In 2016, the government launched the Start-up India initiative, which includes programs like the Start-up India Action Plan, Fund of Funds for Start-ups and Credit Guarantee Scheme for Start-ups. These offered regulatory reforms, ease of procurement, intellectual property protection, self-certification under labour and environmental laws, income tax exemptions, and international market access for Indian start-ups. The efforts led to a significant increase in recognised start-ups, with 84,012 in 2022.
The software-as-a-service (SaaS) segment accounted for nearly 25 per cent of all funding activity in 2022. However, building a SaaS start-up remains challenging despite this support due to intense competition, the demand to scale operations and infrastructure quickly, and the need to innovate continuously to stay relevant in the industry.
While SaaS start-up founders have many expectations from the upcoming Budget 2023, among the most important is to avoid having any drastic policy changes. The reason is simple; the start-up sector's outlook has been relatively buoyant in the past few years and the industry would like to keep it that way in the future too.
A Policy A Day, Keeps Investors Away
The stability and predictability of government policies have helped companies and investors prepare their strategies and make informed decisions in the past. In the Union Budget 2023, the government can continue this stability by introducing policies that help the SaaS industry. This could include providing tax exemptions to help companies save costs, developing talent and skills in technology and innovation, and simplifying regulations and procedures.
Talking about the business hurdles SaaS start-ups currently face, Sparsh Gupta, CEO and co-founder of SaaS company Wingify, said it includes the impact of global economic challenges on revenue, growing inflation and an increase in talent costs coupled with a shortage in skilled talent. According to him, last year's budget did promote digital adoption in the country, which helped many businesses to grow.
“However, the increased inflation and demand for talent made it difficult for some start-ups to sustain their growth. Overall, while last year's budget did provide some support for the start-up sector by showing the commitment to digitalisation, it is important for the government to continue its support to ensure the sustainable growth and development of the SaaS start-up ecosystem,” he added.
While entrepreneurs want to create global start-ups based in India, the current policies and the existing FEMA norms can often be a deterrent. Moreover, compliance requirements and overheads of operating a business in India are high. Founders want to focus on building their businesses rather than spending massive amounts of capital and time managing overheads.
SaaS founders hope the government will roll out seed funding and venture capital (VC) programmes that provide financial support for start-ups throughout their lifecycles. In addition to connecting founders with global investors and VC firms to raise capital and expand their reach, they also expect the government to encourage more cross-border investments in India by removing roadblocks and making investment easier.
Gautam Mehra, the co-founder of ProfitWheel, recommended that the government develop frameworks that start-ups can adopt to operate subsidiaries in other countries. “Allow for tax breaks for early stage, non-profit making tech start-ups, especially from foreign income,” he added.
Taxed By Taxes
SaaS founders hope that the Union Budget 2023 will increase the GST exemption slab for start-ups from the current Rs 40 lakhs to Rs 10 crore. The sector also expects the government to reduce the minimum alternate tax (MAT) from 15 per cent to 9 per cent to help them have more working capital for day-to-day requirements.
Another major ask is introducing a single window clearance mechanism for start-ups to claim tax incentives. Manish Gupta, co-founder and CEO of AI solution provider Rezo.ai is also hoping for some fiscal succour with the revision of existing personal income tax slabs. He said, “We look forward to there being no income tax for income up to Rs 5 lakh and moving the subsequent income tax slabs further up. This will ensure more dispensable income and promote spending, which will benefit the entire economy, including start-ups.”
An ESOP Story
Start-ups often find it challenging to find and retain the right talent, which can be resolved by offering them ESOPs. However, the taxation on the ESOPs often makes it unattractive to the employees.
In this Union Budget, SaaS start-ups expect the government to pay strong attention to ESOPs reforms to bring stability to the sector. To make it a lucrative option to compensate talent, there is a need to remove the prerequisite tax on ESOPs at the time of sale. This will allow more start-ups to attract talent and reward them with stocks without taking an immediate impact on their cash flows.
The government can also address issues like skilled talent, better go-to-market opportunities and technical know-how by improving the current gap between education, skills and expertise. One way is to invest in education and training programs, internships, and apprenticeships to develop talent and skills in the field.
Deepak Tuli, co-founder and COO of Eka Care, recommended that the government can also foster innovation and talent development by creating partnerships between industry, academia, and research organisations. The government can provide funding and resources for R&D programmes and projects in the SaaS industry to support innovation and new technologies.
“Another way the government can help SaaS companies is by assisting them in expanding into international markets by providing resources and support, including information on regulations, taxes, and cultural differences, and connecting them with potential partners and customers. To provide guidance and support, the government can create opportunities for SaaS entrepreneurs to connect with experienced business leaders, investors, and mentors,” Tuli noted.
The Right Value
While the Indian government is taking dedicated steps to promote a start-up culture, it needs to ensure that these programmes lead to better investments and higher valuations in the current funding winter and economic slowdown. Tuli believed that the best way to do this is by targeting high-growth industries like health tech and building a robust ecosystem of support services like legal and accounting services.
“It can also ensure that start-ups are well prepared for fundraising by providing financial planning, business plan development, and investor relations resources; and, lastly, encouraging collaboration and co-investment between the government, venture capital firms, and angel investors,” he added.
Gupta recommended the setting up of incubation and acceleration programmes that provide mentorship, training, and resources for early-stage start-ups along with networking opportunities to connect them with industry experts and potential investors.
“It can also consider implementing skill development programs and education to encourage entrepreneurship and innovation among young people," he added. "It can also set up a dedicated fund for early-stage start-ups to access capital and encourage more angel investors and venture capital firms to invest in them,” he added.
Some other steps include promoting a culture of risk-taking and entrepreneurship among angel and venture capital investors by providing them with tax incentives. The administration can also create a favourable legal and regulatory environment for start-ups by simplifying compliance and licensing requirements and protecting intellectual property rights. This will provide start-ups with the requisite support to expand and grow in global markets and participate in international trade.