Union Budget 2016- the layman review for startup world

The much awaited Union Budget 2016 has been announced and its that time of the year when every media house will bombard us with a dumbed down quantitative analysis of the success or failure of the budget in a respective domain. This post is not much different from the rest, except that, it focuses only on things which directly matter and things which can matter if we are intelligent enough to think accordingly.

So, here are some points worth taking note of:

  1. New Cess leading to increase in Service Tax: Service startups may feel the pinch a little, 0.5% more needs to be paid to the government. But this not a worry, after all we are counting down to GST ! And its still lower than expected increase.
  2. FDI 49% Automatic in Insurance and Pension sectors: Though as foreign VCs, we do not invest in insurance or pension sectors, this is a good move. This being made automatic, gives a general hope to our foreign investors that things are moving in the right direction. Also, FDI up to 100% is now allowed in food products produced in India.
  3. Capital Gains: What was done here was already expected, but what was expected was not promised. As of now, capital gains can be tax free if invested in ‘eligible startups’ and eligible SMEs (the SME part was already there). Does it help? To some extent, it does. It increases the overall mood for investment, but does not help a lot because not every company can be an eligible startup- approval from DIPP is not going to be as easy as it seems.
  4. Capital Gains: The lowering of definition of long term gains from 3 to 2 years is definitely a welcome move, because investors may want to exit early now. And this will give investors like us chances to generate more investments.
  5. Tax Exemption for Startups: Again, the eligible ones formed in/after April 2016 are the ones who will benefit. But something positive is definitely better than nothing. We love profitability and it is good to have this started as some startups will definitely benefit (getting approvals should not be tough if they have our backing).
  6. Corporate Tax Reduction: I don’t find this of any significant benefit to startups, but I’m sure experts will show this as a positive.
  7. Implementation of recommendations received on Feb 1 for Companies Act: This is going to be fun, as there are a large number of proposed changes in the Companies Act. Thought the budget did not talk about them specifically, the recent recommendation from a panel constituted for the same did. One example is the simplification of process of private placement, this will ease the process of raising funds. There are tons of filings needed now and that should not be the case. There should be lot of fluidity so that funding is not restricted to once in a blue moon activity. Also, the point about sweat equity will help entrepreneurs who have only sweat to give and no money (50% of paid up capital can be in form of sweat equity). More on this will come later, once they start getting actually implemented. But the acceptance of these recommendations has been the biggest highlight for me.
  8. Should we talk about the fund for SC/ST and women entrepreneurs? Its good but I don’t see its immediate benefit for us or for a number of startups out there. We invest in talent and innovation, irrespective of caste or gender, so its highly unlikely that we will use the fund to our advantage.
  9. Skills Fund: Well, this has been under a lot of push from a very long time. And for some of the startups focused on using the power of skill development to their advantage, there are possible benefits from this.
  10. Entrepreneurship Training etc. etc.- Not very interesting. Its fine but nothing of immediate gains to us or startups out there.

The above is a result of a quick 30 min review of the points mentioned in the Budget without having a look at analysis around it. With some more analysis, deeper impacts of the pointers will be gathered and this post may be further updated then.

Overall, message for startups who are already incorporated: Nothing much for you, but the market sentiment is in your favor. Use this to the advantage; be proud of being a startup and translate this to revenue by banking on the sentiment and extracting revenue from potential consumers using it. Message for Investors: Time is right, invest in startups, attempts at changing capital gains rules and changes in Companies Act just show what’s to come in future- ease in doing business.

Additional Point: We also invest in Growth Capital, where a major chunk of our fund is involved. Hence the clearance with respect to REIT is definitely an advantage, while extra DDT is a concern. But we are not discussing the same in this post as its focused on startups.