“The Devil Is In The Detail,” Venture Capitalists React To Budget 2017.

If we had to sum up the venture capitalist (VC) reaction to budget, we would have to say it was as lukewarm as the budget proposals covering startups. Most of their concern was around the still unpractical if not confusing tax regimes.

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Budget 2017 just was not the Startup Budget like last year’s was (was that a coincidence given Startup India was announced in 2016 as well?)

Immediate reactions

Following the budget, when we spoke to Blume Ventures, their chief financial officer, Ashish Fafadia brought up some interesting points. FM Jaitley did keep referring to “more details are in annexures to my proposals.”

It is difficult to perform a definite analysis of the budget when what’s in those ‘annexures’ is unknown to those on the outside.

The Blume Ventures CFO said, “There were not many proposals that alter or affect Blume's operations. We still need to see the fine print in the annexures on issues pertaining to startups and investment funds based from India. We welcome the creative manner in which SME tax rates were slashed. But at the outset not much for startups.

An agency for startups is much needed as a nodal agency. They could have done that and created an approach path for fostering startup growth. It didn't. There are small niggles like startup tax, fund taxation for funds in India, mobilisation investor interest for domestic funds. Let's hope fine print addresses some of it, if not all.”

Manish Singhal, founding partner of pi Ventures which invests in artificial intelligence (AI) startups liked the bits on digitalizing India. Other than that he felt, "The budget is a mixed bag as far as startups are concerned. Announcement of the Electronic Development Fund is a positive. It should help more startups in the hardware space raise money. The whole digitization movement is definitely a welcome move, it provides more data for AI startups to build their models on and of course the tax concessions for MSMEs was welcome.”

The budget had a more positive reception from Rajat Tandon, former NASSCOM 10,000 Startups director and now president of the Indian Venture Capital Association (IVCA). "The announcement by the Finance Minister brings in a slew of positive reforms for startups. Significant developments such as the carry forward implementation will build “Saahas” and encourage risk taking. This is the “Sahyaog” sought by IVCA.

However Mr. Tandon continues, “Despite the fact that startups are not exempt from minimum alternate tax (MAT), the carry forward limit of 15 years as against 10 years will boost the startup hopes and operations."

Padmanabh Sinha, vice chairman of IVCA and managing partner, Tata Opportunities Fund - ‎Tata Capital said, "IVCA welcomes prolific initiatives and thanks the Finance Minister for undertaking comprehensive steps in the budget to ease the art of doing business in the country.”

Taxes and startup gains

Pankaj Jain’s wishlist sums up what the startup ecosystem wanted. Mr. Jain recently exited 500 Startups. The American VC paused operations in India, reportedly due to issues around taxation and regulations.

“The most important thing that I want to see is continued access to additional capital supporting startups. Ideally, through better policy attracting more capital but more capital from the government is also welcome. Additionally, tax benefits for individuals and VCs as well as simpler compliance would be greatly welcome in the budget. The biggest thing missing from the budget as well as various startup programs has been policies that benefit foreign investors.”

While Mr. Sinha was happy that the greyest of areas, taxation for alternative investment fund categories 1 and 2 have been addressed, he still spoke with more hope than certainty.

“The Union Budget 2017 has laid out a clear road map for AIFs in India, simultaneously generating a pool of opportunities for businesses. Indirect tax issues related to foreign portfolio investors (FPI), and AIF categories 1 and 2 have been explicitly addressed in the budget.

“Mr. Jaitely also referred to the broader principles of not taxing overseas limited partners (LP) transfers in India funds. I hope it addresses all our industry’s needs and will streamline procedures, revive the demand and ultimately cultivate a robust environment for investors/AIFs in the country," Mr. Sinha said.

Mr. Singhal of pi Ventures continued, “I was expecting some announcements on the angel tax which has been a damper for early stage startups and further implementation plans for the 10,000 crore Startup India initiative announced last year. These are clear misses which could have been addressed in this budget".

About the tax holiday extension for startups, Mr. Fafadia of Blume Ventures said, “A welcome move but profit-based taxation benefits don't matter much to funded startups.”

Touching on capital gains taxing Mr. Fafadia said, “Startup capital gains isn't free. In fact they would have done a good job to bring it at par with listed companies' capital gains. They didn't. The benefit is being offered to companies on taxation of their profits as addressed above. Even that's not going to make a big difference.”

About the foreign investors and funds outside India investing in Indian companies, he said, “FM Jaitley's clarification on foreign investors and giving that clarification should help for sure. We need to read the fine print though because hope there is no devil in the detail.”

Silver lining

Does that mean investors will stop taking risks in India? Just because India has a confusing tax regime? Not according to Mr. Jain, previously the India head for American VC, 500 Startups.

“I don't think that any VCs will change their investment strategy just because of the budget. However, it is possible some angels will choose to be more active if more benefits are made available. It's always a positive thing seeing proposals in the budget that will help investors.

Proposals around compliance and taxes affect operations the most but don't necessarily impact investment decisions.”

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