5 key expectations by the Startup sector on ease of doing business from Budget 2021.

The biggest ever vaccination drive to eradicate COVID-19 has begun, it has given overseas investors confidence about a robust economic recovery. FDI will play a crucial role in ensuring this recovery and injecting growth capital into the Start-ups economy's key sectors. The expectations from the Start-up sector from the Union budget stand justified.

Although startups faced extreme challenges for funds due to this COVID lockdown and a lot of start-up funds dried up in May-June 2020. Now with this Union Budget 2021, Startups are expecting from the government ways to manage the working capital, Retain the talent they have, have lesser compliance up to certain limits, and for affected sectors.

These are some of the Budget 2021 expectations by some of our Start-ups clients & connections:

1. ESOP Taxation: Finance Act 2020 made an amendment to Section 192 for deduction of tax by the employer from the salary of an employee. That says an eligible startup as referred to in section 80 IAC shall deduct tax from income in the nature of perquisites arising from the allotment of shares under ESOPs within 14 days from the happening of either 48 months from the end of the assessment year, Sale of Shares, Employee leaves the organization whichever is earlier.

But this ESOP provision is still benefiting only 1% of the start-ups. Start-ups are expecting this to be broadened enough so that this can be offered to all DIPP registered start-ups.

2. State Governments are coming up with Start-up policies and have their own ways to promote Start-up culture for the State. We recently visited the UPLC Lucknow office for one of our UP Electronics policy subsidy matters. While interacting with officials, we get to know that up to INR 1 crore subsidies are available for incubators in Uttar Pradesh plus a lot of subsidies are there for Start-ups promotion as states are also looking to motivate more & more people to be entrepreneurs.

These policies should be eased & promoted in all the start-up events as well as all the Start-ups ecosystems including blogs & stories so that the actual entrepreneurs are aware of such policies and actually use these benefits to create some more entrepreneurs & Start-up ecosystem in that state.

3. Angel Tax Exemptions are available under Section 56(2)(viib) requires vetting from an Inter-Ministerial Board set-up by DIPP. Startups at the moment are demanding that the government scrap the IMB clearance and grant the exemption to all startups registered with the DPIIT that submit the required enterprise. While the government has relaxed the regulations and process for startups to claim exemption from angel tax, there still exists various issues relating to angel tax that need to be re-visited and appropriately addressed – such as, adopting an ‘exception-based’ approach for applicability of angel tax; relaxation of the current regulations/thresholds & a lot more.

4. Participation by Domestic Investors:  Start-ups are largely dependent on Foreign Investors to build the system. The Government should promote and incentivize that encourage the Indian and Domestic Investors to invest in startups. A possible incentive can be considered 'capital gains taxation from unlisted shares for domestic investors.'

5. Relaxation in TDS norms:  These Startups are burning cash and always face issues in managing working capital due to withholding taxes. This situation went to worst in this Covid situation. While the Government has reduced all the rates by 25% till 31st March. But that requires separate attention considering these start-ups' liquidity issues as it’s not easy to manage the working capital at a large scale.

Further, the Start-up sector & Entrepreneurs will continue to look for support from the Government under ease of doing business to make more unicorns from India. They hope that Government must be interested in making some sustainable start-ups instead of getting compliance and few taxes from Non-sustainable start-ups. Let’s hope some good decisions come up in this UNION Budget 2021 for the Start-up sector this year.