Budget 2017: What does it mean for startups?

By Anusha Ashwin

BENGALURU: Forecasting about the Budget 2017, last week, Prime Minister Narendra Modi had stated that the 2017 Budget would be “futuristic”. Now that the Budget is tabled, do young entrepreneurs at startups agree? Is the Budget “futuristic”? Does it offer a sound footing for their startup ventures? Here are some quick bytes from established and budding startup entrepreneurs on the budget impact.

In the budget presentation, Union Finance Minister Arun Jaitley said that the income tax for small companies with annual turnover of upto Rs 50 crore is reduced from existing 30% to 25% in order to make MSME companies more viable and also to encourage firms to migrate to company format. This is considered as a welcome move at a time when India is still under the effect of demonetization.

“There was an expectation of an ‘across-the-board reduction in the rate’. Instead, a calibrated approach has been adopted and the reduction is only for companies with turnover of less than Rs 50 crore. I expect that there will be some safeguards against unnecessary arbitrage opportunities by splitting businesses,” says Abhishek Goenka, Partner Direct Tax at PwC India.

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Goenka gives a thumbs-up to the increased period for profit-linked deduction for 3 years out of 7 years, as start-ups are not expected to make profits for the first few years. “What the industry wanted was a 10-year period, but extension to 7 years from what was previously 5 years is nevertheless welcome. The exemption from MAT (Minimum Alternate Tax) has however, not been allowed, and an enhanced carry over period will not really help startups from a cash flow perspective. The proposal to allow startups to carry forward losses in spite of change in 51% of shareholding provided original promoter shareholding continues is a big relief and a welcome move,” he says.

As per data of Assessment Year 2015-16, there are 6.94 lakh companies filing returns of which 6.67 lakh companies fall in this category and, therefore, percentage-wise 96% of companies will get this benefit of lower taxation. According to the Minister Jaitley, this will make India’s MSME sector more competitive as compared to large companies. The revenue-foregone estimate for this measure is expected to be Rs 7,200 crore per annum.

Jaitley also stated that it is not practical to remove or reduce MAT at present. However, in order to allow companies to use MAT credit in future years, he proposed to allow carry forward of MAT upto a period of 15 years instead of 10 years at present. MAT is presently levied as an advance tax. Although the plan for phasing-out of exemptions will kick in from April 1, .2017, the full benefit of revenue out of phase-out will be available to the Government only after 7 to 10 years when all those who are already availing exemptions at present complete their eligible period.

For the startups, Jaitley has proposed income tax exemptions. The profit-linked deduction available to the startups for 3 years out of 5 years has been changed to 3 years out of 7 years.

Sandeep Aggarwal, Founder, ShopClues and Droom, classifies the Budget as a progressive economy budget. “The government has mentioned everything right from reducing fiscal deficit gap to cleaner GDP growth, expansionary nature of monetary policies to reducing the tax for income bracket of Rs 5 lakh. Profit linked-deductions for start-ups getting reduced to 3 years, out of 7 years is a big relief for the startup ecosystem. Until, last year government had given three-year tax holiday and MAT, which was going to expire by 2019 and now this has been extended to 7 years. However, there are many things I was hoping 2017 Union Budget to touch upon, for example, policies to ensure that capital is easily accessible to entrepreneurs, repatriation of money coming to India, R&D credit, no capital gain for any kind of start-up sale or exit and to make foreign listing for any Indian company straightforward. Those remain missing still.”

Dr Apoorv Ranjan Sharma, Co-Founder, Venture Catalysts, agrees. According to Sharma, it is indeed a progressive economy budget. “The deduction in corporate tax is a great boost for the companies with turnover of 50 crore or less. Besides, SMEs with turnover up to Rs 2 crore, will enjoy tax relaxation from 8% to now 6% tax rate. The move is going to waive off the financial burden, while propelling small merchants on their path to success,” he says.

Young entrepreneur Sakshi Vij, Founder & CEO, Mylescars.com, says, “The government’s focus on inclusion and encouragement of the MSME sector along with startups is visible. The increase in the profit linked deductions period to 3 out of 7 years is a welcome change for young startups like us. The exemptions proposed for the Indian entities with Foreign placed portfolio investments is also a step in the right direction.”

However, as startups and MSME sector in general is expected to, and will, generate a significant portion of employment and innovation, particularly required in this environment of global economic slowdown, there was definitely a lot more this budget could have done for this sector. “It was disappointing that startups did not receive more prominence beyond the 5% reduction in corporate tax,” opines Gopikrishna Lingala, co-Founder LeanSpoon, who believes that Jaitley could have offered more to startups.

According to Atul Rai, CEO and co-Founder, Staqu, a Gurgaon-based Artificial Intelligence Startup, the Union Budget 2017 does not provide any direct benefits to startups this year. Besides, the tax exemptions from capital gain are rather difficult to meet, at least in the early stage of 3-5 years for a startup. However, the newly announced exemptions for income tax for individuals and well-rounded push towards digital payments will ultimately increase the buying capacity, along with mobile phone utility. "These institutional changes, I believe, will push towards the growth of new age digital startups, albeit indirectly,” says Rai.

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Here is the full text of Finance Minister Arun Jaitley's Speech