China booting up start-ups with billions, India needs a huge leap

Start-ups provide jobs and create wealth, which are essential ingredients of development

prahlad

Prahlad Rao | January 17, 2015 | New Delhi



The government has done the unthinkable in the past and should do unconventional in the future. The interim budget of finance minister Arun Jaitley had allocated Rs 10,000 crore ($1.6 billion) for supporting start-ups.That was a good beginning. But with China also trying to do the unthinkable, it is time India takes another look its start-up seeding scenario.

This week, China set up a government venture capital fund worth 40 billion yuan ($6.5 billion) to support start-ups in emerging industries, in its latest move to support the private sector and foster innovation.

Start-ups are very important for any economy as they create wealth and generate employment. Both these sentiments have been at the core of the Narendra Modi government.

The information technology industries through Nasscom have recently submitted their concerns to the finance minister as part of their budget inputs.

Some of the salient recommendations by NASSCOM include: addressing regulatory and tax challenges for technology start-ups and SMEs, difficulties in access to funding for low asset based firms, investor difficulties related to regulations and taxations discouraging investors, ambiguous Software product taxation and implementation issues adding to burden, incentives for technology start-ups and SMEs, extend provisions on deduction for employment and skill development, suggestions for new provisions like offsetting manpower training cost, deferred tax credits for start-ups and many others.

These are valid demands as it has been observed that many start-ups are registering abroad as Section 56 of Income Tax Act deters local investors. Under Section 56, angel investments are liable to be taxed as income in the hands of start-up receiving the capital.

The government levies a 20% capital gains tax on investments made in private ventures for investments up to 36 months. Industrialists feel that investments made up to Rs 10 crore should not come under Section 56. Instead they seek incentives like tax credits for investing in start-ups.

On the other hand, China has been taking some steps to infuse money into innovation and ideas business. Last month, for instance, regulators issued new rules to allow insurance companies to invest their huge pool of premiums in venture capital funds for the first time.

On the $6.5 billion innovation funding, China's State Council said "the establishment of the state venture capital investment guidance fund, with the focus to support fledgling start-ups in emerging industries, is a significant step for the combination of technology and the market, innovations and manufacturing."

"It will also help breed and foster sunrise industries for the future and promote (China's) economy to evolve towards the medium and high ends," it said in the statement published in the government's website, www.gov.cn, referring to sectors which the government is promoting such as technology and green energy.

China's venture capital market remains small, the legacy of the country's decades of the planned economy in which private sector's development is largely subject to a great variety of restrictions.

India has also seen some latent activity on start-ups. Last month, union communication and information technology minister Ravi Shankar Prasad spoke highly of the Kerala model and recommended replication of Kerala's Start-up Village model in other states in India to boost entrepreneurship. He also said the government will set up an electronic development fund for start-ups across the country.

"I am very happy that Kerala has done good work. We need to replicate it. In order to promote entrepreneurship in IT, the central government has come up with the concept of electronic development fund with the government partnering with angel funds to fund start-ups in IT, electronics and manufacturing," said Prasad during a visit to the village.

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