Is there adequate finance for agri-tech startups in India?
Agri-tech firms are helping transform the way farmers derive value from their output.
Q: My group of friends are very keen on agriculture-tech startups. They want me to join them in investing in their venture in India. However, I am not familiar with this new age business and I want to know more about it before I take any decision. Can you please advise me?
A: In agri-tech startups pertain to provision of farm business management software, supply chain technology and technology for precision agriculture. This is helping to transform the way farmers derive value from their output. Data from a research firm indicates that $100 million has already been invested in the agri-tech sector. The number of such startups in India has increased by six times from 2016 to 2018. Startups that create market linkages for agricultural products account for more than 90 per cent of the value invested in this sector in 2019.
This has resulted in the inclusion of farmers in the information economy. Entrepreneurs in this sector are, therefore, getting adequate finance from private equity firms and venture capitalists. Therefore, if your friends and you decide to go into this line of business, adequate funds will be available for the right agri-tech project. Agricultural income earned from the cultivation of land,whether by using traditional methods or by using technological solutions, is exempt from tax without any limit. However, those who provide technical services or technological solutions to farmers will be liable to tax on their income after the tax holiday period applicable to startups is over.
Q: Many foreign portfolio investors are setting up their base in Gift City. Are there any advantages of doing so? Can you elucidate?
A: Foreign portfolio investors, if located in an international financial services centre, are eligible for a ten-year tax holiday. Gift City in Gandhinagar, Gujarat, has been approved as an International financial services centre by the Securities and Exchange Board of India (Sebi). Units set up in Gift City are exempt from long-term capital gains tax, short-term capital gains tax, dividend distribution tax and minimum alternate tax. If foreign portfolio investors trade on the exchanges set up in Gift City, the securities transaction tax is also not applicable.
In other words, Gift City provides the same advantages and benefits to foreign portfolio investors as other jurisdictions like Singapore and Mauritius do. The Sebi has also relaxed registration and the know-your-customer norms. Hence, those who invest in participatory notes issued by foreign portfolio investors registered in Gift City would not have to comply with stringent rules and regulations. Since there is a tax free regime provided by Gift City, foreign portfolio investors need not take the Mauritian route for investing in India.
Q: My son, who has graduated as an executive chef, wants to go back to India and set up ghost kitchens. He believes that there is great scope in this business. I do not know whether this is a profitable business to get into, though it may save money on renting a place for a full-fledged restaurant.
A: Your son is entering the digital space of culinary establishments. All over the world, ghost kitchens are being set up which have no retail presence by way of a restaurant where food is served to customers. Ghost kitchens are meant for online ordering of food through delivery apps. These apps are becoming more and more popular as most couples are working and home cooked meals are not possible. In fact, with delivery apps nurturing ghost kitchens, traditional restaurants are facing serious competition on account of high operating costs of rent, electricity and employment expenses.
Many finance companies are now giving easy loans for setting up kitchens and buying equipment which form the core of ghost kitchens. These kitchens which use delivery apps have to pay a commission ranging from 15 per cent to 30 per cent on every order, but despite these charges the ghost kitchens are turning out to be profitable businesses. Hence, your son is not wrong in wanting to use his culinary skills to set up ghost kitchens in India because this business is growing at a healthy rate and reasonable profitability is assured with a low investment. Of course, your son will have to ensure that all statutory laws and regulations are complied with and that his establishment is registered under the GST law. He will also have to maintain proper accounts and file tax returns from the first year of operations.
The writer is a practicing lawyer, specialising in tax and exchange management laws of India.