1. ESOP Taxation: While the government had in the previous budget reduced the tax burden on employees by deferring tax on employee stock ownership plan (ESOPs) by five years, or when they leave the company or when they sell their stocks, it is estimated that just 400 startups have been cleared to benefit from this regulation so far.
Startups are now demanding a broadening of the ambit for tax exemptions, suggesting that the government pass on this benefit to all 40,000-odd startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT).
2. Removal of IMB certification: Startups that are seeking income tax exemptions under Section 56(2)(viib), or the so-called ‘Angel Tax’ provisions, require vetting from an Inter-Ministerial Board setup by the DPIIT. This has been seen taking a long time. Startups and investors alike are now demanding that the government scrap the IMB clearance and grant the exemption to all startups registered with the DPIIT that submit the required undertaking.
3. Boost domestic capital participation: The startup and venture capital industry is demanding changes in regulations that currently prohibit or prevent large institutions, such as the Life Insurance Corporation of India (LIC) and pension funds, from investing in alternative investment funds (AIFs).
They say this will boost domestic capital participation in India’s startup industry, which has so far been dominated by monnies from the US and China, while also improving sentiments for other local high net-worth individuals and family offices to invest in startups.
4. Tax free gains on new investments: Industry bodies representing venture capital investors are demanding that the government exempt capital gains on new investments made by AIFs, similar to what the UK and the US have done. They say the loss to the state exchequer will be minimal as increased capital flowing into startups and MSMEs will boost job and asset creation.
5. Rollback of “super-rich” surcharge: While the government rolled back the so-called “super-rich” surcharge of 25% on income between Rs 3-5 crore and 37% for income above Rs 5 crore for gains made through sale of listed securities and for foreign investors, it hasn’t done so for gains made from sale of unlisted securities in startups.
Investors are demanding the government treat listed and unlisted securities at parity, which will help persuade local investors to back startups rather than investing solely in listed securities.
6. GST under reverse charge: Early-stage startups procuring services from overseas providers pay 18% GST under the reverse-charge mechanism, but are unable to claim input tax credits as they often have little to no revenues. They are demanding an exemption from having to pay GST under reverse-charge mechanism up to a certain revenue threshold. For instance, all DPIIT-registered startups with less than Rs 10 crore in annual revenue should be offered an exemption from paying the 18% GST.