With the impact of demonetisation looming over our heads, everyone was highly anticipating what the budget this year would have in store for us all. Would it be a populist one or would it be more in line with the Government’s vision? Well, tensions were running high and Finance Minister Arun Jaitley finally spilt the beans earlier this month.
So, let’s look at the policies and changes that will have a direct impact on the Indian startup ecosystem:
- The corporate tax for MSME’s has been reduced to 25% for all companies that have had a turnover or gross receipts up to Rs. 50 crore. This is a major positive and is expected to help 96% (6.67 lakh) companies across the country at the expense of the Government foregoing Rs. 7,200 crore of revenue.
- Startups recognised under the Startup India Initiative can now claim tax benefits in three out of the first seven years under Section 80-IAC of the Income-tax Act, 1961. It was three out of the first five years earlier. This is a great move keeping in mind that startups do take time to become profitable and it’s good to see the Government taking that into account.
- Up until now, converting preference shares to equity shares was considered a transfer and hence required one to pay capital gains tax. This year’s budget changes this and from now on, there will be no capital gains on conversion of preference shares to equity shares.
- As announced during the demonetisation period, the Government has reduced the requirement u/s 44AD for declaring a minimum presumptive tax profit margin to 6 percent from the existing 8 percent in cases of non-cash receipts and turnover. This was earlier announced during the demonetisation period and also by way of a press circular and so was anticipated by most people.
- The addition of a penalty for the late filing of income tax returns has been another good addition. The Government has prescribed a late filing fee of Rs 5,000 for delay up to December 31 and Rs 10,000 for further delay.
- Section 79 of the Income-tax Act, 1961 now allows the carry forward of losses of a company for seven years and then set-off against profit of future years. This makes a lot of sense and is definitely a huge positive keeping in mind the changing landscape of the Indian startup ecosystem as well as multiple buyouts and takeovers that keep taking place.
- When an entity shows profit in its Profit & Loss account but ends up being in a loss after tax deductions, they are required to pay something known as MAT (minimum alternate tax). Finance Minister Arun Jaitley has allowed companies to carry forward their MAT to 15 years from the current 10 year period, giving them an additional five years before they are liable to pay MAT.
What we thought the Government could’ve done better:
- Well, we definitely think the Government would’ve done all of us a favour by completely abolishing MAT (minimum alternate tax) for startups.
- Startup Investment should ideally have been taxed at par with listed equity.
- There was absolutely no mention of the removal of Angel Tax in this year’s budget which could be harmful for many startups.
Our overall verdict:
We were definitely very happy about a few of the benefits; the reduction of the Corporate Tax to 25% being a major one. We feel that the announcements in this year’s Budget definitely do help. However, they certainly aren’t transformative and probably won’t lead to any kind of an exponential impact. Staying true to their Digital India drive, this year’s budget is a technology centric one which gives priority to the digital economy. For example, the Bharat net project, where the Government will spend around 10,000 Cr in order to providing high speed internet and WiFi hotspots in rural areas. This will indirectly boost digitalization and better access to internet based services in these areas. Another big announcement was the creation of a innovation fund for secondary education in order to boost local innovation. These two points will not directly impact startups but they will definitely play a major role in fostering more entrepreneurs across the country.