As per the recent industry survey, Indian Economy is sought to be the most attractive market by international investors as it provides one of the best market and opportunities for products and services in every strata of the society given the diversity.
With the growing entrepreneurship in India, the industry felt that the finance minister would have a lot in store for Start Up’s and Small and Medium Enterprises (SME’s).
However, Budget 2017 looked to be more restrictive than progressive.
The few cheers that we got from SME’s/ Start up’s didn’t seem to last long. The ones which made them excited were:
1. Reduced Rate of Tax
The proposed tax rate for companies having a revenue of less than 50 crores have been reduced to 25% from 30%.
This is something which would have a huge impact on the SME sector and it may also encourage them to book all the revenue as against the debatable practice of under disclosing income.
2. Elegible start ups to get increased tax holiday
As per the provisions of the Income Tax Act, an eligible start-up can avail a 100% profit linked tax holiday for a period of 3 consecutive years out of initial 5 years from incorporation. The period of 5 years has been increased to 7 years in the budget.
Eligible startup has a restrictive definition and needs to fulfill the below mentioned:
- Company or Limited Liability Partnership
- Incorporated between April, 2016 and March 2019,
- Turnover does not exceed Rs. 25 Crores in any of the year from April, 2016 to 31st March 2021,
- It holds a certificate of eligible business from the Inter-Ministerial Board of Certification
3. Carry Forward of Losses:
As per The Act, where a company is a closely held company,carry forward of tax losses in the following year is not allowed in case there is achangeof 51% or morein the shareholding carrying voting rights.
This provision was causing a genuine hardship for the start-ups as this becomes an important point of valuation and negotiation, but since there were no clear guidelines, utilisation of losses was not considered.
In the budget it has been proposed to relax the contents of this provision for eligible start-ups, provided all shareholders who held shares with voting rights on last day of the year in which losses were incurred, also hold such shares on the last day of the year in which the losses are to be set-off; and the loss was incurred during first 7 years from date of incorporation.
4. Presumptive Tax rate
- Small business with turnover upto INR 2 Crores are allowed to opt for payment of tax on a presumptive basis (with no requirement of maintaining books of accounts or audit) where 8% of the turnover is taken as taxable income.
- It is proposed to reduce the tax rate from 8% to 6% to the extent turnover constitutes payments received by way of account payee cheque/draft/electronic clearing system.
Though the above were welcome changes, they didn’t seem to be enough. There was a lot of expectation on few critical points which seem to have been ignored by the Finance Minister. I have enumerated below few which might have made a difference:
5. Abolition of MAT
The current MAT rate comes to approximately 20% for companies having book profit. This has been a major point of debate for SME’s as there is not much difference between minimum rate and the maximum rate. The SME’s were stronly expecting the reuction of the current MAT rate. Though the utilisation period of MAT has been increased, but it serves only half the purpose.
6. No Clarification/ Abolition on section 56(2) (viib) or Section 79
There was a lot of discussion as to why section 56(2) (viib) or Section 79 should be abolished altogether as it is verty ambigous and it taxes the very basis of funding in a start up. However to everyones disappointment nothing was discussed about both these sections in the budget.
7. Abolition of capital gains on start ups
This was the most wishful demand of the start up community as it was expecting capital gains for startups to be either brought down to a nominal rate or abolished itself. The premise for the same was that since since people investing in startups are exposed to a lot more risks, it is unfair to allign the tax rate with capital gains made from listed companies.
Since the start up community is the ones which most allign with the governments vision of Digital India, it would be wise to look at their demands much more seriously, so that they are encouraged to devote most of their time and energy in doing innvoation. Compliances for them should be simple and transparent.
(This article is authored by Kapil Nayyar and Kriti Gupta).