The Union budget is just around the corner, and the stakeholders in the venture capital (VC) and startup ecosystem are tabling a few of their demands to the government. India is gradually eyeing the top spot when it comes to being the home of startups. While the Indian government has taken bold steps and is constantly making policy changes to assist young entrepreneurs in starting their own businesses, industry experts have been flagging issues, which include, but are not limited to, parity in the treatment of LTCG (long-term capital gain) for listed and unlisted securities and employee-friendly regulation for ESOPs (employee stock option plans).

Parity in Listed and Unlisted Securities

Currently, if listed shares are held for more than 12 months, they are considered long-term; for unlisted shares, the period is 24 months. Short-term capital gains on listed securities are taxed at 15 per cent. Capital gains from listed stocks sold after more than a year are currently taxed at 10 per cent if they exceed Rs 1 lakh in a fiscal year.

Unlisted securities, on the other hand, are subject to a 20 per cent tax. Unlisted shares must be held for a minimum of 24 months before they can be considered long-term assets. Since the startup ecosystem is grappling with funding, and as a result, startups across industries are reducing their headcounts, a simple tax code is needed to attract more investment.

“Rationalising capital gains tax in startups will help reduce the compliance burden and bring in a simplified tax and regulatory framework. A parity in the LTCG tax rate can encourage a large number of retail investors to participate. The increased allocation to programmes like SIDBI, BIRAC, and MeitY will also aid in promoting innovation and technology, thus supporting many entrepreneurs,” says Manu Rikhye, Partner at Merak Ventures, who suggested the policy change for ease of investing by retail investors.

Domestic institutions such as NPS, LIC, and Provident Funds must be permitted to invest in homegrown VCs, at least, in order to encourage more investment and employment in the ecosystem. He added, “We hope to see an easing of restrictions on domestic institutions like Provident Funds and NPS investing in VC funds.” This will allow greater participation in domestic VC funds, which in turn will help make patient and long-term domestic capital available for AIFs. Additionally, given the current low interest rates, this is a significant opportunity for such pension funds to invest in AIFs to increase their yields.

Demanding parity in listed and unlisted securities, Gautam, CEO and Co-founder of CBREX, stated, “Startups are considered innovation and job-creating engines and should be nurtured at an early stage. They rely heavily on private investments to get off the ground and sustain initial loss-making periods. Parity on these two counts will provide a level playing field for private investors. At the same time, it ensures that startups continue to raise capital seamlessly and helps them stay focused on building next-generation products and solutions.”

Experts recommended streamlining the processes involved in receiving grants from government-sponsored programmes like BIRAC and the Atal Innovation Fund. Like other policies, the implementation of these funds and policies is one of the most difficult roadblocks that needs to be overcome. “A continued effort to simplify the tax code will continue to provide confidence to global investors who wish to invest in India but are fearful due to the complex tax code,” said Anirudh A. Damani, Managing Partner, Artha Venture Fund.

Employee-friendly ESOPs

Furthermore, employee-friendly ESOPs are one of the long-standing demands of startups across industries. Startups use ESOPs more often than giants because they help an entity retain employees at an early stage of the venture. “There is an expectation to introduce deferment of the time of payment of tax on ESOP plans available to employees of more startups. This would be a fantastic effort to draw top talent to Indian startups and ensure their continued growth in the years to come,” Rikhye mentioned.

Taxes are levied on the exercise of ESOPs as well as their sale in the market, making them less appealing to employees and putting a financial burden on startups. The government can help create a more favourable environment for startups by addressing the dual taxation of ESOPs.

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