Union Budget 2017 for Startups

The much-awaited Union Budget 2017-18 seems to have maintained a right balance between populism and fiscal prudence. However, a few sectors like insurance and e-commerce felt disappointed as they hardly found a place in it.

The much-awaited Union Budget 2017-18 seems to have maintained a right balance between populism and fiscal prudence. However, a few sectors like insurance and e-commerce felt disappointed as they hardly found a place in it. With an agenda to Transform, Energize and Clean India, the budget of this year focused primarily on the long-term benefits of the country.

The formal inauguration of the “Startup India” campaign last year and the demonetization drive followed by an aggressive push towards digital economy made the start-ups and SMEs to expect highly from the upcoming budget. Though most of their expectations remained unfulfilled, a few measures have been taken, which can be quite beneficial for the startups.

Let’s see what the Union Budget 2017 has offered to incentivize and encourage start-ups in India.

Timeline for Tax Break Enhanced to 7 Years

Under tax concessions for startups, a new policy is implemented in which the profit-linked deductions are extended from 3 years out of 5 years to 3 years out of 7 years. Most startups struggle to earn profits in the first few years after coming into operation.

However, we expected that the tax exemption period should have been extended from current 3 years to at least 7 years. It is observed that startups begin to experience growth after the completion of initial 1000 days. So, if the government had lifted the tax burden for at least 7 years, it would have been beneficial for the startups to create room for more growth.

Timeline to Claim MAT Credit Extended to 15 Years

MAT (Minimum Alternate Tax) is the minimum amount of tax that a company has to pay irrespective of its size and turnover. The amount of MAT a company pays depends on the registered book profit of the company (20% of the book profit). However, a book profit may be different from the net profit of the company as it doesn’t take into account certain deductions or exemptions. Therefore, in many cases, even if a startup is making book profit, it may incur net losses too. So, we expected the government to exempt startups from the MAT at least for 5 years.

Contrary to our expectation, no measure to relax the MAT limit is taken by the government. Instead, the timeline to claim MAT credit has been extended to 15 years. Till now, the MAT credit could be carried forward up to the 10th assessment year. Though tax experts welcomed the move, but it would have been better for startups growth, had the government abolished or at least reduced the rate of Minimum Alternate Tax (MAT).

The Condition in Respect to Carry Forward of losses Relaxed

Currently, the startups must have a continuous holding of 51% voting rights in order to carry forward losses. This condition has been relaxed in the budget 2017. From now onwards, in order to carry forward losses, only the founder(s) need to hold shares.

A company is allowed to carry forward losses for up to 7 years and then set off against profit after 7 years. But the carry forward of losses was allowed only if there was 51% shareholding intact in the period of loss. However, recently, with an increase in investments and buy-outs, the startup ecosystem experienced significant changes. So, this measure taken by the government is indeed beneficial for the startups.

What Else We Expected but Didn’t Come True

Most startups provide ESOPs or Employee Stock Ownership Plan to their employees additionally with their salary. ESOPs are beneficial as the startups do not earn much profit in the initial years. Hence, ESOPs are provided to compensate for the low amount of salary the employees receive. But as the company grows and the employees want to liquidate the ESOP, a significant amount goes out as tax at the time of selling out the shares. Therefore, we expected that ESOPs will be made tax-free in the hand of employees. Unfortunately, no such measure is taken by the government to incentivize on the practice of giving ESOPs for the financial benefit of the startup employees.

Moreover, currently, any capital gain arising out of shares held more than a year is tax free, if STT is paid even at the time of selling shares. But in the budget, it was announced that Long Term Capital Gain benefit can only be claimed if STT is paid at the time of acquisition of shares. This will have a negative impact on the start-ups which are going to be listed in the coming years.

Conclusion

The finance minister also made an announcement in the budget to abolish FIPB. Instead, the government should have taken serious measures to strengthen FIPB in the direction of providing better funding to startups or new age companies.

Startups are the backbones of economic growth leading to more job creation in the country. Hence, more tax reforms and benefits were expected for the growth of startups in India.

VidyaSunil & Associates is into practice of Tax Complaince, Audit, Accounts , Corporate / Business Finance & Outsourced CFO Services.

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