• Aishwarya Sihag, Associate
• Meenakshi Gupta, Associate

The Start-ups ecosystem is going to be the backbone for modern India. The ecosystem of start-ups is encouraging innovation, promoting and strengthening new young entrepreneurs and businesses with new ideas and modus operandi of doing businesses. Given the record-breaking year of 2021, in terms of fund inflow and the emergence of unicorns from the Indian start-up ecosystem, it is evident that 2022 will continue to witness this momentum. 

The Indian government has taken a comprehensive and exhaustive view of the start-up community’s requirements, and has moved forward with providing further impel in developing an ecosystem that supports growth of the start-up community.  

The Union Budget 2022 prioritizes on increasing infrastructure and growth by spending on various sectors with specific implication, involving start-ups to facilitate and collaborate with various stakeholders in certain core sectors. These announcements also align with the government’s Make in India or Athmanirbhar Bharat mission. 

The Union Budget 2022 has given some respite to businesses and start-ups that have struggled post the pandemic period. The cornerstone of the budget includes development, productivity advancement, sunrise opportunities, energy transition, climate action, financing of investments, and a re-enforcement and incorporation of infrastructure by means of the Pradhan Mantri Gati Shakti master plan.

The propositions and incentives idenified below, and as introduced in the Union Budget 2022, should set the path for India to be seen as one of the preferred destinations for start-ups. These measures have been introduced to boost the start-up ecosystem in India and can be enumerated as follows:

• In order to promote long-term equity investment in start-ups, it has been proposed to cap the surcharge at 15% irrespective of the amount of long-term capital gains. This is significant for the individual investors who are holding shares for more than twelve months, and selling it thereafter. Capping the surcharge on long-term capital gains of all listed and unlisted stocks at 15% is a positive step for the start-ups.

• In order to capitalize start-ups for agriculture and rural enterprises crucial for farm produce value chain, a fund with blended capital under the co-investment model will be accelerated through National Bank for Agriculture and Rural Development. This will focus on enhancing certain activities such as support for follow on public offers, machinery for farmers on rental basis at farm level, technology and Information Technology support .

• The start-ups formed before March 31, 2022 had previously been granted a tax incentive for three consecutive years out of ten years from the formation. The Union Budget 2022 intends to prolong the period of establishment of the start-ups by additional one year up to March 31, 2023 for the purpose of granting such tax incentive.

Some other additional course of action includes the following:

• Artificial Intelligence in Start-ups: A vital aspect has been the promotion of Drone Shakti with drone as a service with the support of start-ups.

• Virtual Digital Asset taxation: Cryptocurrencies and other virtual digital assets will be taxed at 30%. No deduction will be allowed while calculating this except cost of acquisition.

• Reserve Bank of India’s digital currency: The RBI will start issuing its long-mulled digital rupee currency using blockchain technology in this financial year.

• PM Gati-Shakti Plan: This Plan accelerates the faster movement of people and goods through INR 20,000 crore financed by the government to enhance logistics sector.

Key Takeaways:

The Union Budget 2022 clearly showcases the government’s dedication towards the digital economy and infrastructure, but the start-up community has perceived it as a mixed bag since the Budget did not provide any guidelines with respect to reforms around foreign direct listing, taxation, and Employee Stock options. 

Nowadays, various innovative products and services are being built by tech start-ups that have the capability to compete globally, which is why an overseas listing would allow these start-ups to compete with larger firms listed aborad. But, the Indian start-ups and enterprises are yet not allowed to directly list abroad for opening up a new and deeper pool of capital. 

As per the existing regulations, an Indian company can only list abroad after it has been listed in India. Investors have stated that the ambiguity with respect to foreign direct listing has lead to uncertainty in the boards of start-ups in terms of exploring listing options.