The much awaited Union Budget 2016 has finally been unveiled by the Hon’ble finance minister (“FM”),expatiating on a series of policy initiatives and schemes that aim at encouraging startups and existing Micro, Small and Medium Scale Enterprises (“MSME”). They key objective of such schemes were to eliminate the common challenges startups come across, and ensure that MSMEs in the country get a fillip.
The union budget has several proposals and schemes to boost the government’s “Make in India” and “Start-up India” campaign. Some of the key proposals/schemes are highlighted below:
Tax deduction @ 100% of Profits for the 3 of first 5 years of Profits
Any start-upeligible under the Start-up India scheme established between April 1, 2016 and March 31, 2019, will be eligible for100% tax deduction for any 3 out of first five years of their establishment. However, MAT (“Minimum Alternate Tax”) would be applicable.To be eligible as a ‘Start-up’ under the above scheme, the business should involve innovation development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property. Further, the Start-up should have equity funding of at least 20% by incubation, angel or private equity fund, an accelerator or angel network registered with SEBI endorsing the innovative nature of the business.
In the past, tax holidays of similar nature provided to Software Technology Parks of India (“STPIs”), Special Economic Zones (“SEZs”) etc. have contributed to increased employment, productivity and growth of GDP. This proposalshould incentivise the start-ups for sure.
Exemption of LTCG on investment into eligible start-up
Investment of proceeds from sale of residential property by an Individual of HUF in the shares of eligible start-up are exempt from long term capital gains provided such individual or HUF holds more than fifty percent shares of the Company and such Company utilises the amount invested in shares to purchase new asset before due date of filing of return by the individual or HUF.
This proposal would assist in mobilising seed capital or Initial funding process of the start-up company and would be a positive sign for investor as well.
Reduction in Corporate Tax
New manufacturing companies incorporated on or after March 1, 2016 have been provided an option to adopt a reduced corporate tax of 25% plus surcharge and cess. In absolute terms, 27.55% (where the income exceeds Rs 1 crore but does not exceed Rs 10 crore) or 28.84% (where income exceeds Rs 10 crore) provided such companies do not claim profit-linked or investment-linked deduction or do not avail of investment allowance and accelerated depreciation.
This change is envisioned to provide the much needed boost to the manufacturing sector and the 'Make in India' campaign of the government, considering the capital-incentive nature of the manufacturing industries. However, the benefit of reduced rate may be of little help in the initial years. Thus, the companies may prefer to claim deductions and incentives which may result in reduced effective tax rate rather than opting for lower rate of tax.
Extension of tax holiday benefit for SEZs commencing activity before Mar 31, 2020
The benefit of section 10AA to new SEZ units will be available to those units which commence activity before 31.3.2020.The SEZs enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years thereafter and 50% of the ploughed back export profit for another five years.
On the SEZ issue, the industry has demanded to retain the tax incentives being enjoyed by these zones as their removal would hurt exports and employment generation. During April-September, exports from these zones stood at Rs 2.21 lakh crore as against Rs 4.63 lakh crore in 2014-15. About 500 proposals for SEZs have been formally approved by the government, out of which over 200 are operational. This proposal has been given yet another chance to the industries to setup/operationalize their units in SEZ.
Ease of Registration
Specific rules and processes are awaited by the stakeholders regarding proposals relating to amendment in Companies Act to improve enabling environment for start-ups.
Hub for SC/ST & Women Entrepreneurs
A hub has been setup to support SC/ST entrepreneurs. INR 500 Croresearmarked for SC/ST and women entrepreneurs under the Start-up India scheme. Further, entrepreneurship is proposed to be taught through Massive Open Online Course Scheme. This will open up access to quality educational resources to all section of people across the country.
Overall, the budget for start-up has met expectations of budding entrepreneurs. In addition to this, there are several proposals like increase of turnover limit from INR 1 crore to 2 crores for businesses claiming presumptive taxation, Positive changes in excise and custom duties, Mudra Yojanaetc, highlighted in the budget. However, there should be lot of thrust given by executive authorities for smooth implementation of the proposals and schemes to attain vision 2020 of the government for start-ups!