The Indian Budget: Broken down for entrepreneurs and startups of all shapes and sizes

Co-founders of 91springboardStartup Advice Comments

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The buzzword on everyone’s lips these days is ‘startups’. Either people want to create one, acquire one or are just curious and want a piece of the action going down in the ecosystem. Also, keeping in mind how much of a priority it is to our honourable Prime Minister, it’s no surprise that this year’s budget had plenty to get eyeballs from anybody in the startup ecosystem.

So, now the budget has come into play, effective from this month. Let’s take a look at a few main sections of the budget relevant to entrepreneurs and how these will impact your business. We’ve also thrown in our two-cents on each of these sections.

1. As per the latest budget, start-ups are to get a 100% tax exemption of profits for three years, out of five years, after their inception.

Our take-home: We know the first thing to come to people’s mind when they read this section will  be that as great as it sounds, are three years enough? Keeping in mind how startups from certain avenues such as tech require a heavy upfront investment, and rarely make any profit in the first three years.

Well, there are two ways of looking at this.

Firstly, this will primarily be the case in product companies. Not so much in the case of service companies. Plenty of service based companies start making a profit within the first year and for them, this is going to be a big benefit.

Secondly, the Government is all for helping SME’s and small companies and this policy will be a great boon for them. Not for the Flipkart’s of the world, but for the local kabadiwala who wants to take his business online. Anyhow, the large tech startups have VC funding that allows them to keep going for a long time in any case.

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Not for the Flipkart’s of the world, but for the local kabadiwala who wants to take his business online, the 100% tax exemption is a great boon.
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2. An amendment in the Companies Act, 2013 will ensure speedy registration. The Government has gone so far as to say they will ensure a ‘1-day incorporation’ via a mobile app. 

Our take-home: This is great as we’re all for the simplification of the process of opening a company. That being said, opening a company in a day or 4-5 days isn’t the big worry. The major concern is the unpredictability of the time spent in the processing stage as there are a bunch of things that could go wrong. Be it your company name getting rejected or you missing out on submitting a key document. So, if the Government can bring down the processing time to say 2-3 days, now THAT will be the real game changer.

The 1-day incorporation promise is good, but definitely not the most important feature. Opening a company isn’t an immediate need like calling a cab. We highly doubt people will suddenly feel the urge to start a company while on the train to work. It will be a more planned and thought-through decision than on a whim.

Also, the Government has introduced a bankruptcy bill which will help people speedily shut down their companies and this too is helpful to startups.

Opening a company in a day or 4-­5 days isn’t the big worry. The major concern is the unpredictability of time in the processing stage as there are a bunch of things that could go wrong at that stage.
3. The long term capital gains tax has been 20% with a holding period of 3 years. As per this year’s budget the holding period has been reduced to 2 years so that unlisted companies can get the benefits of Long Term Capital Benefits. 

Our take-home: We don’t find this to be that big of a deal as it isn’t going to affect our lives that much. However, it’s a step in the right direction.

It shows that the Government has the intent to help the entrepreneurial ecosystem in the country. We would’ve preferred if the long term capital gains tax would’ve been at put at par with listed equity and by this we mean that just like you buy listed stock for a term of over one year, it becomes a long term capital gain and is taxed at zero. But let’s be honest, this is version one and there is always room for improvement. The fact that the Government is showing intent is a great sign.

4. Initiatives such as Skill India and Stand up India have been launched and have high aspirations. Skill India aims to train over 40 crore people in India by 2022.
Stand up India is an initiative that aims to provide credit to Scheduled Caste, Scheduled Tribes and Women Entrepreneurs. 

Our take-home: We know most of you must be thinking these are tall promises the Government is making and that we should be grateful if even half of this is done. We agree that we’re all cynical because we’ve come from a system where we’ve succeeded in spite of the Government and that the Government has been more of a hindrance than help.

However, we like this Government’s ability to implement things and so we feel it’s too early to judge and write them off. Take, for example, the work they are doing to reduce the number of unbanked people in the country.

However, we aren’t the biggest fans of reservation in the post primary education space. In business and in the market, you compete on the basis of quality and not on the basis of quota. A customer almost always buys a product solely because it’s a good quality product not because it’s made by a person of a certain class/caste.

We aren’t the biggest fans of reservation in the post primary education space. In business and in the market, you compete on the basis of quality and not on the basis of quota.
The biggest highlight of the Budget 2016 for the entire entrepreneurial ecosystem?

So, we think there are a few things that deserve to be called highlights.

First, the pure signalling of intent from the Government, the intent to make policy level changes in order to benefit the ecosystem.

Secondly, the promise to set aside funds in order to boost various parts of the ecosystem. These are all a sign of good things to come in the near future.

Also, another great thing that has begun happening is the Government’s willingness to partner with private players to help achieve the goal of progress in the startups ecosystem.

Did the Government miss out on anything?

Well, while everyone seems to be asking for ‘money’ from the Government, we feel that the Government’s role should be a lot more towards policy rather than just giving money out for everything. So instead of saying we’ll set aside so much money to set up incubators and so on, they could’ve done other things that would have resulted in a lot more money being available for entrepreneurs from the market itself.

For example, there could have been a better element of tax incentives/deductions for investing in startups. If not tax incentives, they could’ve at least have converted it into no tax on Long Term Gains just like it works in the stock market.

The government’s role should be a lot more towards policy rather than just giving money out for everything.

Another problem is the lack of a pooling vehicle in India for people to invest in.

So, for example, if three people decide to invest together, they cannot put their money in a single bank account or a single LLP (limited liability partnership). While some people have tried their hand at this, it seems like a grey area and most investors are scared, as they don’t want to be caught on the wrong side of the law in the future. Thus, the investment has to either come separately from all three investors, which means more overheads and complications or if an entity is setup, it needs to be a SEBI registered entity which again means it will be more expensive and far more complicated or it will end up being an NBFC .

Whereas if you see globally, the US, Singapore, Canada, Germany etc all allow pooling money via an LLP which makes it super easy for syndicated rounds.

Over to you!

What are your thoughts on the budget? We’d love to know.

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