India has undisputedly established itself as a key startup hub globally. Driven by factors such as massive funding, evolving technology, and burgeoning consumer demand, it has attracted a significant amount of foreign investment. The evolution of startups has not only made the market competitive but has also created a huge employment opportunity and innovative technologies.
The startup community was expecting a booster package from the Finance Minister in the Union Budget 2021-22 to get them back on track from the COVID-19 shock and enable steep growth.
Here are some of the key expectations from the startup community and the proposals announced for startups therein:
Key expectations of startups from the budget
Increasing the threshold for incentivising startups
To avail tax holiday benefits, the turnover threshold is capped at Rs 100 crore. The startup community works on a high-volume model and there is a critical need for increasing the turnover threshold to support them in their growth story.
“Similarly, the threshold of share capital capped at Rs 25 crore for exemption from angel tax needs to be significantly raised if big-ticket investments were to be invited and more Indian unicorns created.”
Single point tax compliance for startups
Startups are burdened with a plethora of mandatory compliances. During the growth stage, such startups would not have budgets to hire large teams/consultants to manage these multiple compliances. Therefore, a single point compliance ecosystem for startups is the need of the hour to simplify compliances.
Inter-ministerial Board roadblock
Out of the total startups, only 319 startups have been recognised by the Inter-ministerial Board (IMB) as on December 2020. Incentives relating to angel tax, perquisite tax on ESOPs, and the aforesaid tax holiday are available only to IMB registered startups.
Therefore, expeditious startup certification from the IMB is an imperative and a restructured / efficient IMB was an expectation from the Budget.
What was delivered in the Budget?
Key Regulatory announcements relating to startups
Entities falling under the definition of ‘Small’ companies have a reduced compliance burden under the Company Law. ‘Small’ companies’ definition is proposed to be widened to include companies with paid-up share capital of up to Rs 2 crore and a turnover of up to Rs 20 crore.
– Further, the following changes are proposed for One Person Company (OPC):
- Allow Non-Resident Indians to set up an OPC
- Remove ceiling on paid-up share capital
- Flexibility for subsequent conversion to any other form of company
- Criteria for residency of a person setting up an OPC is reduced to 120 days
Key tax proposals for startups
Against the major expectations highlighted above, the Finance Bill 2021 proposed some relief:
– Extension of Tax Holiday for Startups ‘Eligible startups’ incorporated on or after April 1, 2016, but before April 1, 2021, were eligible to claim the tax holiday for any of the three consecutive fiscal years out of 10 years at the option of the taxpayer. The above sunset is proposed to be extended to April 1, 2022.
– Extension for the claim of capital gain exemption Capital gains from the sale of residential property up to March 31, 2021, are exempt if the proceeds are invested in the equity shares of an eligible startup (subject to conditions). The outer date of transfer of such residential property is extended to March 31, 2022.
– Scrapping of GST audit by Chartered Accountant The mandatory GST audit and certification by a Chartered Accountant has been dispensed with. Taxpayers are now permitted to self-certify reconciliation statements of supplies for GST purposes.
Hits and misses
In the run-up to the Budget, the hands of the government were tied in balancing COVID-19 related packages with depleting resources and fiscal prudence. Given this, one would appreciate that no additional taxes/compliances were introduced while providing for significant infrastructural investments and capital outlay. This will indeed enable growth and demand, and in turn help startups in their endeavours.
“The scrapping of GST audits, rationalising company law requirements, and extending tax holidays would also provide the necessary impetus.“
However, key expectations mentioned above on thresholds, compliance eco-systems, streamlining processes, etc., remain unfulfilled. Certain other long-standing expectations like allowing ‘round tripping’ of funds to genuine startups have also remained unanswered.
Until the startup ecosystem issues and genuine expectations of the community remain unanswered, startups will continue to face significant challenges in innovating and taking Indian businesses to the world.