New Delhi: After the hype of Start-up India, the government initiative that brought young entrepreneurs, venture capitalists and policymakers under one roof, all eyes are on the government to see how the policy changes are implemented.
On Saturday, Prime Minister Narendra Modi unveiled the start-up action plan, announcing measures including a Rs.2,500 crore annual fund for the next four years, exemption from capital gains tax on investments via this fund, self assessment for three years and faster patent applications.
While these measures have enthused existing and aspiring entrepreneurs, it remains to be seen how these policies take shape.
“This is a great move towards creating awareness. The impact of specific policies announced will become clear after their on-the-ground implementation,” said Deepak Gaur, managing director at SAIF Partners.
Sudhir Singh, a partner at PricewaterhouseCoopers India, agrees. “The government has an ambition of creating 30,000 startups and for that, one needs basic infrastructure like electricity, Internet and roads. The direction that the government has taken is positive. However, a lot of clarity is still required.”
The government’s waiver of capital gains tax, which will only come into effect after a formal proposal in the Union Budget next month is approved by the Parliament, is seen as a radical move.
However, several venture capital firms are waiting for the fine print before they assess its impact.
“From what it looks like, the capital gains tax kicks in only when you invest in the MSMEs (micro, small and medium enterprises). I can only wish that the universe of these investments is expanded,” said a top executive at a venture capital firm on condition of anonymity.
While investors are exempted from paying tax on long-term capital gains in the case of listed companies in India, they have to pay 20% on such gains from investments in privately held firms.
For this reason, most foreign investors in Indian start-ups prefer the Mauritius route where they are exempt from capital gains tax because of a provision in the Double Tax Avoidance Treaty. However, revenue secretary Hasmukh Adhia, speaking at the Start-up India event, said the government is looking to lower the capital gains tax for start-ups in the budget to be presented on 29 February. “This gap is too wide. I can assure you of this gap being bridged at the time of budget,” Adhia said.
Rahul Garg, leader (direct tax) at PwC India, said though foreign investors currently take the Mauritius route, it will not be available after India and Mauritius sign the multilateral Base Erosion and Profit Shifting (BEPS) treaty. BEPS is meant to check the practice of shifting of profits from high tax rate countries to lower tax ones, often practiced by multinational firms.
Garg said that the initiative to exempt capital gains tax on investments into the fund of funds seems to be aimed at securing cheaper availability of money for startups. “It should work if there are good fund managers who can attract investors,” he added.
While the government has also announced income-tax relief for start-ups, entrepreneurs are also expecting to see some relief on service tax.
“As start-ups don’t make profits early on, some relief on service tax could really help and support start-ups,”said Vijay Shekhar Sharma, founder of One97 Communications Ltd that runs payments firm Paytm.
What is being seen as the biggest takeaway is the government’s decision of trying to stay away from start-up processes.
Start-ups, which the government has defined as companies registered in India within the last five years and with annual turnover not exceeding Rs.25 crore, will now be allowed to self assess businesses for the first three years of operations.
Modi in his speech on Saturday said that start-ups will not have any inspector visits for the first three years, in a measure aimed at helping young companies save time and money.
“Having run a business and struggled with teething problems of registering a company and getting all licences in early days, I think it will be great for aspiring entrepreneurs that they can register easily (on an app) and self assess environment/labour laws, etc., in early stages,” said Neeraj Kakkar, co-founder at Hector Beverages Pvt. Ltd that owns the Paperboat brand.
Speaking at the event on Saturday, economic affairs secretary Shaktikanta Das said that the finance ministry has held detailed discussions with the Reserve Bank of India (RBI) over online filing of returns under the Foreign Exchange Management Act, 1999 (Fema). “You will see very quick action on that, which will facilitate online filing of returns,” said Das.