While India is reporing a 6% plus growth rate, we must take into cognizance 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 in multiple regions of the nation.

In the Union Budget for 2016-17, there seems to be a conscious effort to make structural changes in the contours of the national economy, be it fast tracking of infrastructure projects, irrigation, highway or deep sea exploration, empowering the rural panchayats (Rs. 287,000 crores has been sanctioned), aiming to double farmer income by 2020 or promoting new manufacturing companies.

The digital literacy mission that has been announced will target 6 crore households with financial literacy. With this, the digital connect and payments connect will play an important role.

Statutory status to Aadhaar awarded in this budget will play a very big role in promoting digital payments, social benefit transfers and will allow several services beyond banking & insurance such as government subsidies and payments.

Specifically for startups, the budget has a number of provisions that aim to provide an impetus to thus fast growing sector.

Unleashing the entrepreneurial spirit

The news for start-ups is  encouraging. The Start Up India Scheme for SC/ST entrepreneurs has secured a budgetary allocation of Rs 500 crores. An SC/ST Hub is to be set up in MSME Ministry. Similarly, entrepreneurship education and training (online courses, mentoring) will be provided in 2,200 colleges, 300 schools, 500 government institutes and 50 vocational training centres.

The government has 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.” This is a restrictive provision which will preclude a lot of deserving start-ups from tax benefits 

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 .

Imposition of MAT on start-ups will not allow the full impact of the benefits to be realized.

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 lakh
Book Profit as per Companies Act: Rs 25 lakh
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 lakh (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

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.

The provisions will also give an impetus to large scale manufacturing. 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 has also been announced. 
The benefit, albeit marginal, will provide marginal boost to early stage and manufacturing based start-ups

Other key points

The Companies Act will 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. These are positive moves.

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 is also set to amended to enable entrepreneurship in the road transport sector.

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