Budget 2021: Booster dose to get startup ecosystem into a high-growth orbit

Budget 2021 was the most keenly watched event by the startup sector and Finance Minister Nirmala Sitharaman has offered a number of initiatives to foster growth in the sector. The government has acknowledged the need for specific initiatives to boost various segments within the broader startup ecosystem.

One initiative that stands out for the sector is the ease of norms for Non-Resident Indians (NRIs) to set up a one-person company (OPC) to promote startups. Other positive steps include the revision of the definition of small companies and a proposal to decriminalise several procedural and technical compoundable offenses under the Limited Liability Partnership (LLP) Act.

The minister also mentioned that the compliance requirements are being eased for small companies as the government is proposing to revise their definition under the Companies Act, 2013. This is being envisaged by increasing the threshold for paid-up capital from Rs 50 lakh to Rs 2 crore, and turnover from Rs 2 crore to Rs 20 crore.

"As a further measure which directly benefits startups and innovators, I propose to incentivise the incorporation of OPCs by allowing OPCs to grow without any restrictions on paid-up capital and turnover," Sitharaman said in her budget speech.

A proposal to convert OPCs to any other type of company at any time and the reduction of residency period for an Indian citizen to set up an OPC from 182 days to 120 days is a relief for NRIs. Reduction of residency requirements for founders will allow talent flow and is a welcome step to support India's burgeoning startup ecosystem and entrepreneurship.

Other positive measures for the sector include an extension of eligibility for claiming tax holidays and exemption of capital gains tax for investments in startups till March 31, 2022. The proposed allocation of Rs 1,500 crore for the support of digital payments is another step that would be beneficial for digital payment startups. From announcing a fintech hub to increasing FDI limits in insurance, which would especially help digital insurance companies, the government is increasingly adopting a more focused approach that bodes well for the startups in the coming years.

Incentivising the incorporation of OPCs and the proposed reduction of compliance burden on startups will especially encourage more individuals to take a stepping stone to the daunting journey which is entrepreneurship. The extension of the tax holiday till March 2022 and capital gains exemption for startups will allow more recovery time to these enterprises, many of which continue to reel from the pandemic-induced slowdown.

Though the startup ecosystem continues to grow from strength to strength with almost 100 unicorns expected by 2025, the budget plays an important role in giving a fillip to the ecosystem which has grown at a CAGR of ~20 percent during the last four years. In specific, the doubling of budgetary allocation to the MSME sector to Rs 15,000 crore compared to the Rs 7,000 crore allocated in last year's budget will boost stakeholder sentiment.

The startup ecosystem is now ready to draw upon its structural strengths such as the availability of a strong talent pool combined with a large amount of foreign capital flowing into the ecosystem. Budget 2021 aims to be the right booster dose to get the ecosystem into a high-growth orbit.