Budget 2020: Startup sector needs relevant reforms, right support and opportunities to play crucial role in India's growth

Meena Ganesh

In less than a week, the Finance Minister Nirmala Sitharaman will present the Union Budget 2020. Given the current state of the Indian economy, with the lowest-ever GDP growth in 11 years at 5 percent, falling consumer demand and an overall lacklustre outlook, expectations are that the government’s primary focus will be on boosting growth.

The government has acknowledged that the startup sector has a significant role to play in achieving its projected target of transforming India into a $5 trillion economy by 2025. With just five years to go, there is much to be done, and enough provisions must be made in the Budget to power this growth.

At the outset, it is imperative to ease out the regulatory and compliance bottlenecks for startups. This will enable even the common man to have access to cutting-edge technologies. The use of technology for the public good has been possible due to the creation of digital infrastructure like the India Stack. They are the key building blocks to sustain a healthy startup ecosystem.

The need of the hour is implementation and continuing the good work already being done. Given that youth are an important pillar in achieving economic growth, there is a need to foster the spirit of entrepreneurship among them. There is a need to drive game-changing reforms that offer relief and tax sops to the startup ecosystem.

Employee stock ownership plans (ESOPs) are an important tool to motivate and nudge professionals to join startups and go through the pressures and uncertainties instead of taking a job in the corporate world or government. For this to be effective, there is a need for changes in taxation such that ESOPs are taxed at the point of liquidity, not exercise. The current tax laws make it almost impossible for employees who are forced to exercise their ESOPs.

For instance, while leaving a company, they should be able to get the benefit of vested options, since they have to pay huge tax even despite not owning any money. In cases where the valuation goes down, the options become worthless, and they will be left without anything in their pocket. Thus, the true benefit of ESOPs is not realized in majority of the cases as employees forego the exercise of options.

Representational image.. Reuters

Representational image.. Reuters

Apart from this, the sale of unlisted equities should be taxed at the same rates as listed ones. This provision can become a gamechanger in the Budget to be announced. It will not only encourage investments into startups or unlisted equities but also lead to the creation of more jobs, foster innovation, and lead to newer business models.

Startups can come up with solutions for some of the critical problems in India today including pollution, water shortage, poor sanitation, etc. Unfortunately, social sectors like these don't attract venture capital which tends to gravitate towards tech ventures. By providing incentives, tax breaks for key, defined areas and allowing corporate social responsibility (CSR) funds to be used for research and development (R&D) in select areas, the government can give a fillip to capital flowing into these underserved sectors.

The rate of ‘infant mortality’ in startups is very high. To reduce this and encourage angel investments, risk-taking, creation of jobs, we hope the government will allow for tax exemption for amounts invested in accredited startups. In cases where there is monetisation or capital gain during a successful exit, the same can be taxed. However, the key focus should be to draw more money into startups at the early stage by encouraging investors through positive incentives.

In addition, changes must be made within the country’s regulatory environment to drive greater innovation in the startup sector. The potential that India’s startups have in terms of their innovative capabilities can be gauged by the fact that between 2015 and 2018, Indian startups filed nearly 200 patents in the US, especially in areas related to artificial intelligence, machine learning, industrial internet, cybersecurity, and vehicle technology. To this end, there is an urgent need to come up with a comprehensive IPR framework and ensure the effective implementation of IP-friendly policies so that obtaining a patent is less complex, expensive and time-consuming.

While the IT sector continues to see the maximum growth in terms of new startups, the healthcare and life sciences space comes a close second. The pharma sector is another area where innovation is fostering growth and needs to be given more encouragement. The government had promised that it would increase healthcare spending to 2.5 percent of the GDP by 2025, which continues to stand at 1 percent. Given the recent tragedies in government hospitals in Kota and Rajkot, an urgent revamp of the healthcare infrastructure across the country, especially the upgradation of public hospitals, is the need of the hour, and the budget should focus on this aspect.

Another area that needs more support from the government is the home healthcare industry. Currently, home healthcare is not recognised as a mainstream sector and should be brought under the ambit of governmental schemes like the Ayushman Bharat Yojana to regulate the sector and improve the quality of services. Elder care should be made an important focus area since the number of elderly people in India will increase manifold in the next decade.

As of now, preventive health check-ups account for less than 10 percent of the total market and this segment is witnessing a CAGR of 20 percent. We hope to see an increase in the tax exemption ceilings under Section 80D towards the cost of preventive check-ups. This will ensure that more people undertake health check-ups, propelling the segment to grow at a CAGR of 27 percent (FY 2019 to 2023).

India is the third-largest startup ecosystem in the world and will play a crucial role in the country’s growth ahead. Given this, the need of the hour is relevant reforms and the right support and opportunities in this direction. This and the access to better healthcare for every citizen will ensure overall development for the country.

(The writer is MD & CEO, Portea Medical, a consumer healthcare brand)

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