India's New Budget Targets Foreign Investment
India's New Budget Targets Foreign Investment
Startups Hope for End to Funding Winters
The world’s fastest growing large economy is no exception to the rule that emerging markets require foreign investment to sustain economic dynamism. Precisely to that end, the first budget of India’s new coalition government has set out to up the ante on India’s attractiveness for foreign capital, technology and expertise and flip the calendar on a nagging funding winter for Indian startups.
With $576 billion in spending, the first of the new coalition government and the seventh to be presented by India’s finance minister, Nirmala Sitharaman, tackles India’s reputation as a place that’s persistently tough to invest and do business in at the same time that it hopes to beef up policy support for job creation, agriculture development and green economic growth. It also keeps a tight rein on fiscal controls, holding the post-pandemic deficit target to 4.9%.
The budget is now before the lower house of Parliament, the Lok Sabha, whose members must approve it along with the Finance and Appropriation bills. It then goes to the upper house, the Rajya Sabha, where it can be amended but not rejected. Once signed by India’s president, it takes effect on April 1, 2025, the start of the new fiscal year.
For investors, a highly critical centerpiece of the new Union Budget involves the closely watched proposals to drop the corporate tax rate for foreign investment from 40 to 35% and the easing of rules on what is and is not an investable sector. However, it’s the third initiative that addresses India’s reputation as a difficult place to invest that is winning high praise as a much-needed boon for India’s startup ecosystem.
The decision to abolish the Angel Tax – a 30% income tax levied on capital raised by an unlisted company through the issue of shares at a higher price than fair market value or the existing valuation – deserves the praise that it’s garnering. Ending the tax should help reverse a debilitating slowdown in domestic as well as foreign investment into the entrepreneurial sector.
Abolishing the tax affects all investors and is expected in the process to more closely align India practices with global norms. This too is a critical step toward integrating India’s economy with the global startup ecosystem and enhancing its overall attractiveness as a global innovation hub.
Even so, some say the current capital slowdown, frequently described as a funding winter across the ecosystem, will persist at least in the short term. It also will continue to challenge the very existence of some plays, such as e-commerce and fintech startups.
An April 24 post by ICICIDirect takes issue with hopes – albeit pre-release of the new Union Budget - for a quick turnaround. For the last five years, the startup funding culture has been a roller coaster ride of phenomenal growth followed by a recent slowdown – and there are few signs of changes in economic forecasts and the macro and geopolitical weights bearing down on investor confidence, argues ICICIDirect. Their view going forward: “The funding winter is likely to persist in 2024.”
The numbers speak for themselves:
Still others are sanguine about the opportunities ahead mean this time will be different. It will take patience, disciplined diligence and attention to governance by startup founders and managers. But overall, it’s argued, India has economic, political and soft power momentum to push it beyond its constraints to capital inflows.
Investor concerns are “transient concerns”, says Rahul Mehta, partner and CIO, Mumbai-based Beas Capital. “Over our investment horizon of the next five to seven years, we believe that global allocations toward India will change substantially and soon rival China,” writes Mehta.
“This time is different,” says Mehta.
This latest in a series of government initiatives could well be the impetus that begins to move the needle.
The Angel Tax was introduced initially via the Finance Act of 2012 to curb money laundering and tax evasion. It also raised the otherwise sticky industry problem of the subjective nature of how valuations are determined.
Still, the chilling effect the tax had on investment, the risks it imposed on investor and startup alike and the addition of costly administrative burdens to satisfy tax authorities quickly encountered criticism. The influential Confederation of Indian Industry (CII) lobbied against it as did investors and entrepreneurs in the startup ecosystem.
Six years later, norms were relaxed in a nod to the need to boost entrepreneurship across the, ecosystem. Today, the tax is slated to be fully scrapped, effective April 1, 2025 and relevant for the assessment year 2025-26.
It is a tax that is viewed as more than a money problem, according to Anshu Sharma, angel investor and co-founder & CEO, Skyflow, a data privacy vault company. It’s also a friction problem that has stood in the way of the relationship between startup and investor. “Now that there’s not much paperwork and complications involved, it will certainly boost investments, both domestic and foreign,” says Sharma.
This most recent reform is in keeping with pro-startup sentiments in New Delhi as expressed through a series of initiatives beginning with the 2016 flagship measure, Startup India Initiative. The Initiative promoted entrepreneurialism and startups generally. The intent at the time, interestingly, was to ease tax burdens and simplify regulatory complexities.
The 2021 Startup India Seed Fund scheme followed, offering financial assistance to eligible startup incubators and the Credit Guarantee Scheme for Startups (CGSS) offering collateral-free credit. There also have been state-level initiatives, notably the Karnataka Elevate program which offers grants and related support.
Today, India boldly claims a seat among the top tier of startup communities globally, winning applause for its diversity, energy, dynamism and talent depth. As of last year, there were 112,718 startups in the country, according to the Department of Promotion of Industry and Internal Trade in New Delhi.
IT ranks at the top of the ecosystem with a 13% share, followed by healthcare and life sciences with 9% share; education, 7%; and agriculture and food and beverage, each with 5% share.
While concentrated in three cities – Delhi, Mumbai and Bangaluru, investment-driven expansion is underway into India’s Tier 2 and 3 cities, attracting funding from some of the largest and most prominent venture capital and private equity investors globally.
Clearly, dropping the angel tax may well turn into a landmark event as India pushes forward to find its place in the upper tier of large global economies. It’s won deserved praise for advancing a ground-breaking culture of digitalization. Support for its entrepreneurial ecosystem should go hand in hand.
New Delhi is taking the initiative also at a complicated time in global economics. There are on again, off again predictions of a looming recession. Global tensions continue, not the least of which involve the US/China relationship and wars in Ukraine and the Mideast. Despite these circumstances lending context to the challenge, India needs to keep driving fast, but not recklessly and breaking aspects of its economy. It has an obligation not only to foster and proect its culture of entrepreneurship but also to get out its way when the time is appropriate.
When it comes to the Angel Tax, the time is on the money.