Happy With Interim Budget, Startups Look Forward to Domestic Push in Union Budget 2019

File photo of Finance Minister Nirmala. (Image: PTI)

File photo of Finance Minister Nirmala. (Image: PTI)

Five months hence, with newly appointed Finance Minister Nirmala Sitharaman presenting the budget, startups are looking for a much needed domestic push in order to compete with the tall order of international startups.

The startup sector had welcomed the interim budget proposal of setting up one lakh digital villages saying that it be a boost for the sector. Taking forward government's Digital India programme, former Finance Minister Piyush Goyal had on February 1 said that the government has set an aim of building one lakh digital villages in the next 5 years.

Five months hence, with newly appointed Finance Minister Nirmala Sitharaman presenting the budget, startups are looking for a much needed domestic push in order to compete with the tall order of international startups.

Prime Minister Narendra Modi launched the “Start-Up India” programme in 2016, offering tax breaks, funding options, and easier procedures to aid fledgling start-ups.

The signature initiative was intended to build “a strong ecosystem that is conducive for the growth of startup businesses, to drive sustainable economic growth and generate large scale employment opportunities”.

The 19-Point Startup India Action Plan envisages several incubation centers, easier patent filing, tax exemptions, ease of setting-up of business, a Rs 10,000 Crore corpus fund, and a faster exit mechanism, among others.

For being eligible for tax exemptions for three years, a startup’s turnover should be less than Rs 25 crores in any of the previous financial years.

Under the scheme, an entity shall be considered as a startup up to seven years from the date of its incorporation or 10 years in case of startups in the biotechnology sector.

The move, however, had faced criticism as three-year tax breaks have not yielded benefits given that small-bore, innovative ventures struggle for several years before breaking even.

Startups and investors are also crying foul over a tough taxation climate in India.

The biggest bone of contention is the so-called `Angel Tax’, which is levied on startups who are raising money in terms of equity issuance from friends, family and angel investors. It is regarded as taxable income, from other sources.

Angel tax was introduced in the 2012 finance bill aimed at tackling money laundering by investors. Startup entrepreneurs, however, say that this results to an effective taxation rate of 30 percent, and makes it difficult for them to raise funds.

Around 350-400 startups raise angel funding every year and the tax is impacting most of them. The government has allowed tax concession if the total investment did not exceed Rs 10 crore and have said that it will look into the issue again.

The government’s decision to bar online retailers such as Flipkart and Amazon from selling products of companies in which they own stakes, need to be seen in this context.

The new rules stipulate that such companies will also not be allowed to offer cashback schemes to charm customers to shop at their online market places.

Online retailers will also not be allowed to strike exclusive deals to promote brands through flash/festive season sales.

The new rules, which will come into effect from February 1, 2019, are aimed at leveling the field among online and offline retailers. Offline retailers have been lobbying with the government that online marketplaces, flush with foreign money, are driving brick-and-mortar stores out of business.

Offline retailers say e-tailers such as Amazon and Flipkart were adopting “discriminatory” and “predatory” pricing to attract customers by offering deep discounts. Smartphone flash sales, and festive season sales of fashion and electronic products were examples of such destructive pricing.

E-tailers get into exclusive tie-ups for deep discounts with brands and also push products of preferred vendors which they partly own or have preferential contracts.

Such heavy price markdowns, while very attractive for consumers, appear to have seriously impacted the business of mom-and-pop stores as also large offline retailers selling the same brands.

The government’s move comes after local traders complained that they were being put out of business. The new rules appear to be the Modi government’s way of demonstrating its intent to walk the talk in support of the local traders.

Online marketplaces have found the new rules restrictive.

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