2017 marks a brave new frontier for the Indian economy. With demonetisation, a mammoth step to curb tax evasion and counterfeit currency as well as the GST, promising to unite a nation of 1.2 billion under one common market,  the nation took historic measures to boost innovation, investment and productivity. The eagerly awaited Union Budget reinforced these notable economic overhauls by awarding specific tax benefits to Indian start ups.

Lower corporate income tax

• According to the previous budget MSMEs (micro, small and mid-sized enterprises) were subjected to pay 30% in annual corporate income tax.
• The new budget cuts corporate income tax for MSMEs (micro, small and mid-sized enterprises) listed as domestic private limited companies by 5% to 25% starting from FY 2017-18. The lower tax bracket applies to all such companies with gross turnover of up to INR 50 crore in FY 2015-2016.
• Broadly heralded as the most significant of all budget revisions, this tax cut is expected to benefit 95% of an estimated nine million businesses in India. Although it is intended for MSMEs, the generous reduction will spill over to benefit partners, collaborators and customers of Indian start-ups.

Time extension for income tax exemptions

• A previous provision under Section 80-IAC of the Income-tax Act, 1961, permitted start-ups 3 out of 5 years of tax exemption on profits.
• As per the new budget, start-ups incorporated after 1 April 2016 and reporting turnover of less than INR 25 crore can now choose 3 out of 7 profit-deductible years.
• Considering that most young businesses require several years to turn steady profits, the extension relieves nascent companies of a heavy burden, offering essential support during their most crucial years.

Extension on Minimum Alternate Tax (MAT) credits

• Although start-ups will enjoy an extended tax exempt period, the government will continue to accrue a 20% minimum alternate tax (MAT) on reported profits.
• To offset this caveat, the Union Budget extends the availability of MAT credits by 5 additional years, to 15 years.
• Despite the extension, MAT remains a source of disappointment to many who hoped it would be abolished altogether. The extension is, however, a positive step that allows the government to phase out the MAT over a seven to ten year period during which time existing availers will exhaust its exemptions.

No shareholding restrictions to carry forward losses

• A previous provision, under Section 79 of the Income-tax Act, 1961, stated that start-ups could carry forward losses for seven years and then offset those losses against future profit. However, this benefit was invalidated if the original promoter did not retain 51% equity stake in the year losses were carried forward and in the year they were off-set.

• In a dynamic environment of increased investments, diversely structured buyouts, mergers and acquisitions, shareholdings are anything but static. The Union Budget, therefore, revises these outdated obligations for all startups recognised under the Startup India policy and eligible to claim benefits of Section 80-IAC.

• Start-ups with an active founding member that have faced significant changes in shareholding can now carry forward losses at 100% tax exemption for up to eight years.

Amendments towards ‘ease of doing business’

• The Budget strongly motions towards a ‘Digital India’ through key actions like establishing the CERT (Computer Energy Response Team) to bolster cybersecurity, thereby curbing digital fraud and promoting consumer trust in web-based transactions that will boost e-commerce sector sales and reduce logistics costs to digital firms.

• Customs and excise duties are slashed or abolished altogether on a long list of chemicals and commodities across the board, signalling multi-tier cost relief to manufacturing companies.

• Finally, the budget dissolved the Foreign Investment Promotion Board (FIPB) – a two-decade old inter-ministerial liaison that sorted through Foreign Direct Investments (FDIs) and parsed recommended proposals for government approval. Now, FDIs are funnelled through a more transparent and efficient approval process, further incentivizing undecided investors to place their bets on India.  

References:

1. Economic Times
2. The Hindu
3. Financial Express

Tags: budget, india, startups