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Budget 2016 : How Arun Jaitley invests in Startups?

Finance Minister, Arun Jaitley entered the Parliament on 29th February with his briefcase that held the economic fate of the nation. It carried a set of documents that explained revenues, taxes and expenditures by the Central Government for the coming year. With all eyes set on the Budget, a part of the attention came from the budding world too. Our country is home to over 18,000 startups, making it the third largest in the world after the US and England. Hence, their fate lied in the words of the money man.

Our government realizes that funding is a major issue when it comes to seed ventures. And with this, they launched the ‘Startup India, Stand up India’ campaign on the 16th January 2016; keeping in view an action plan to promote bank financing for start-up ventures. To enhance their steps further, our Central Government has a few things more in store that can cheer up our inquisitive minds.

A start for the sequestered: The first step towards change – to set aside Rs 500 crore to help the scheduled caste, scheduled tribe and women to do better in business. This scheme also looks forward to facilitate at least two such projects per branch, one for each category of entrepreneur to boost benefit to 2.5 lakh entrepreneurs. The MSME ministry will be partnered with a National Scheduled Caste and Scheduled Tribe Hub to provide professional support and to leverage the initiative.

The exemption list : An icing on the cake came with the three year tax holiday for Startups. Sticking to the fact that startups generate employment, foster innovation and are the prospective partners to the ‘Make In India’ programme; the budget speech declared to assist their propagation by 100% deduction of taxes on profits for three out of five years for start-ups set up between April 2016 and March 2019. The Moving Annual Total (MAT) at the rate of 18.5% of book profits (plus surcharge and cess) will still be applicable.

This proposal however, seems a bit of dampener. On one hand where some startups may shutdown to start new ventures again; the others who tend to incur losses for years would be scrutinised on their ‘book profits’ under MAT.

The dive of corporate taxes : To provide a fresh breath to to newly set up domestic companies in manufacturing (those set up on or after 1st March 2016), are provided an option to offer income at a concessional base rate of 25% (plus surcharge and cess). Moreover, tax rate applicable to small corporates having a turnover of Rs 5 crore or less in FY 2014-15 has been lowered to 29% (plus surcharge and cess). Other than these, no change in the tax rate is applicable to the corporates.

In the course of 2015, a similar measure was taken for mobile handsets to boost local manufacturing of phones. It drew a number of companies to assemble in India and the government is hoping the latest move to complement that.

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In the hands of the Lady Justice : The Ministry had constituted the Companies Law Committee in June 2015 for providing recommendations on the issues related to the Companies Act,2013. India recently leaped to the 130th position in the Ease of Doing Business. With an aim to improve this further, a bill will be introduced in the current session of the Parliament for facilitating registration of a new company in just one day and enabling a better environment for startups. Now that, is pretty quick.

As of now, it takes anywhere between 15 and 30 days for a company to get incorporated. It would be interesting to see if all steps ranging from Digital Signatures, Director Identification Numbers (DINs), Name approvals and Certificates of Incorporation can be done, all in just one day.

The LTCG dip : The long term capital gains tax has now been a barrier for a long time for startups. For a fact, listed companies do not attract LTCG beyond a holding period of 12 month, whereas, unlisted companies (read Startups and Privately held) companies attract 20% till a holding period of 3 years.

The good change to look out for is the reduction in the holding period from three to two years to get benefits of Long Term Capital Gain regime in case of unlisted companies. Another significant move in the Budget has been that Jaitley now allows non-banking financial companies deduction to the extent of 5% of its income in respect of provision for bad and doubtful debts. He also added that determination of residency of foreign company on the basis of place of effective management (POEM) will be deferred by one year and reiterated commitment to implement General Anti Avoidance Rules (GAARs).

The Reconstruction of Assets : To attract more investment in Asset Reconstruction Companies (ARCs), which play a huge role in resolution of bad debts, a complete pass through income-tax to securitization trusts including trusts of ARCs has been proposed in this Budget. The income will be taxed in the hands of the investors instead of the trust. Arun Jaitley has constructed a go-to situation for startups indeed.

To Learn and Relearn : Laying out the objective of skilling one crore youth over the next three years, the Budget declared a raft of measures including setting up 1,500 multi-skill training institutes and National Board for Skill Development Certification. Unveiling the nine pillars that would transform the country, ‘education, skills and job creation’ proved to be one of them.

The Finance Minister proposed to exempt service tax on services provided under Deen Dayal Upadhyaya Grameen Kaushalya Yojana and services provided by Assessing Bodies empaneled by Ministry of Skill Development and Entrepreneurship.

Fulfilling the nine pillars, entrepreneurship education and trainings will be provided in 2200 colleges, 300 schools, 500 ITIs and 50 vocational institutes through massive online courses. Budding entrepreneurs, particularly from the rural areas will now be able to connect to mentors and grasp knowledge at ease.

Though all these initiatives provide stupendous expectations for pioneering institutions, it is all easier said than done. With the current economic slowdown and fiscal crisis in picture, the planned expenditure is estimated to be Rs. 5,50,010 crore, proving significantly higher than last year. In a birds eye view, the budget is a mix bag of goodies and its impact on reviving the Indian economy will be seen only with time. Undoubtedly, Arun Jaitley has his mind set in the right direction. But, does the implementation of these steps happen in the coming year? That is the real question.

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