The venture capital industry in India is at a critical juncture. As the sector continues to grow, industry leaders are voicing their expectations from the government, particularly in light of the upcoming Union Budget 2024. Their collective demands centre around policy adjustments that could significantly enhance the venture capital landscape, fostering a more conducive environment for startups and investors alike.
Anil Joshi, Managing Partner, Unicorn India Ventures, in a pre-budget note emphasises the need for removing the Angel Tax, a long-standing issue that has hindered early-stage investments. “The venture capital industry is very young and has certain expectations from the Honourable Financial Minister. Removal of Angel Tax has been a long standing demand of the industry. Stakeholders of the ecosystem have made representation to the Govt with an aim to find a solution for the same,” said Joshi.
The Angel Tax, imposed on startups receiving funding above their fair market value, has been a deterrent for both investors and startups. By eliminating this tax, the government could alleviate the fear of scrutiny from tax authorities, encouraging more investments in young companies with limited resources.
Manoj Agarwal, Co-founder and Managing Partner, Seafund, echoes Joshi’s sentiments, stating the broader implications of a simplified taxation framework. “Simplifying the taxation framework for startups, ESOPs, and investors is essential. In many European countries, investors receive tax benefits for investing in startups, either directly or through funds. Similar provisions in India could stimulate more domestic investment,” Agarwal said.
According to him, by aligning India’s tax policies with international standards, the government could attract more domestic and foreign investments into the startup ecosystem.
Another critical area of concern for VCs has been the the Goods and Services Tax (GST) on management fees. Both Joshi and Agarwal stressed the importance of favourable consideration in this regard. Joshi pointed out, “Some of the demands are long pending like favourable consideration to GST on management fee and adjustment of management fee toward expenses while calculating income or gains.”
Agarwal added, “A simplified GST tax regime for the funds and doing away with angel tax will free up a lot of domestic capital towards early stage funding.” He said that the current GST framework adds a layer of financial burden on venture capital funds, and adjustments here could lead to more efficient fund management and increased capital availability for startups.
Additionally, the need for a dedicated fund to support deep tech startups is another significant expectation from the budget. Agarwal emphasised the necessity of government backing at the seed stage for deep tech startups, which often require substantial R&D investments.
“The government has made encouraging statements about supporting this sector, and I believe it is crucial to provide more backing at the seed stage. A dedicated fund of funds to support investors who are willing to take the plunge into deep tech is vital,” he asserted. Such a fund could bridge the gap between initial research and market-ready products, thereby fostering innovation in critical areas like artificial intelligence, biotechnology, and advanced manufacturing.
Speedier approvals for overseas investments also feature prominently in the wish lists of venture capitalists. Joshi said, “The VC community would prefer speedier approval on overseas investment as the current process takes too long.” Streamlining these approvals could enable Indian startups to expand globally more efficiently, enhancing their competitive edge in international markets, according to him.
Addressing the issue of ‘reverse flipping’—where businesses originally founded in India move their headquarters abroad—could also benefit the ecosystem. Agarwal suggested, “We need to address the issue of ‘reverse flipping’ for businesses built in India but headquartered abroad. Facilitating an efficient and tax-effective way for these businesses to return to India could significantly benefit our economy and the government’s revenue in the long run.”
According to Agarwal, this move could help retain homegrown talent and innovation within the country, contributing to India’s economic growth and technological advancement.
