The annual big day for the businesses, stock markets and the tax professionals came and went this year with the Union Finance Minister, Shri Arun Jaitley, presenting his Union Budget proposals on February 1 this year.
In many ways, this years’ budget was a path-breaking one.
This year’s budget was presented after a massively disruptive policy of demonetization, and there was widespread expectation that the budget would be business friendly. There is an upbeat mood among the business community as they felt that the budget scored more hits than misses. Unmistakably, the budget was somewhat lenient on smaller and new businesses.
Small Businesses are the Biggest Job Creators and Their Tax Burden will be Lower
The MSME sector is the biggest creator of jobs in India as we are faced with the challenge of growth in GDP with low job creation. But the tax compliance is a painful exercise for them. Most of these companies are not equipped to undertake sophisticated tax planning. Running the business itself is tough, and the owners and top managers shuffle multiple roles like marketing, HR, purchase, etc.
As a result these companies actually pay far more tax in terms of profit percentage (about 30%) than the top corporates who pay about 25%. The budget addressed this issue and brought down the tax rate to 25% for all such companies below Rs 50 crore annual revenue. It is expected that with a little more at their disposal, these companies will have some extra resource to fund their growth. These companies constitute almost 96% of all the startup companies.
Reductions in Direct Tax Rates will Stimulate Demand
Subsequent to demonetization, there was widespread demand reduction in many industries, especially in the unorganized sector. In the lowest slab up to Rs 2.5 lakh, tax rate is reduced to 5%. Tax burden for individuals earning less than Rs 50 lakh annually will also be reduced. Personal income tax reduction in the lower slabs will definitely help to stimulate demand to some extent. More cash at the hand of the individuals as well as small businesses will surely help them to buy more products and services; some of the beneficiaries will be startup businesses.
Tax Holiday Benefit Enhanced for Startup Companies
The policy on tax concessions for start-ups and said firms incorporated after 31 March 2016 could now avail of a three-year tax holiday in the first seven years of their existence. Of, the benefit will be availed of by businesses which are approved by the Department of Industrial Policy and Promotion (DIPP). The rebate could earlier be availed in the first five years.
The change is, however, likely to provide only minor relief to start-ups. Stakeholders had requested either removal of the incorporation date criterion or increase in the concession period. Most start-ups are not able to achieve profitability in the first few years of existence. Only 8 start-ups were allowed to avail the tax rebate in 2016 out of 111 applications received, according to data on the Startup India website.
There is some more relief with respect to Minimum Alternate Tax (MAT). While the industry expected exemption from MAT for the startups, it has accepted the provision to allow MAT credit to be carried forward from 10 years to 15 years as a positive step forward. However, there was no mention of Rs 10,000 crore fund set up under the Startup India program. The expected removal of Angel Investment Tax was also a massive dampener.
More than tax sops and minor policy tweaks, the startup businesses actually need some giant steps by the government to make it far easier to do business in India. After a lot of noise from the government, India is ranked quite poorly at 130 out of 190 nations.
Author: Dipankar Dutta advises businesses on marketing strategy and implementation through digital channels and is Director of Excelligent Infotech Pvt. Ltd.