COLUMNSECONOMY

Dear FM, can angel investors and startups expect something this Budget?

Incentives necessary as angel investment is riskiest

The 2018’s Union Budget will be Modi Government’s fifth budget and the last one before the 2019 Lok Sabha elections. Hence, the Budget also holds a strategic importance for the current government. Keeping in mind the current government’s startup initiatives, the expectations are high for the upcoming Budget, especially for the startups.

There are a few things startups and investors are highly anticipating the Budget to address;

FOR STARTUP ENTREPRENEURS:

Angel Tax: The tax was introduced in the year 2012 to curb money laundering; however, it was only over the last couple of years that CBDT has started to monitor it. One of the ways is to provide incentives to angel investors by offering them tax breaks. Most of the European countries and UK had introduced tax breaks for angel investors. These incentives were offered only for few years.

Such incentives are necessary as angel investment is one of the riskiest investments. It will kick start the start-up investments and expand angel investment as an asset class. The government should also formulate the guidelines for accreditation of the investors, and the angel tax should only be levied on the non-accreditated investors.

This will not only give a much-needed relief to the entrepreneurs and investors from angel tax but also will help to clean up the angel investment space. Making government funding accessible directly: One of the major issues in the Indian startup ecosystem is that the funds are not easily accessible to the startups.

The government of India does launch funds for Indian startups, under their startup India initiative. However, these funds are facilitated to the startups via VC firms, hence; they end up as funds of the fund. The government should make provisions to disburse the funds to the startups directly instead of through VC firms. It will make funds more accessible for the startups.

Guidelines on startup valuation: Most of the valuations of the startups are done by the third party companies, which mostly have their base in the other countries. To make the matters worse, the valuation of the startups differ with respect to each company evaluating it, this creates a lot of discrepancies with regards to the true value of the startup.

A concrete set of guideline set by the government will help in eradicating this debatable issue.

FOR INVESTORS:

Encourage foreign investment: Although India has seen a boom of many foreign VC firms; the angel investors still shy away from the Indian market due to the amount of risk involved and compliance issues. Simplifying the compliance related to inward remittances will encourage foreign investors to actively look India as an investment opportunity. Active use of technology will prove to be beneficial to remove all process related bottlenecks.

FOR CORPORATES:

Encourage innovation and tax benefits: Encouraging innovation and tax benefits to corporate, who actively invest in emerging technologies relevant to them as it can lead give a huge boost to the entrepreneurial ecosystem in the country.

Like CSR, corporates can be mandated to set aside a certain portion of their profits as CIR – Corporate Innovation Responsibility, which can be deployed towards the above.

LEGAL FRAMEWORK:

Laws relating to financial intermediaries: Laws need to be further well defined to give clarity to the role of angel groups, investment bankers, financial advisors, service providers as well as incubators, accelerators & co-working spaces. The EoW may need to have a separate specialized vertical to address all conflicts related to startup and venture investments in India.

The current legal framework needs to be widened to incorporate all the scenarios, contracts, transactions that may take place during the engagement between startups and investors, mentors or advisers.

The expectations are high from the upcoming budget, and there are a few major issues in the startup sector which the government needs to address to help India be one of the startup hubs in the years to come.

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