Budget 2016 – 10 Important Things That Startups Must Know

Update – Read about 5 Key benefits announced in Budget 2017 for startups.

When finance minister, Arun Jaitley was about to open his ‘Goodie Bag’ while presenting the union budget 2016, expectations from the startup community were sky high. In order to boost small business and MSME sectors, Mr. Jaitley announced various schemes and policies in sync with the Startup Indian Action plan announced previously by PM Modi. Apart from giving 100 per cent tax deduction for three years and allotting Rs 500 cr fund for Women and SC/ST entrepreneurs, he also revealed some more positive strokes for these sectors.

Lets see the highlights of budget 2016 that are important to startups..

1) Three Year Tax Holiday For Startups.

Startups can now enjoy 100 per cent tax exemption for the first three years (except MAT). Finance minister announced 100% deduction of profits for startups adhering to certain conditions Make in India Policy. “I propose to assist their propagation through 100% depropagation through 100% deduction of profits for three out of five years for startups set up during April 2016 to March 2019. MAT (minimum alternate tax) will apply in such cases.” Arun Jaitley said.

MAT has its own way of calculating taxation. MAT takes “book profit” in to account for taxation. Book profit is basically profit made (shown in P&L) and it disallows certain deductions which companies make before they arrive at net profit (or loss). In many cases, start-ups may be making book profit, but could incur net losses.

Industry trackers say that this could set in motion some events. Where on one hand some start-ups may try to shut shops and re-register as new ventures, to get benefits of a three year tax holiday period. On the other hand, these start-ups who tend to incur losses for years would be scrutinised on their “book profit” under MAT, even when they may have incurred net losses.

2) Change In Duty Rates To Boost Manufacturing

Carrying forward the process initiated in the last Budget, the government has scrapped excise duty on inputs, parts and components, and subparts for the manufacture of charger or adapter, battery and wired headsets or speakers of mobile phones.

Besides, parts and components, and subparts for the manufacture of routers, broadband modems, set-top boxes for Internet and TV access, digital video recorders and lithium-ion batteries also will not face any duty, compared with as much as 12.5% earlier.

Last year, a similar measure was taken for mobile handsets to boost local manufacturing of phones. It drew a number of companies to assemble in India and the government is hoping the latest move to complement that.

New manufacturing firms from March 1, 2016, shall be taxed at 25 per cent (plus cess and surcharge). No further exemptions shall be available for new companies if taxed at 25 per cent. The erstwhile flat corporate tax rate was 30 per cent (plus cess and surcharge). This shall be an immense motivator to manufacturing startups from the initial years of establishment of production unit to post production phase. The investments on capital expenditure are huge, and a five per cent curtail in tax payable shall allow such funds to be routed in more capital infusion expenses.

Further, companies with a turnover of less than Rs 5 crore per year shall be taxed at 29 per cent (plus cess and surcharge). All startups that had started from scrap and are now popular unicorns had been through the phase of breaking even, and for most of them, break even has been possible somewhere at a turnover of Rs 4–5 crore. A tax relief to the startups at this critical phase had been looked upon and strongly expected from the New Government, and now it is here to stay and benefit for sometime.

3) Small Bag Of Goodies For Importers

There is an attempt at simplification and rationalisation of taxes in a move that will also give some respite to importers. For example, importers with good track record will be able to make deferred payment of customs duty. The government also proposes to roll out single window clearance for importers from key ports from coming financial year. Importers will not need separate clearances from various authorities such as plant quarantine.

4) Service Tax Changes In Budget 2016

There are several changes in the service tax legislation which are expected to impact trade and industry.

The effective rate of service tax will go up to 15 per cent from June 1, due to the introduction of the Krishi Kalyan Cess (KKC) at 0.5 per cent on the value of taxable service. It is good to note that this cess would be creditable, unlike its earlier peer the Swachh Bharat Cess.

There has been a conscious effort to rationalise the abatements in service tax to uniform levels, which is expected to bring simplicity in service tax computation. However, confusion between “goods” and “services” for online downloads has not been cleared because of which foreign entities continue to sell their products without paying any taxes.

Service tax on services provided under Deen Dayal Upadhyay Grameen Kaushalya Yojana and services provided by Assessing Bodies empanelled by Ministry of Skill Development and Entrepreneurship are proposed to be exempted.

5) Presumptive Tax Scheme For Small Businesses

This scheme covers small businesses with gross turnover up to Rs 2 crore – up from the existing ceiling of Rs 1 crore. It has also been extended to professionals with gross income up to Rs 50 lakh.

So what exactly is presumptive taxation? As per Section 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account. However, a person adopting the presumptive taxation scheme can declare income at a prescribed rate of 8% and, in turn, is relieved from the tedious job of maintaining books of account. However, in case income earned is at a rate higher than 8%, then the higher rate can be declared.

With the inclusion of professionals, a new Section 44ADA is proposed to be inserted in the Act to provide for estimating the income of an assessed who is engaged in any profession referred to in sub-section (1) of Section 44AA such as legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration or any other profession as is notified by the board in the official gazette and whose total gross receipts does not exceed Rs 50 lakh in the previous year. For the purpose, 50% of the total receipts of the professional during the financial year will be considered as profit and get taxed under the income-tax head “profits and gains of business or profession”.

To further keep the compliance burden minimum, those using presumptive taxation scheme are also allowed to pay advance tax by March 15 of the financial year, as against the normal practice of paying the advance tax in four installments. However, the taxpayer needs to be careful when opting for this as he or she has to remain in that scheme for 5 years to avail the benefits.

6) Employee Provident Fund

The Government will pay EPF contribution (employer’s contribution) of 8.33 per cent for all new employees for first three years, which shall save straight 12 per cent cost for the startup companies and provide security benefits to the employees.

Formally, the employer was required to pay minimum 12 per cent of basic salaries of the employees to EPFO as employer’ contribution towards EPFO, which was in the nature of a direct component of staffing costs for the company. With this relaxation, we are expected to see startups registering their companies with EPFO on a voluntary basis in order to provide the same facilities to their employees without incurring any cost for the first three years, and moderate the challenges of efficient team making in a newly established business.

Startups often fail to hire talents due to the inherent mindset of insecurity and job consistency. With a PF registered entity, this mindset is bound to change.

7) 80GG Deduction Increased By Rs 36,000/annum

The FM also provided relief to those living in rented houses by raising the 80GG deduction from Rs 24,000 to Rs 60,000. Since entrepreneurs of the startup community hail from different places of the country and need to relocate to proper business locations to yield value, this will be a huge impetus to them while planning their personal taxes.

8) Amendment in Companies Act, 2013

While presenting the Union Budget 2016-17 in Parliament, Financial Minister Arun Jaitely announced that the government will be updating the Companies Act to ensure conducive environment for start ups. The government aims to ease up the process of registration, and hopes to complete the procedures within one day. The announcement follows the government initiative to encourage entrepreneurship among SC/ST people in the country

9) Joy For Food Retail and Farm Produce Companies

In an unexpected move, the finance minister has announced FDI in food retailing. Since food is the largest category in retail in India, the move is a hopeful one – the government might just add other categories in the near future. However, this is just a budgetary announcement. It is up to the Directorate of Industrial Policy and Promotion (DIPP) to release the policy now.

More importantly, the Budget allowed a national online market for farm produce. So far, there were restrictions on farmers as the Agricultural Produce Marketing Committee Act let them sell only in designated mandis within the State. The National Agriculture Market policy of 2015 aimed to electronically connect all mandis and marketers so that traders can find prices from other States through this website, as well as bid and buy.

10) Capital Gains and ARCs

Long Term Capital Gain Tax has been the most debatable subject for the startup industry. While listed companies do not attract LTCG beyond a holding period of 12 month, unlisted companies (Startups and Privately held) companies attract 20 per cent till a holding period of 3 years.

However, in the recently proposed budget, FM has brought down the holding period from three to two years for unlisted companies to get Long Term Capital Gain. Another significant move in the Budget has been that Jaitley now allows non-banking financial companies deduction to the extent of 5 per cent of its income in respect of provision for bad and doubtful debts. Jaitley, also added that determination of residency of foreign company on the basis of place of effective management (POEM) will be deferred by one year and reiterated commitment to implement General Anti Avoidance Rules (GAARs) reports ET.

Other Key Benefits For Startups Announced In Budget 2016.

• Hub to support and escalate Scheduled Caste/Scheduled Tribe entrepreneurs.
• Rs 500 crore earmarked for SC/ST and women entrepreneurs under the Startup India scheme.
• Entrepreneurship to be taught through MOOCS – Massive Open Online Course. This will open up access to educational resources across the country.
• Motor Vehicles Act to be amended to enable entrepreneurship in the road transport sector.
• Capital gains shall not be taxed on investments in regulated fund of funds for startups.
• Long-term capital gains for unlisted firms lowered from three to two years.
• The FM also announced the setting up of a fund to raise Rs 2,500 crore annually for four years to finance startups.

Here’s how the Startup Ecosystem Reacted To The Budget 2016:

NASSCOM welcomed the Union Budget 2016, while terming it as a mixed bag for the sector. The budget reiterates the 7.6% GDP growth rate for the country and provides a slew of incentives for the rural, agricultural sector to enable inclusive growth. Mohan Reddy, Chairman, NASSCOM said, “Our wish list for Budget 2016 included three key priorities – policy bottlenecks including ease of business; nurturing start-ups, products and eCommerce sector; and clarifications on transfer pricing to enable inward investments in India. Budget 2016 only partially covers these priorities. Extension of Section 10AA for SEZ units till 2020 is a positive outcome though the imposition of MAT on startups will not allow the full impact of the benefits to be realized.”

Here’s what Siddhartha Roy, CEO of Hungama.com said- “The Union Budget 2016 has stepped in the direction to pave the way for rural digitization with a focus on digital literacy. The aim to connect 6 crore households will provide a stronger reach and deeper penetration for digital and technology driven services in rural India thus allowing residents a plethora of services. The digital literacy scheme announced by Mr. Arun Jaitley in rural India will not only give rise to increased manpower but also boost employment generation. The budget is an indication of the government’s resolve towards the Digital India scheme.”

Alok Saraf, Partner – Private & Entrepreneurial Group, PwC India, said, “This budget is a Budget for the MSME sector with various policy measures and tax incentives focusing on their needs. Policy measures on encouraging entrepreneurship, enhanced spending on rural development and infrastructure including on roads and railway, focus on developing one crore skilled workforce could be a big boost to the sector.”

Sharad Sharma Co-Founder & Governing Council member of iSPIRT, said, “Start-ups in the country will certainly benefit from the budget announcement of amending the Companies Act to announce easier and swifter registration of companies. Another positive announcement from the budget speech by Arun Jaitley has been the focus on Aadhar for subsidy delivery. The Aadhar powered India stack from authentication to execution, coupled with the open API policy in India, can certainly transform the way”

What do you think about the budget 2016?

Please feel free to share your views in comments section below.
Also read about Budget 2017 highlights.

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