What Budget 2017 meant for startups and MSMEs

Budget 2017 left much to be desired for the startups. The budget which focussed more on propelling the digital economy of the country gave some concessions to the startups while holding out on some of the major demands of the startup community.

Here are the top announcements concerning startups and Micro Small and Medium
Enterprises (MSMEs) made by the Finance Minister (FM) Arun Jaitley in Budget 2017:

Tax break
Partially conceding to the demands of the startups, the Finance Minister has increased the
period of profitlinked deductions available to the startups to seven years from the current
five years. However, the tax breaks is still only available on the profits made by startups for three years. Notably, this tax sop is only available to those startups which are recognised by the DIPP (Department of Industrial Policy & Promotion).

Minimum Alternative Tax
Although refusing to remove the Minimum Alternative Tax (MAT), as requested by the
startups, FM Arun Jaitley has allowed the companies to carry forward their MAT to 15 years
from the present period of five years. This provides the companies an additional five years before they become liable to pay their MAT.

Income Tax benefit to MSMEs
In order to give the Micro Small and Medium Enterprises a breather, the FM proposed to reduce the Income Tax for those companies with an annual turnover of upto Rs 50 crore to 25%. This gives the MSMEs a reduction of 5% from the current applicable rate of 30%.
This will benefit 96 percent (6.67 lakh) of companies in India at the expense of the government forgoing Rs 7,200 crore of revenue. The concession, hoped the FM, will give a platform for MSMEs to become more competitive vis a vis larger companies and will also enable firms to migrate to a company’s format.

Carry forward of losses For the purpose of carry forward of losses in respect of startups,
the condition of continuous holding of 51% of voting rights has been relaxed subject to the condition that the holding of the original promoter/promoters continues.

Asserting that the Budget provides a ‘big relief’ to the MSME sector, Union
Minister Kalraj Mishra today said announcements like the lowering of income tax for smaller firms and doubling the lending target under MUDRA Yojana will benefit small entrepreneurs in the country.

Observing that smaller firms had “faced difficulties” post demonetisation, Mishra told PTI that the move to slash income tax for firms having turnover up to Rs 50 crore will provide a “big relief to the MSME sector”.

Mishra said the announcement to double the lending target to Rs 2.44 lakh crore under the
Pradhan Mantri Mudra Yojana for 2017-18 will immensely benefit the small entrepreneurs.
The minister said the government’s thrust on skilling youth and enhancing their employability potential will provide a skilled workforce to the micro, small and medium enterprises.
Finance Minister Arun Jaitley today reduced the income tax for smaller companies with
annual turnover up to Rs 50 crore to 25 per cent, to make MSME companies more viable
and also to encourage firms to migrate to company format.

Unveiling the budgetary proposals for 2017-18, Jaitley said: “As per the data of assessment year 2015-16, there are 6.94 lakh companies filing returns, out of which 6.67 lakh companies fall in this category. Therefore percentage wise, the 96 per cent companies will get the benefit of this lower taxation”.

Observing that the Pradhan Mantri Mudra Yojana has contributed significantly to funding the unfunded and the underfunded, Jaitley said:

“Last year, the target of Rs 1.22 lakh crores was exceeded. For 2017-18, I propose to double the lending target of 2015-16 and set it at Rs 2.44 lakh crores. Priority will be given to Dalits, Tribals, Backward Classes, Minorities and Women”.

According to the Ministry of Micro Small and Medium Enterprise’s (MSME) Annual Report
2015-16, the sector has shown an impressive growth of 18.74% during 2015 (April to
September).

The ‘Startup India’ initiative announced by the government on 15 August 2015
is aimed at fostering entrepreneurship and promoting innovation by creating an ecosystem that is conducive for the growth of startups, in the country. The initiative is expected to provide momentum to the growth of MSMEs in India.

While the government has made significant efforts to push MSMEs in the forefront, there are few development areas which require immediate attention. The MSMEs today continue to deal with core business challenges including high interest costs, ability to raise adequate working capital (specially new age businesses), and most importantly ease of doing business in the context of administrative complexities. Further, multifold
regulatory compliances take significant entrepreneur time away from businesses.
Here are key focus areas that can support the MSME sector to focus on business:

Simple compliance procedures
The country’s complex tax and regulatory compliance norms do not support the growth of MSMEs. These regulations require substantial time and efforts along with increased compliance costs being incurred by startups and MSMEs. The focus should be on simplifying regulatory compliances relating to various filings pertaining to direct and indirect taxes and the Ministry of Corporate Affairs (MCA) filings along with various state specific compliances. Further, compliance norms should aim at reducing the need for interactions with regulators and administrative machinery.

Ease working capital lockup in taxes An exemption for payment of advance taxes and flexibility to pay taxes once a year could be an alternative which the government may
consider for MSME sector. Faster completion of tax assessments and refunds could also be a great initiative to boost working capital requirements.
It is time that tax rates are aligned to global developments; significant reduction in tax rates and increase in tax slabs could ease cash
flows and help reduce burden of interest costs on SMEs.

Encouraging investments
It is important for SMEs to stay agile and upbeat with technological advancements. This will require them to invest in new markets, technologies, research and development, and training for skill development. The Government’s ‘Make in India’ initiative was launched with an aim to boost industrial growth and make the country a global manufacturing hub.
The SME sector can support the nation’s need to generate significant employment across sectors and provide necessary growth in GDP.

Enabling entrepreneurship is key and above changes can energise the sector tremendously.

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