Budget 2018 is unclear on startup concerns, disappoints on angel tax

Removal of LTCG exemption on listed equities will impact the nascent SME listing platforms; List in India initiative is still awaited

The last full budget of the NDA government will have significant reverberations in the startup ecosystem.

Investors awaited with bated breath for doing away with the draconian angel tax but that did not materialise. The Finance Minister acknowledged that the Government has taken various measures to develop the and promote the Startup and Venture Capital ecosystem and decided that they require a special regime to ensure their sustained growth.

The LTCG exemption provided to listed equities suffered a major blow with the removal of the STT (Securities Transaction Tax) regime in favour of a flat 10 per cent tax without any indexation benefits. The effect this will have upon the nascent SME listing platforms and the List in India initiative is still awaited. Several experts expect this to be detrimental in 2 ways:

1.    Tax-free exits for shareholders, which has traditionally balanced the increased compliance burden of listing,  may have an impact on the appetite of Startups to list.

2.    From a liquidity perspective, the effect this may have on Foreign Institutional Investors (FIIs) and domestic investors, for whom the tax-free gains would temper the inherent volatility of listed startups, is still unknown.

The Finance Minister’s promise to rationalise Overseas Direct Investment (ODI) will be welcomed by both Startups and Investors. If the regime is more streamlined and liberalised, this would be a great boon to the Stay in India initiative as we may see the rise of Startups with an Indian Parent and Foreign Subsidiary, instead of the current norm of a Foreign Parent and Indian Subsidiaries.

Two hundred million rural Indians now have access to broadband internet,with an additional 500,000 WiFi hotspots being introduced.The wave of digitally empowered citizens will continue to drive user engagement for startups across most domains.

Consumer internet companies, in particular, will now have access to huge volumes of users in several segments, and their challenge will be to ensure that they can prove their value propositions clearly.

One of the biggest announcements of the budget was the massive health insurance programme. This scheme will give new momentum to startups in several associated domains such as insurance technology, affordable medical devices, innovations in drug delivery, and cost-effective diagnostics services.

In education, the intent to move from blackboards to digital boards is a clear signal ofencouragement to edtech startups. The fundamental install base of educational infrastructure will become more robust on the back of this support, allowing startups to pursue important value propositions such as skill &content development to improve the job readiness of the Indian youth.

The announcement that the Government would seriously explore the use of blockchain technology and how it could contribute to the digitisation of the economy. This is a good statement of intent and it clarifies the role that the Government will play in this technological wave. Of particular note was the mention of Niti Aayog - the body has certainly been paying close attention to blockchain's adoption into multiple domains in the country.

The clear statement on cryptographic currencies is another strong signal to the startup ecosystem. They will not be considered legal tender so they cannot be used in financial transactions. The use of crypto-currencies in financing illegitimate activities or as part of the payment system will be also be clamped down. Much more is needed to clarify how blockchain will be utilised and adopted if startups are to move forward rapidly to build new models and unleash new value propositions.

Several low-hanging fruits which would have solved the chronic malaise enervating startups and investors were not addressed by the Finance Minister in his speech. The decisiveness demanded of this Budget, being the last one by the Modi Government, instead saw a deferment of these changes into more formal regimes which are yet to be articulated. Yet the initiatives announced sows the seeds for a digital dividend which we can hopefully harvest in the future.

The author is Chairman, Aarin Capital. Views are personal and do not reflect those of Business Standard