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Highlights of Budget 2022 – Pier Counsel

The Economic Survey of India, 2022 (the “Survey”) revealed that startups in India have grown remarkably over the last six years. The number of new recognized startups has increased to over 14,000 in 2021-22 from only 733 in 2016-17. As a result, India has become the third-largest startup ecosystem in the world after the US and China reported 61,400 startups as of January 2022. India also recorded 44 startups achieving Unicorn status in 2021 taking the overall tally of Unicorns in India to 83.
The Survey had also highlighted the importance of tech-startup in innovation and disruptive technology creating multi-industry impact. Emerging technologies such as artificial intelligence (AI), geospatial mapping and space imagery are playing a significant role in government initiatives across diverse fields, the Survey said. However, the Survey was quiet about the Crypto and NFT regime despite the rise of public interest, a clear stance of the government regarding the adoption of these new-age assets had been long due.
Union Budget 2022 was expected to be packed with exciting offerings for the tech and startup ecosystem. To fuel further growth and to battle the Covid-19 pandemic’s impact on the startup ecosystem, support was anticipated from the finance minister in this year’s budget. Let’s look at what Union Budget has in store for the tech and startup ecosystem this year. Here are the highlights of the Union Budget 2022-2023 announced by the Hon’ble finance minister on 1st February.

Extension of the eligibility period for Tax Holiday

Under the current regime, eligible startups can claim a 100 percent tax rebate on profits they make, provided that their annual turnover is not over Rs 25 crore in any financial year. The tax holiday has been provided under the Startup India Scheme as a tax incentive for three consecutive years out of ten years from incorporation. The eligibility date of incorporation to benefit out of such scheme was before 31st March 2022. In the budget speech, it was announced that the period of incorporation of startups eligible to avail tax incentives has been extended by one more year, up to March 31, 2023. This move will surely encourage the setup of new ventures.

Rationalization of Surcharge

In an attempt to bring parity with the long term capitals gains surcharge on listed securities, the surcharge on long term capital gains arising on transfer of any type of assets has been capped at 15% to give a boost to the startup community. Under the previous regime, the surcharge on LTCG could go up to 37%. The surcharge is now capped at 15% which will result in significant tax savings thereby providing better returns to angel investors and founders. This move envisages a boost to the start-up community and encourages further investments into securities of unlisted companies.

Fund for financing Agri-Startups

Budget 2022 is a boon for farmers as major announcements concerning technological advancements in the agriculture sector have been made, from Kisan drones to chemical-free farming. Specifically, a major announcement has been made regarding funding for agriculture-based startups by NABARD. The finance minister said the National Bank for Agriculture and Rural Development (NABARD) will set up a blended fund to financially support the AgriTech and rural enterprise startups for enhancing the farm produce value chain in rural areas. The activities for these startups will include, inter alia, support for FPOs, machinery for farmers on a rental basis at farm level, and technology including IT-based support.

Defense R&D and Manufacturing opened up for Startups.

In an attempt to reduce reliance on imports in the defence sector and promote Atmanirbharta, it has been announced that 68 per cent of the capital procurement budget will be earmarked for the domestic industry in 2022-23, up from 58 per cent in 2021-22. Defence R&D will be opened up for industry, startups and academia, with 25% of the defence R&D budget earmarked for this. Private players will be encouraged to take up the design and development of military platforms and equipment in collaboration with DRDO and other organizations through public-private partnerships. A nodal body will be set up for testing and certification of these indigenous platforms. The finance minister also added that “Artificial Intelligence, Geospatial Systems and Drones, Semiconductor and its eco-system, Space Economy, Genomics and Pharmaceuticals, Green Energy, and Clean Mobility Systems have immense potential to assist sustainable development at scale and modernize the country…. Supportive policies, light-touch regulations, facilitative actions to build domestic capacities, and promotion of research & development will guide the government’s approach”

Expert Committee to be set up for examining challenges in PE & VC investments

In the budget speech, the finance minister noted the importance of Venture Capital and Private Equity investments in aiding the startup and the growing ecosystem. It was also noted that a holistic examination of the regulatory framework and other frictions is necessary moving forward in scaling up these investments. An expert committee will be set up to examine and suggest appropriate measures.

Focus on digital banking and fintech innovations

The Budget has focused on Promoting the digital economy & fintech, technology-enabled development as a vision for Amrit Kaal. The government is continuously encouraging these sectors to ensure that the benefits of digital banking reach every nook and corner of the country in a consumer-friendly manner, this provides fintech startups with an aligned interest of the government and hints at a supportive ecosystem.

Digital Rupee and Taxation of ‘Virtual Digital Assets’

The finance minister announced in her budget speech about the taxation scheme of Virtual Digital Assets, effectively, the taxation on income from trading in NFTs and Cryptocurrencies. A definition for ‘Virtual Digital Assets’ has been introduced, signifying the intent of the government to treat it different from capital assets. Income from the transfer of any virtual digital assets will be taxed at 30%. Moreover, no deduction in respect of any expenditure or allowance shall be allowed while computing such income except the cost of acquisition. The loss from the transfer of virtual digital assets cannot be set off against any other income. The finance minister also proposed to provide for TDS on payment made in relation to the transfer of virtual digital assets at the rate of 1 per cent of such consideration above a monetary threshold. The gift of virtual digital assets has also been proposed to be taxed in the hands of the recipient. The government has also declared its intent to launch a Blockchain-based and RBI-backed Central Bank Digital Currency (CBDC). The taxation of virtual digital assets seemingly legitimizes trading in private cryptocurrencies and NFTs. However, the proposed regime appears to be stringent and at par with speculative income.

Pier’s Comment

The union budget has brought some clarifications to long-drawn speculations on how the Government of India will approach the evolving digital currency space. For the time being it appears that the government is classifying Cryptocurrencies as virtual digital assets and full details can only be gathered after the cryptocurrency bill is tabled and upon other regulators like SEBI and RBI issuing their respective circulars. Tech entrepreneurs and seasoned investors in the crypto and blockchain space will warm-up for more clarity which may open further avenues for more startups.
On the lines of new and disruptive tech, this Budget has spelt out promotion of drone technology through the scheme of Drone Shakti. The concept of using making available drones as a service (DRaaS) may be a new step in offering a range of functions in many industries including helping farmers in agriculture. It would be interesting to see how this concept plays out and how stakeholders dish out innovation and opportunities from this concept.
The government’s attempt to encourage all stakeholders in the startup ecosystem including startup founder’s, stock option holders and domestic investors has been carved well through effective incentives. The extension in tax holiday timelines and capping of LTCG surcharges on unlisted securities is indeed a welcome step. Moreover, as a measure to battle any regulatory challenges and other frictions, the setting up of an expert committee is a proactive move to further enhance venture capital and private equity investments.
Thus, considering all things, the Union Budget 2022-2023 is futuristic and it lays the foundations for a strong, advanced and driven India.

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