Budget 2024: What Investors & Startups Want From Modi Government?

Narendra Modi led NDA secured its third term a month ago, with Nirmala Sitharaman back in her role as the finance minister of India. As government offices resume with fresh zeal, the industry eagerly anticipates the new union budget for the remainder of FY2024-25 on 23rd July, 2024.

What transformative reforms could be on the horizon? Will this budget address the critical needs of the deep tech ecosystem, provide clarity for virtual digital assets (VDA), and support the burgeoning Web3 sector?

As the Union Budget approaches, industry leaders are voicing their expectations, hoping for impactful changes. Finance Minister Nirmala Sitharaman is set to present the budget, which many believe could be a turning point for these dynamic sectors.

Support for Deep Tech Ecosystem

Manoj Agarwal, Co-Founder & Managing Partner of Seafund, emphasizes the need for greater support for the deep tech ecosystem.

"The government has been making the right noises about the deep tech ecosystem. However, it requires more support at the seed level to help these startups engage in deep research, which may not attract investment at early stages," says Agarwal.

He suggests a fund of funds to support investors who back deep tech initiatives, which could catalyze the production of innovative products in India. 

Agarwal also calls for simplified taxation for startups, ESOPs, and investors.

Drawing comparisons with European countries, he notes, "Many countries provide benefits to investors who invest in funds that support startups or directly in startups. Such provisions could attract more domestic capital into the startup space, mirroring the trend in listed spaces." Additionally, Agarwal highlights the ongoing debate on reverse flipping and suggests that the government should offer incentives for startups willing to return to India, which would bolster the ecosystem and ultimately benefit the economy.

Tax Reductions and Regulatory Clarity for VDAs

Dilip Chenoy, Chairman of Bharat Web3 Association (BWA), stresses the importance of tax reductions and regulatory clarity for the VDA sector. The BWA has proposed a reduction in the transaction tax from 1% to 0.01% and allowing the setting off of losses on one VDA transaction against profits on another.

"A lack of regulation has caused the Indian VDA industry and the government to lose significant revenue in recent years. Clear regulations will prevent startups and entrepreneurs from relocating to more VDA-friendly jurisdictions," Chenoy argues.

He urges the government to implement industry-friendly regulations and tax reforms to ensure the sector's growth, creating new opportunities and revenue streams.

Manhar Garegrat, Country Head India & Global Partnerships at Liminal Custody, also advocates for rationalized taxation in the VDA sector. He identifies three major challenges: the absence of long-term and short-term capital gains differentiation, high withholding tax, and the inability to offset losses against gains.

Garegrat asserts, "Rationalizing these tax components to reasonable levels can promise a brighter future for India's economy. Many jurisdictions are progressing rapidly in this area, and India should adopt a rational approach to resolve these issues."

Garegrat praises the government's efforts, particularly the FIU-registration of blockchain and VDA firms, which has provided legitimacy to the sector. He hopes the upcoming budget will address tax-related issues, further supporting the sector's development.

Comprehensive Regulatory Framework for VDAs

Shivam Thakral, CEO of BuyUcoin, India's second-longest-running digital asset exchange, highlights the negative impact of the current 1% TDS and 30% VDA gains tax on the industry.

"The 1% TDS has significantly impacted our business. We expect the upcoming budget to address our grievances and reduce these taxes to reasonable levels," Thakral says.

He advocates for a comprehensive regulatory framework for the VDA market, ensuring a level playing field for all companies, both Indian and offshore.

Thakral notes that the lack of specific regulations has driven VDA and Web3 businesses offshore, depriving local businesses of funding opportunities and legal protection for investors.

"We urge the government to consider these factors when formulating the regulatory framework for the VDA market. Supportive laws are needed to facilitate our growth and unlock the full potential of the Indian market," he concludes.

As the Union Budget looms, industry experts are hopeful that the government will introduce measures to support deep tech startups, rationalize taxation in the VDA sector, and establish clear regulations. Such reforms are seen as crucial for fostering innovation, attracting investment, and ensuring the long-term growth of these emerging industries in India. The upcoming budget holds the potential to set the stage for a transformative phase in the Indian economy, driven by advancements in technology and digital assets.