The Parliamentary Standing Committee on Finance has unveiled a report addressing start-ups. It describes the Startup India Scheme initiated by the Government of India in 2016 and offers recommendations to help Indian start-ups gain independence from China and the USA.
Key Recommendations for Start-ups
The committee’s advice suggests that Indian start-ups should work towards self-reliance by leveraging larger domestic growth funds fuelled by local capital. This could be achieved by expanding and fully operationalising investment vehicles like the Small Industries Development Bank of India (SIDBI) Fund-of-Funds.
A fund-of-funds, or multi-manager investment, is a pooled investment fund that invests in various types of funds. The committee also recommends inviting foreign development finance institutions to collaborate with local asset management companies to establish fund-of-funds structures.
Companies and Limited Liability Partnerships (LLPs) should also be permitted to invest in start-ups without being categorised as Non-banking Financial Companies (NBFCs) by the Reserve Bank of India (RBI). By doing so, start-ups can have access to expanded capital sources.
Tax Policies and Collective Investment Vehicles
The committee calls for the abolition of Long Term Capital Gains (LTCG) tax on Collective Investment Vehicles (CIVs) for at least two years as an incentive for investment in start-ups. A Collective Investment Vehicle (CIV) is an entity that enables investors to pool their money and invest as a group.
These include angel funds, alternate investment funds, and investment LLPs. After this two-year period, the committee suggests applying Securities Transaction Tax (STT) on CIVs to maintain revenue neutrality.
The Importance of a Robust Start-up Ecosystem
According to the committee, a robust start-up ecosystem can stimulate investment, job creation, and demand in the economy. Adopting these recommendations will undoubtedly strengthen such an ecosystem.
Start-up India Scheme
The Start-up India Scheme is a flagship initiative of the Government of India, created to cultivate a start-up culture and establish a strong and inclusive ecosystem for innovation and entrepreneurship.
Since its launch in 2016, Startup India has initiated several programs aimed at supporting entrepreneurs and transforming India into a country of job creators rather than job seekers.
Understanding Securities Transaction Tax and Capital Gain Tax
Securities Transaction Tax (STT) is a tax applied at the time of purchase and sale of securities listed on the Indian stock exchanges. Both buyer and seller must pay 0.1% of share value as STT.
On the other hand, Capital Gain Tax is levied on any profit or gain resulting from the sale of a ‘capital asset’, such as land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. The tax applies in the year of the transfer of the asset.
About Small Industries Development Bank of India (SIDBI)
The Small Industries Development Bank of India (SIDBI) was established in 1990 under an Act of Parliament. It serves as the principal financial institution for the promotion, financing, and development of the Micro, Small and Medium Enterprise (MSME) sector.
