India’s 2016 Union Budget Unleashes the Entrepreneurial Spirits

Go Entrepreneurial @ Union Budget

As we gear ourselves to dissect the anatomy of Mr Jaitley’s budget speech, we must take into cognisance the negative headwinds in the background, be it the global economy (global trade shrank 4.4% last year), Indian politics (stalemate on the GST and Insolvency Act) as well as the drought like weather conditions

The world is predicting that it is India’s chance to fly; that our nation is one of few bright spots on the stuttering global economic landscape

In this Union Budget, we @ Team noticed a conscious effort to make structural changes in the contours of the national economy, be it fast tracking of infrastructure projects, be it irrigation, highway or deep sea exploration, empowering the rural panchayats with Rs. 287,000 crores, aiming to double farmer income by 2020, promoting new manufacturing companies. The government has expressed its commitment to a lower tax regime with non-litigious framework. This in effect will lead to a more vibrant demand ecosystem for start-up products and services

Unleashing the entrepreneurial spirit

The specific pointers for start-ups have been quite encouraging. Start Up India Scheme for SC/ST entrepreneurs has secured budgetary allocation of Rs 500 crores. SC/ST Hub to be set up in MSME Ministry. Similarly, entrepreneurship education and training (online courses, mentoring) will be provided in 2200 colleges, 300 schools, 500 govt. it is and 50 vocational training centres.

Fund raising

Under the ‘Start Up India Action Plan’, the proposal is also to establish a ‘Fund of Funds’ which intends to raise Rs 2,500 crore annually for four years to finance the startups.

The Budget also proposes to insert a new Section 54EE to provide exemption from capital gains tax if the proceeds are invested in units of such specified fund, subject to the condition that the amount remains invested for 3 years failing which the exemption shall be withdrawn. The investment in the units of the specified fund shall be allowed up to Rs 50 lakh.

 Go Digital

The digital literacy mission that has been announced which will target 6 crore households with financial literacy, with this the digital connect and payments connect will play an important role. Also, statutory status to Aadhaar will play a very big role in promoting digital payments, social benefit transfers and allowing several services beyond banking & insurance be it government subsidies/payments.

New patent regime

To promote innovation, a special patent regime has been proposed with a 10% rate of tax on income from worldwide exploitation of patents developed and registered in India

Tax holiday for 3 years

One debatable point is that start-ups approved before FY2019 under the Start-up India scheme will get 100 per cent tax exemption for three years over a period of five years .

  1. Imposition of MAT on start-ups will not allow the full impact of the benefits to be realized.
  2. The government has strictly defined the term ‘Start-up’ as “a company which would 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.”We feel that this is a restrictive provision which will preclude a lot of deserving start-ups from this benefit either because they are bootstrapping or have not been able to secure funding yet. While certainly there have to be safeguards built into the tax codes for qualifying start-ups, we feel there could be audited turnover or profit criteria

Nevertheless, for qualifying start-ups, the numbers stack up as follows

Let us consider a hypothetical case for a funded start up

Turnover Rs 1 crore

Net profit as per Income Tax Act– Rs 30 lacs

Book Profit as per Companies Act– Rs 25 lacs

Tax liability as per normal provisions – Zero (since 100 per cent exemption applicable)

Tax liability as per MAT Rules u/s 115JB – Rs 4.625 lacs (18.5% on book profits)

This MAT paid can be carried forward and utilised where tax liability as per normal provisions exceeds tax liability under MAT rules

Lower tax rates  

New manufacturing firms from March 1, 2016, shall be taxed at 25% (plus cess and surcharge). However this is provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.

Corporate tax rate at 29% for companies with turnover less than Rs 5 crore

The benefit, albeit marginal, will provide marginal boost to early stage and manufacturing based start-ups

Other key pointers

  • Companies Act to be amended to ensure ease of doing business. Registration of a company will take no longer than just a day under the Government’s 1 Day Incorporation Policy.
  • Relaxation in capital gain tax for investment in Funds of Funds and reducing the time frame to two years from three for availing long term capital gain tax benefit in the unlisted space will further boost the investment in start-ups
  • To maintain competitive parity with shopping malls, Small and medium sized shops also would be allowed to be open for 7 days a week under the proposed amendment of Shops and Establishment Act
  • Motor Vehicles Act to be amended to enable entrepreneurship in the road transport sector.
  • Besides, to tap tax on income accruing to foreign e-commerce companies from India, the Budget proposes a person making payment to a non-resident without a permanent establishment to withhold tax at 6% for amounts exceeding Rs 1 lakh in a year for online advertisement. This “equalisation levy” will only apply to B2B transactions.

About the author

Sonia Singal, is a CA and MS-Finance. Her start up is India’s first recruitment website exclusively for CA, CS, CWA and MBA (Finance)