Currently, we are the third largest start-up ecosystem in the world with new-age entrepreneurs leading the journey by introducing innovation and technology-based solutions to tackle the challenges faced by the country at grass root levels. Start-ups are not only bringing innovations but are also evolving as major job creators in the current decade or ‘techade’ of India.
To percolate this culture further deeper into India, the current government has been active in recognising efforts and encouraging the new-age entrepreneurs to become an important contributor to the country’s aspiration of becoming a $ 5 trillion economy by 2025. The Hon’ble Prime Minister has also coined the agenda of ‘Innovate for India, innovate from India’, to encourage the entrepreneurs to go global with their innovation strategy.
Globally governments have introduced various schemes to promote start-up culture as startups not only bring a wealth of transformative innovations but also play a critical role in job creation for the nation. Leading countries like the United States had launched ‘Start-up America’ initiative to promote entrepreneurship and provide start-ups with easy access to capital, incubator programs, federally funded R&D activities, etc to poise itself as a leading start-up ecosystem across the globe. Similarly, China runs at least 1,500 incubators a 27-year-old Torch Programme that provides policy, and financing and consulting services for hi-tech firms.
Being the last full budget for the Modi Government 2.0, Budget 2023 is one of the most awaited. After a solid post Covid recovery, the Hon’ble Finance Minister would now be expected to lay down strong support policies for start-ups and chart out India’s growth roadmap in a scenario where the world is at the brink of a possible recession. . To add more weightage, the Indian start-ups and investors are now focusing on profitability from the erstwhile focus on growth at all costs and accordingly the start-up arena is looking for slew of changes and support to strengthen their position and gain a level playing field in the organised Indian markets.
In the light of the above backdrop, it is important for the Government to introduce policies and offer risk free and low-cost funding to the start-up ecosystem to position India as an innovation-based economy. The Hon’ble Finance Minister as a part of the Budget 2023 would be expected to introduce unique funding avenues/ support to encourage Indian start-ups to continue their journey of path breaking innovation.
One of the attractive ways the government could explore to augment innovation and participation in the start-up ecosystem could be to notify Innovation Bonds/ Early-stage Innovation Bonds/ Impact Investment Bonds similar to the existing NHAI and REC bonds which enjoy a tax-free status (ie. interest income being tax free in the hands of the investor), to fund companies focusing on solutions for underserved communities. With this, the government could explore providing low-cost funding and support to projects/ early-stage companies that face difficulties in accessing capital, particularly those without the necessary assets or cash flow for traditional bank funding. What would these Innovation Bonds mean for the start-up ecosystem and the government?
- Channelizing public funding into innovation activities and providing easy access to early stage innovation start-ups
- Facilitating innovation and R&D participation from new-age start-ups/ entrepreneurs
- Lowering the immediate burden on the government treasury on funding and supporting start-up incubators/ projects
- Fixed rate of interest for general public with lower risk and tax benefits
- Creating strategic opportunity for India to establish itself as a global innovation hub, ultimately making the country the preferred destination for R&D and manufacturing outsourcing
The startup ecosystem is an important pillar for India’s growth aspirations and ensuring ease of fund access to early-stage start-ups should be an important policy agenda for the government to enable it to become a significant contributor to India’s GDP and an innovation hub globally.
(Rahul Kakkad is a Tax Partner at EY India. Dipesh Chauhan, Senior Tax Professional, EY India, also contributed to the article)