Union Budget 2021-22 & its Implications of the Indian Startup Eco-System

On the chilly morning of Feb 1, Union Minister Nirmala Sitharaman emerged in-front of shutter bugs along with a tablet kept inside a red cover, embossed with a golden coloured national emblem on it. The red covered tablet that replaced the age old red Swadeshi 'bahi khata', carried India’s very first paperless Union Budget for the year 2021-22. All eyes were eagerly upon the budget that was meant to provide the pandemic hit economy with the much needed relief and revival. The startup, MSME and tech world was also anticipating the announcement of policies and initiatives that would spur on growth and development across all sectors.

And the budget did not disappoint. One of the key aspects of the budget was the allotment of Rs 1500 crore for a new fund to further accelerate growth and incentivise businesses to offer digital payments. India has a strong digital payments economy which grew immensely over the past one year. The proposed fund will spur on the digital payments’ industry’s growth. The Finance Minister also announced the government will facilitate setting up of a world class ‘fintech hub’ in Gujarat International Finance Tec (GIFT) city.

Keeping in mind the startup eco-system, the budget brought with it the announcement that the tax holiday for startups has been extended by one more year and startups will get capital gains exemption by one more year to 31 March 2022. This move will incentivize startups and funding in startups alike. Another positive announcement was that the incorporation of OCPs will be incentivized by allowing one person companies to attain growth without restriction on the paid up capital and turnover.

Let us have a look at how Venture Funds and Investors reacted to the budget.

Speaking about the impact of the budget on startup eco-system Anup Jain, Managing Partner, Orios Venture Partners said, " Incorporation of 1 person company allowed without any restriction on paid up limit is a welcome move for startups as 2 directors were nec at a minimum and founders were forced to co opt others under the companies Act". He also added that big focus on Infrastructure which is key to driving India's overall development can be crucial in reviving construction industry which has a domino effect on employment and GDP per capita. “This is extremely positive”, he further added.

Jatin Desai, Managing Partner, Inflexor Ventures, weighed in his thoughts and said, "While the devil will be in the details and implementation, there were few direct and indirect measures that were announced in the budget that are positive for the startup and VC ecosystem. Direct measures that will have a positive impact on the ecosystem include extension of tax holiday and capital gains tax exemption for startups by one more year, OPC (one-person company) reforms and setting up of a Fintech hub in GIFT city. Indirect measures like massive increase in healthcare spending, higher capex, infrastructure building and reducing some stress in the banking and financial system will also be a net positive for startups and VC ecosystem".

Deepak Gupta, Founding Partner, WEH Ventures believes that the budget has moved the ball forward for the startup ecosystem by making favourable announcements in capital gains, carry forward losses and single person cos. “I think that's useful as NRIs will now have more leeway to incorporate in India and this should encourage some reversal of the brain drain,” he added.

Bertelsmann India Investments’, MD, Pankaj Makkar, added, “The increase in FDI in insurance is a welcome step. Not only will it boost growth in fintech and insurance sectors, but also as more international companies come-in, overtime it will help build great products in India”He also said, "The extension of tax holiday is a welcome step. The amount saved will help startups focus on building products & services and also pass on a part of this value to the end consumer."

Ankur Bansal, Co-founder & Director, BlackSoil, commented, “Overall budget seems expansionary and growth oriented, one has to look at the fine print though can see the positive market reaction as indexes are up ~5%. Mixed focus around recovery and growth with a boost for the infrastructure sector, increase in healthcare budget, comfort to MSMEs, attracting FDI, setting up of fintech hubs which will promote startups, etc. Plans for Covid-19 seems to be good enough for the next 9 months where in significant population is expected to be vaccinated. Bank recap is very low at INR 20,000 Cr though there is ongoing discussion around privatization which is quite big. Inflation is expected to be under control and broadly nothing seems to be negative as no major change in tax rates or increase in tax rates for the wealthy.

Interest rates and bond market has not significantly moved which shows even though the fiscal deficit is higher, the same will not tank the economy”. He also lauded the announcement of allowing NRIs to operate One Person Companies or OPCs in India and believes it will play a positive role to attract Indian talent overseas to come to India.