Abstract
This piece focuses on the tax exemptions and incentives for startups in India offered in the Union Budget 2022. India has been a developing country is offering opportunities to businesses to establish themselves. Startups have been a part and parcel of the same inception. In the year 2016, India announced the Startup India campaign to boost entrepreneurship. This initiative has had a positive effect on the startup ecosystem of the country and has enabled innovative business ideas and turned them into reality, boosting the startup environment. This shift in the Indian mindset has helped the Indian economy and has generated employment. As a result, the startup ecosystem of India has grown significantly, each year. It is safe to say that this sector has played a significant role in the reeling of the Indian economy post the covid outburst. To encourage the startup economy and to capitalize on the benefits attached with it, the Indian Government on the 1st February 2022 presented the Union budget for this year announcing certain exemptions, incentives and new schemes for the emerging startup sector of India.
Introduction
The year 2021 is said to be a landmark year for the startups of India.[1] The Economic Survey of 2021-2022 showed that India now has the third-largest startup ecosystem in the world after the United States of America and China. The government recognized over 14,000 startups in the year 2021-22 itself, with the number going up to 61,400. [2] The growth of the startup ecosystem has not just been in terms of the number of startups established but also in terms of wealth creation. Indian startups were successful in raising $42 billion in 2021 as opposed to $11.5 billion in the year 2020. [3] To flourish this idea of entrepreneurship, the Indian Government has provided benefits to entrepreneurs establishing startups. The Government has launched various schemes/campaigns for entrepreneurs with intending to develop ease of business in the country. With that being said, this sector has had its share of challenges and losses in the last couple of years owing to the covid-19 outburst. The year 2020 saw close to 385 startups shutting their operations and causing a loss of $760 million. Policy support, tax exemptions/incentives, and access to funding, thus become the key support features for this sector.
The finance minister announced the Union Budget[4] for the year 2022-23 on February 1, 2022. The budget has 3 main goals for ‘Amrit Kaal’ (India’s 100th-year post-independence); (i) focus on growth and all-inclusive welfare, (ii) promoting technology-enabled development, energy transition, and climate action, and (iii) virtuous cycle starting from private investment, crowded in by public capital investment.[5] Focusing on making startups the backbone of new India, Budget 2022 has introduced policies and tax benefits to encourage the startup ecosystem. From introducing new startup schemes to providing exemptions, tax holiday extension, here’s what the government of India has in store for the startup budget[6] for the year 2022-23:
1. Tax Holiday Extension
A Tax Holiday is a program run by the government which aims at a reduction or elimination of the tax, i.e., during such period a company or a person is permitted to pay no tax or less than usual. The tax holiday available for startups has been extended by one year, as proposed in the Union Budget 2022. The Startup Tax Holiday Scheme provides a tax incentive, to eligible startups, for three consecutive years out of ten years from incorporation. Earlier this scheme was available to startups incorporated till March 2022 but post this extension startups incorporated till March 31, 2023, will be able to benefit through this scheme.
An extension on the last date for a concessional tax regime of 15% for the newly established domestic manufacturing companies was also announced. This tax regime was introduced to develop a globally competitive business environment for domestic companies. Under section 115BAB[7] the last date for commencement of manufacturing or production was extended by one year, i.e., from March 31, 2023, to March 31, 2024. These announcements are aligned with ‘Atma Nirbhar Bharat’.
2. Rationalization of Surcharge
Capital gains realized on selling equity funds after holding them for a year or more are termed long-term capital gains. Long-term capital gains on listed equity shares were chargeable to a maximum surcharge of 15% and unlisted equity investments were subjected to graded surcharge up to 37%. Providing major relief to investors in India, the long-term capital gains tax has now been capped at 15%, across all equity investments (listed and unlisted). Harmonizing the surcharge will help in reducing the tax burden for venture capital and angel investors and will give a boost to the start-up community.
3. Drone Startups
In the Union Budget 2022 ‘Drones’ have been mentioned for two separate purposes. One, they will be used to help modernize agriculture in the country by using data and emerging technologies. This effort has been named as ‘Kisan Drones’ scheme by the government and is aimed at promoting such ariel vehicles for crop assessment, digitizing land records, and spraying of insecticides and nutrients.
Second, the government is aiming at enabling Drone-As-A-Service (DrAAS). This will be a part of a new Drone Shakti scheme where the startups will be encouraged to launch applications for the same. These announcements are expected to increase drone-related innovation in the country. Keeping this in mind the government has also announced required courses for drone-centric skilling across select institutes in all states.
4. Agritech Startups
In an attempt to encourage startups in the agriculture industry, the government has proposed to finance startups for agriculture and rural enterprise appropriate for the farm produce value chain. To facilitate the financing, a fund with blended capital, developed under the co-investment model, will be promoted through NABARD. The activities for these startups will include, inter alia, support for FPOs, machinery for farmers on a rental basis at farm level, and technology including IT-based support.
5. Startup Participation in Defence Research and Development (R&D)
One of the biggest breakthroughs for the startup industry has been announced in the defence sector. Through this proposal, the government is aiming at encouraging startups to commence the design and development of military platforms and equipment in collaboration with DRDO and other organizations. With 25% of the total defence R&D budget set aside for this, defence R&D will be opened up for startups.
6. Centre for Processing Accelerated Corporate Exits
In a growing ecosystem, it is important to acknowledge successes as well as failures. The government has announced the development of a Centre for Processing Accelerated Corporate Exits (C-PACE) to provide for a quick exit to businesses when failure is insight. The main objective behind setting up C-PACE is to fasten the procedure of voluntary winding up and reduce the timeline from 2 years to 6 months. This can be a positive step towards the startup community to recognize mistakes.
Conclusion
The Union Budget 2022 presented by Finance Minister Nirmala Sitharaman, has announced various new initiatives and proposals to capitalize on the startup ecosystem of the country. Although there have been some misses, such as no parity between the tax rates for listed and unlisted securities, lack of clarity to allow for a foreign direct listing, the budget still gives some break to businesses and startups that struggled because of the pandemic. This budget is a positive step towards encouraging more entrepreneurship and growing the startup ecosystem of the country.
[1] Team Inc42, India’s First National Startup Day! A Milestone For Indian Startups, Inc42 (Jan. 16, 2022), https://inc42.com/buzz/indias-first-national-startup-day-a-milestone-for-indian-startups/
[2] Nikhil Patwardhan, Economic Survey: India becomes third-largest startup ecosystem in the world, LiveMint (Updated on Jan. 31, 2022, 04:39 PM IST),
[3] Indian startups raised $42 billion in 2021: report, The Economic Times (Updated on Jan. 13, 2022, 04:18 PM IST),
[4] Budget 2022-2023 Speech of Nirmala Sitharaman Minister of Finance, Government of India (Feb. 1, 2022), (https://www.indiabudget.gov.in/doc/budget_speech.pdf)
[5] Key Features of Budget 2022-2023, Government of India Ministry of Finance Budget Division (Feb. 2022), (https://www.indiabudget.gov.in/doc/bh1.pdf)
[6] Ministry of Finance, Highlights of the Union Budget 2022-23 (Feb 01, 2022, 01:18 PM IST), https://www.pib.gov.in/PressReleasePage.aspx?PRID=1794165
[7] Income Tax Act, 43 (1961)
