Six Questions For Indian Startups, Tech & Digital India
With the headline-grabbing announcement around income tax rebates, the Union Budget 2023-24 has been called the middle-class budget. But much before Finance Minister Nirmala Sitharaman concluded her Budget speech with that mega proposal, there was plenty that directly impacted the startup ecosystem.
Sadly, the budget did not touch on many of the key expectations of the startup ecosystem such as the elimination of ESOP double taxation, a uniformity in long term capital gains for private and public investors, and a dedicated fund for the electric vehicle (EV) industry.
Among the most glaring miss in this year’s Budget was the crypto industry, where a 30% tax was announced last year. But there was no mention of this volatile sector in this year’s budget speech.
Beyond these demands, there was some clarity on carbon credits (or green credits), a big push for AI, skilling in Industry 4.0 areas and 5G applications. Besides this, Sitharaman emphasised how the government is taking steps to reduce the compliance burden on Indian startups. Further, the budget has proposed a revamp of some fintech regulations that have become a major bone of contention in BFSI.
But what impact will these key announcements have on Indian startups? Going beyond mere takeaways, we are looking to see how the Union Budget 2023-24 will change lives for Indian startups.
Will Tax Holiday Actually Benefit More Startups?
Like last year, this year’s Budget extended the tax holiday for new startups by one more year to April 1, 2024. This extension does not come as a surprise, as it has been announced every year since 2017.
The tax exemption applies for startups for any three out of seven years, provided that the annual turnover does not exceed INR 25 Cr in any financial year. Of course, the condition for availing this tax holiday makes it hard for most startups to claim it.
The Inter-Ministerial Board (IMB) setup by the Department for Promotion of Industry and Internal Trade (DPIIT) validates startups that are granted tax-related benefits. As previous reports have highlighted, only a fraction of all DPIIT-registered startups are eligible for this exemption, around 800 startups in 2023. That’s out of a total of 90K registered startups, including the ones that have now shut shops.
The same eligibility criteria applies for the setting off of carried forward losses, the timeline for which has been proposed to be extended from seven years from incorporation to 10 years.
So, despite the extension of tax holiday till March 2024 and extension in carrying forward losses, more than 99% startups may not be eligible to avail the benefits.
Whether the eligibility criteria will be relaxed to cover more startups is unclear at the moment. Alternatively, the process for IMB validation and certification for startups could be expedited such that the tax holiday will actually become useful for most startups.
Can Startups Look Forward To Easier Compliance?
The Budget has tried to ease some of the compliance burden for startups by proposing a ‘Unified Filing Process’ to help them seamlessly share information or returns with regulatory agencies.
Further, since PAN will be used as the common identifier for all digital systems of specified government agencies, startups would not have to run from pillar to post with various identification numbers to meet their compliance requirements.
Both these steps are expected to make life much easier for startups that do not have the necessary bandwidth to navigate the maze of regulations in India. Besides this, the deployment of 100 joint commissioners for the disposal of small tax litigation appeals should also remove many hurdles for startups.
Similarly, the creation of Entity DigiLockers for MSMEs, large business and charitable trusts will also go a long way towards relaxing the burden on these companies and businesses. This dedicated DigiLocker will help these organisations store their data virtually and seamlessly share this with authorities, regulators, banks and other business entities.
Can AI, 5G Become More Than Buzzwords?
Pretty early on in her Budget speech, Sitharaman announced plans to set up three centres of excellence for artificial intelligence research and development that are likely to boost the prospects of startups working with emerging technologies. The FM claimed it to be in line with the country’s vision of Make AI in India and Make AI work for India.
Of course, we have heard about AI CoEs in the past too. The National Informatics Centre, for instance, set one up in 2019 to boost utilisation of cutting-edge tech for governance and particularly push for use of AI across ministries.
The key difference, this time around, is that industry players are likely to be invited to partner in conducting R&D for applications in agriculture, health, and sustainability.
So far, we don’t have the details of when or where this would happen, or what the framework would be for private industry participation. However, given some of the key developments and advancement of models such as ChatGPT, we expect a major push by the government in these areas, which is certainly good news for the 200+ VC-backed startups that are working in these emerging areas.
In an adjacent focus area, the Budget has also proposed that 100 labs for developing applications using 5G services will be set up in engineering institutions for the development of smart classrooms, precision farming, intelligent transport systems, and healthcare applications, which also involve a degree of AI and machine learning.
Will Digital Public Infra Boost Agritech?
Digital public infrastructure has become a key crutch for the Indian government in the past year, given the success of UPI, IndiaStack, Aadhaar-based schemes and more. And now, the agritech segment is the next focus area for open source, open standard and interoperable public goods.
The FM also announced an Agriculture Accelerator Fund in the Budget, which should help boost the prospects of rural agritech startups, while digital public infrastructure is expected to bring in inclusive, farmer-centric solutions across the value chain.
Here too, the push for modernising Indian agriculture is not new. A similar INR 500 Cr accelerator fund was announced in October last year.
An Inc42 report estimates the Indian agritech industry to grow to a size of $24.1 Bn by 2025. Since 2014, Indian agritech startups have raised close to $2 Bn funding. The sector has not been held back due to the dearth of funding or market opportunities but the fact that farmers are usually reluctant to invest in technology.
In this regard, the creation of DPI for agriculture is likely to have a bigger impact than the accelerator itself, since it will reduce the cost of access to tech for cash-strapped farmers.
Can Green Credits Become Noteworthy?
The past few years have seen the Budget give more and more prominence to cleantech startups, green technologies, alternative fuels and subsidies to back sustainable areas such as EVs, battery manufacturing, clean energy and more.
One of the key announcements in this year’s budget was around the expansion of the Green Credit Programme, which is expected to be notified under the Environment (Protection) Act. While India has had a GCP for a few years now, this was in specific sectors and areas. Expanding the carbon credit economy is critical to boosting adoption of sustainable business practices across segments, including in startups.
In the past, climate tech startups have spoken about the need to push the carbon credit industry, which will allow investors to evaluate business models with greater certainty.
Siddhanth Jayaram, cofounder of carbon credits startup Climes, told Inc42 earlier this year that VCs have been habituated by the returns cycles in non-climate businesses, but the same realisation involves a longer horizon when it comes to climate tech. A push for green credits in this Union Budget will certainly shake the reluctance of Indian climate tech startup investors.
Will The Skilling, Digital Learning Push Pay Off?
The lack of skilled talent has been a long-standing problem in the Indian market, and since the launch of Startup India, Digital India and other flagship projects, this aspect has come under the spotlight.
The Union Budget 2023-24 has proposed creation of new-age courses for Industry 4.0 areas including coding, AI, robotics, mechatronics, IOT, 3D printing, and drones, among others. The courses will be enabled through 30 Skill India International Centres and a unified Skill India Digital platform.
Skill development is a key focus area for edtech startups, where school and test prep-centric models have been hit hard by a slow market. Given that employability remains a major challenge for freshers in the workforce, skill development has a near-constant demand that has not fluctuated in the wake of schools and colleges reopening in the past year.
When it comes to erasing the digital learning divide, the Budget has proposed a central National Digital Library for children and adolescents built around state government infrastructure. This is likely to democratise access to learning material across geographies, languages, genres and levels.
It will be interesting to see how Indian startups will make use of the opportunities arising from the Budget’s push for industry-centric upskilling and promoting literacy through digital means.
In the past year, we have seen cohort-based learning coming to the fore as a distinct model within skill development, and most areas that the government wants to focus on fit well within the cohort-based learning thesis.
However, given the focus area, it’s clear that the government’s Industry 4.0 push is towards the manufacturing sector. In this context, the development of AI centres of excellence will be even more critical, since that will have deeper ramifications on digital services and products.