The Impact of Taxation On Startups

Historically, Indian businesses have relied on the traditional banking systems for financing their
venture. However, the scenario has changed radically with the rise of the thriving startup
ecosystem of the country. In 2021 alone, Indian startups managed to churn up $42 billion in
investments – an $11.5 billion surge from the previous financial year. 
Unfortunately, India – the third-largest start-up ecosystem in the world, is also experiencing a
dread brain drain in the realm of startups. Numerous startups born in the country are parching for
investments and moving to greener pastures in foreign lands. This begs the question, what has
been hindering Indian venture capitalists and angel investors from doing their job – investing? 
Well, it is the complex, aggressive Indian tax system of the country! It has been dissuading
investors by penalizing them with higher taxes when they make high-risk investments in startups
and SMEs – basically, any company that’s unlisted. 
A Ray of Fresh Hope? 
The new budget released by the government has unleashed a fresh wave of cheer for investors
and founders alike. Apart from paying the 10% to 20% of taxes on long-term capital gains
(LTCG) depending on the asset class, investors also had to pay surcharges. Those within the
income slab of 2-5 crores were levied with a 25% surcharge. And, those whose incomes
ballooned over 5 crores have to shell away 37% in surcharges! 
However, the new budget has standardized the surcharge payable by all income groups and
capped it at 15% irrespective of the asset class. Such a fiscal move from the Indian government
reflects their vision of developing a thriving “Start-up India”. 
The Impacts of Taxation

  1. More Success Stories 
    Lower surcharges translate to higher incentives for investors, thus, motivating the analytical
    minds of modern investors to invest more in start-ups that exhibit growth potential. A rise in
    investment is the key to increasing the success rate of startups that currently lingers at a
    miserable 10%. 
  2. Job Creation 
    Building a flourishing employment ecosystem is the key to retaining the country’s innate talent
    and preventing the dreaded brain drain. With an increase in investment and the success rate of
    start-ups, households can gain employment. A rise in employment ensures a subsequent rise in
    the country’s GDP too. 
  3. Economic Growth 
    With capital available for increased R&D and investment in new technology, the productive
    capacity of the economy is increased which not only makes new scope for more imports into the
    global market but also helps the country be self-sustainable. 
    While tax incentives are a crucial tool to reduce the marginal cost of investment, the empirical
    evidence of the success of such a strategy is mixed. Investors should be encouraged with more
    support from the government with direct grants and funding. When tax incentives are bolstered
    with fiscal support from the government, its impact is much louder.