e-commerce operators in India, the government has proposed lowering the tax deducted at source (TDS) rate from 1 to 0.1 per cent under Section 194-O of the Income Tax Act; e-commerce operators must deduct income tax from the gross amount of sales of goods or services facilitated through their digital platforms. This significant reduction in the cost of online selling is expected to provide a stimulus to digital commerce adoption in the country. This TDS was initially introduced to monitor e-commerce transactions for round-tripping of funds and to prevent money laundering. While the reduction in the rate is a positive step, ideally, the TDS should have been completely removed to alleviate and eliminate the compliance burden.

Although the finance minister’s Budget speech mentioned the word “start­up” only twice, the Budget contained significant provisions for the startup ecosystem. This year’s Budget indicated that the government views startups as an integral part of the broader business landscape.

The definition of “eligible startup” under the Startup India initiative was expanded to include entities incorporated between April 1, 2016 and March 31, 2025, allowing more startups to benefit from the tax holiday offered under the scheme. Currently, to qualify for incentives, a startup’s turnover in any of the previous financial years must be less than ₹100 crore.

The government has also proposed easing foreign direct investment (FDI) and overseas investment rules to facilitate investment, encourage prioritisa­tion, and promote the use of the Indian rupee for overseas investments.

To boost the nation’s space economy over the next decade, the government has announced the creation of a ₹1,000 crore venture capital fund for space tech startups. This fund aims to enhance private sector-driven research and innovation in the space tech industry on a commercial scale.

The finance minister proposed expanding the use of Digital Public Infrastructure to drive productivity gains, create business opportunities, and foster innovation within the private sector, particularly in the areas of health, law and justice, logistics, MSMEs, service delivery, credit, e-commerce, education, and urban governance.

Agri-tech startups focused on vegetable supply chains receiving support, including improvements in connectivity, storage, and marketing is a good move, including the development of Digital Public Infrastructure for the agriculture sector following a year-long pilot.

The customs duty on mobile phones, mobile PCBAs (printed circuit board assemblies), and chargers is proposed to be reduced to 15 per cent from the existing 20 per cent, aiming to benefit consumers and further develop the mobile phone industry in the country. This decision was influenced by the three-fold increase in domestic production and the nearly 100-fold increase in mobile phone exports over the past six years, indicating the maturation of the Indian mobile industry.

The government intends to create e-commerce export hubs through a public-private partnership (PPP) model to enable MSMEs and traditional artisans to sell their products internationally. These hubs will function within a streamlined regulatory and logistical framework, providing a comprehensive array of trade and export-related services in one location, thereby significantly improving the ease of doing business for SMEs.

The Budget is heartening and has brought some cheer among the startup ecosystem. India’s digital ecosystem has transformed re­markably due to initiatives like Digital Public Infrastructure (DPIs), including open APIs, the United Payment Interface (UPI), and the Open Network for Digital Commerce (ONDC).

More needs to be done on a war footing in the days to come if India is to continue on its promising trajectory toward a $10 trillion economy. The next immediate reform the government should undertake is ushering in a GST 2.0 that truly works for the ease of doing business, and one which does not hurt the digital economy. Currently, the states are working out new cess models in different digital sectors that are equally hurting the digital economy.

Startups operating in the digital world face significant challenges from increasingly stringent regulatory restrictions from different ministries as well as state governments, apart from GST. Excessive regulatory constraints have already begun to hamper the ability of Digital India to innovate, compete, and grow. These companies, the backbone of our digital economy, require a flexible and supportive regulatory environment to thrive.

The number of laws specifically targeted towards digital companies is increasing by the day. Commercial impact and com­petitiveness are affecting digital companies domiciled in India which, almost always, have to ensure immediate and full compliance with such laws as opposed to non-domiciled digital companies, which can afford to operate in In­dia completely disregarding such laws. There is a need to ensure that the law treats all com­panies, digital or physical, domiciled in India or foreign, in the same manner, and offers a true level playing field.

Overregulation can lead to increased com­pliance costs, stifled innovation, and, in the long run, reduced competitiveness on both the domestic and global stages. This, in turn, could deter investment in Digital India, hinder job creation, and potentially slow down the overall economic growth of the country, risking Prime Minister Narendra Modi’s vision to make India a developed nation by 2047 in the hundredth year of Independence.

About The Author

Rameesh Kailasam

Rameesh Kailasam is CEO, IndiaTech.org, an industry association representing Indian startups and investors

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