Budget 2024: Key Takeaways for Startups & Investors

Over the past decade, India has undergone a transformative journey, evolving from a nation on the cusp of realising its full economic potential to a burgeoning global economic powerhouse. The government's resolute focus on infrastructure development, digital inclusion, and social welfare programs has laid a robust foundation for sustained growth. Initiatives like 'Startup India' and 'Digital India' have not only propelled India to become the third-largest startup ecosystem globally but have also fostered an environment ripe for innovation and entrepreneurship.

India's nominal GDP has surged from INR 113.5 trillion in FY14 to INR 273.1 trillion in FY23, reflecting a robust 10.25% CAGR growth. With over 100,000 startups and more than 100 unicorns, the startup ecosystem has demonstrated its immense potential to drive economic growth. 

Budget 2024 represents a landmark moment for the Indian startup ecosystem. It is an opportunity to build on the progress made, address existing challenges, chart a course for sustained economic prosperity and cement India’s position as a global hub for innovation.

This article distils the key highlights of Budget 2024 from a startup ecosystem perspective, analysing its potential impact and exploring the opportunities it presents for new and existing ventures.

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Tax Incentives and Simplifications

1. Removal of Angel Tax

Budget 2024 has abolished the Angel Tax for all investors, effective April 1, 2024. Initially introduced as an anti-abuse measure, this tax targeted the difference between the issue price of securities and their fair market value. Over time, it evolved into a tax that hindered startup fundraising efforts. Its removal will facilitate capital formation in India and boost entrepreneurial activity.

Siddarth Pai (Partner) expressed relief, noting, “What was meant as an anti-abuse measure slowly became a tax-harvesting section as many startups began to get tax notices for their raises. The taxman’s penchant for comparing the actual performance of the company against the projections and taxing the difference was patently absurd. Not adhering to projections is a commercial risk, not a taxable event.”

2. Taxation of Unlisted Equities on Par with Listed Equities

Unlisted equities were subject to a long-term capital gains tax rate that was double that of their listed counterparts, despite most startup funding being directed towards new asset creation, hiring, sales, and product development. The budget's decision to equalise the tax rates for listed and unlisted securities is a significant boost for startups. This change is expected to encourage greater rupee capital participation and diminish the preference for mutual funds and listed equities over startups.

3. Buybacks to be Taxed in Shareholder Hands as Dividend Income

Previously, buybacks were tax-free in the hands of shareholders, with companies paying a 20% buyback tax on the difference between the buyback price and the original issue amount. Budget 2024 has now taxed buybacks in the hands of shareholders as dividend income, attracting tax at slab rates. This change will alter exit strategies and ESOP buybacks for startups, requiring a reevaluation of financial strategies.

4. Unlisted Debentures and Bonds to be Taxed at Slab Rates

Unlisted debentures and bonds will now be taxed at slab rates, instead of benefiting from the previous 12.5% capital gains tax rate. This change will impact the financial calculations of Venture Debt Funds and their investors, potentially prompting many to list their debentures to take advantage of the favorable 12.5% Long Term Capital Gains tax rate.

5. Removal of Indexation Benefits

Indexation, which adjusted the original cost of an asset for inflation to enhance tax efficiency, has been removed following the rationalisation of Long-Term Capital Gains to a uniform 12.5% for all assets. This change, introduced by the Finance Minister, will particularly impact real estate investors. The new regime will only be more advantageous if the Rate of Return is approximately 11.5%, with varying effects depending on holding periods and investment multiples.

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Access to Capital

Access to capital remains a pivotal challenge for startups, and the 2024 budget addresses this through multiple initiatives. The allocation of INR 10,000 crore to the Fund of Funds for Startups (FFS) is a substantial boost. Managed by the Small Industries Development Bank of India (SIDBI), the FFS aims to provide much-needed capital to startups through various Alternative Investment Funds (AIFs). 

Pranav Pai (Partner), noted, “The SIDBI fund of funds has been a huge success, and we expect the new announcements for investment support in innovation areas like manufacturing, logistics, and space tech will continue this trend.”

In addition to FFS, the budget introduces the National Seed Fund Scheme with an allocation of INR 1,000 crore. This scheme is designed to provide seed funding to startups, enabling them to bridge the gap between ideation and commercialisation. By offering financial support at the nascent stage, the government aims to nurture high-potential startups and accelerate their growth trajectory.

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Digital Infrastructure

Recognising the pivotal role of digital infrastructure in the modern economy, the 2024 budget outlines substantial investments in this area. The government has committed INR 15,000 crore to enhance broadband connectivity in rural areas under the BharatNet project. This investment is poised to create new opportunities for startups operating in rural and semi-urban regions, facilitating digital inclusion and encouraging a new wave of tech-enabled solutions.

Additionally, the budget introduces the Digital Innovation Fund with an initial corpus of INR 5,000 crore. This fund aims to support startups working on cutting-edge technologies such as artificial intelligence, blockchain, and the Internet of Things (IoT). By providing financial assistance and mentorship, the government seeks to position India as a global leader in technology-driven innovation.

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Regulatory Reforms and Ease of Doing Business

The 2024 budget underscores the importance of regulatory reforms to create a conducive environment for startups. The government has proposed several measures to simplify compliance and reduce the administrative burden on startups.

1. Equalisation Levy Removed for E-commerce Startups

The Equalisation Levy, introduced in 2016 to tax digital transactions by e-commerce operators without a permanent establishment in India, has been removed as highlighted in the Budget memo. This decision reduces compliance burdens and aligns with the Global BEPS 2.0: Pillar One and Pillar Two taxation framework, which India is expected to adopt in the near future.

2. TDS on E-commerce Reduced to 0.1%

Originally, e-commerce transactions were subject to a 1% TDS rate under section 194-O, along with a 0.1% TCS (tax collected at source) under section 206C(1h). Since offline transactions had a lower TCS rate of 0.1%, the government decided to rationalise the rates for both e-commerce and offline transactions to 0.1%.

3. Introduction of Variable Capital Company Structures in GIFT IFSC

Variable Capital Companies (VCCs) are globally recognised and widely accepted investment vehicles. Traditional Trusts were not designed for the complex operations of VC/PE funds, and the introduction of the VCC structure will enhance the attractiveness of GIFT IFSC. 

4. Extension of Section 68 Exemption to GIFT IFSC Funds

Section 68 aims to tax unexplained cash credits within a company and was previously associated with the Angel Tax provision. The absence of an exemption for GIFT IFSC AIFs was an oversight that has now been corrected.

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Sector-Specific Initiatives

The 2024 budget also includes sector-specific initiatives to promote innovation and growth in key industries. The allocation of INR 7,000 crore to the National Biotechnology Fund is a significant step towards supporting biotech startups. This fund will provide financial assistance and mentorship to startups working on innovative biotech solutions, driving advancements in healthcare, agriculture, and environmental sustainability.

Additionally, the budget introduces the Agritech Innovation Fund with an initial corpus of INR 2,500 crore. This fund aims to support startups developing technology-driven solutions for the agriculture sector, addressing challenges such as crop management, supply chain inefficiencies, and climate resilience. By fostering innovation in agriculture, the government seeks to enhance productivity, ensure food security, and improve the livelihoods of farmers.

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International Collaboration and Market Access

In a bid to enhance the global competitiveness of Indian startups, the 2024 budget emphasises international collaboration and market access. The government has announced the establishment of Startup India International Hubs in key global innovation centers, including Silicon Valley, Tel Aviv, and London. These hubs will facilitate networking, knowledge exchange, and market access for Indian startups, enabling them to scale globally and attract international investments.

The budget also proposes the launch of the Export Promotion Fund for Startups with an allocation of INR 1,500 crore. This fund will support startups in expanding their export capabilities and accessing international markets. Through increased financial assistance for export-related activities such as market research, product development, and trade missions, Indian startups will be able to enhance their global footprint.

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Conclusion

The Union Budget 2024 represents a definitive leap forward for the Indian startup ecosystem, addressing key financial and regulatory challenges. With ample impetus and a forward-looking vision, Indian startups are poised for unprecedented growth and a greater contribution to India’s push towards a $10 trillion economy. 

The budget’s emphasis on private sector investment, coupled with its startup-friendly provisions, positions India as a premier destination for entrepreneurship. As the nation transitions from a demographic dividend to a demographic bonus, the startup ecosystem emerges as the paramount economic imperative.

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