Yourstory Budget Commentary: What it holds in store for Indian Entrepreneurs

Budget 2009-10 was lackluster indeed – as the 5.8% drop in the Sensex clearly spelt out. Finance Minister Pranab Mukherjee, making a comeback after 25 years did short work of tempering any inflated expectations that corporate and individuals had on being provided a short term reprieve during times of a global economic depression. Markets had rallied strongly over the past few weeks as industry pundits expected that a government devoid of any coalition pressures (especially the leftist kinds), would usher in measures extraordinaire. Instead the one billion odd Indian populace was treated to an encore of nationalistic ideologies as Mr. Mukherjee read out a budget that clearly played to the political audience. The increased government expenditure, coupled with uncertainty over tax revenues (given the volatile business environments due to global macro factors) and lack of clarity over non-tax revenues (no clear steer of divestments, FDI, etc.) left India Inc a trifle worried over the growing fiscal deficit position. While a fiscal deficit signals an expansionary stance by the Indian Government, one can only hope that firstly, the increased Government spending boosts long term revenue growth and secondly funding the fiscal deficit does not lead to a credit squeeze or inflationary pressures.

While we leave a detailed sectoral impact analysis of the budget to various esteemed budget experts, we thought it worthwhile to present a quick snapshot of what the budget holds for the Indian entrepreneur in general. As entailed in our quick analysis below, small businesses and entrepreneurs have a bit to cheer about under Budget 2009-10.

Long term growth impetus:

While Budget 2009-10 failed to lay out any short term measures to boost government revenue or boost foreign investments – the message was undoubtedly clear – that measures will be taken to steer Indian back towards a 9% GDP growth rate through an agenda of inclusive development and increased government expenditure on much-needed infrastructure.

Go Rural:

Mandate of inclusive development augers well for businesses with a rural sector focus. In general our advice to young entrepreneurs would be to develop strategies based on rural India – as these will not only lead to a 700mn people strong demand but also long term government impetus and incentives.

Easing credit availability for Micro and Small Enterprises:

To facilitate flow of credit at reasonable rates to small enterprises, Budget 09-10 provides for a special Rs. 4000 crier fund with the Small Industries Development Bank of India (SIDBI). This is expected to incentivize Banks and State Finance Corporations (SFCs) to lend to Micro and Small Enterprises (MSEs) by refinancing 50 per cent of incremental lending to MSEs during the current financial year.

Good news for Start-ups – focus valuable resources and time on business as opposed to administration:

Budget 09-10 proposed that the scope of presumptive taxation be extended to all small businesses with a turnover upto Rs. 40 lakhs. All such taxpayers to have option to declare their income from business at the rate of 8 percent of their turnover and simultaneously enjoy exemption from the compliance burden of maintaining books of accounts. As a procedural simplification, they are also to be exempted from advance tax and allowed to pay their entire tax liability from business at the time of filing their return. This new scheme is to come into effect from the financial year 2010-11.

Fine-tune that ESOP scheme to incentivize key management personnel:

With the abolition of the Fringe Benefit Tax (FBT), corporates can now aggressively use Employee Stock Option Plans (ESOPs) as compensation strategies to reward and retain employees, without being burdened by the FBT. However, instead ESOPs will now be subject to perquisite tax in the hands of the employees. The perk tax will be the difference between the Fair Market Value (FMV) of the shares on the date of exercise of the options less the exercise price.

Its time to invest for future growth:

In a bid to foster proactive investments by corporates, Budget 09-10 extended the waiver relating to tax deductions of 150% on expenditure incurred on in-house R&D for all manufacturing businesses. In addition, businesses will be incentivized by providing investment-linked tax exemptions rather than profit-linked exemptions. Under this method, all capital expenditure, other than expenditure on land, goodwill and financial instruments will be fully allowable as deduction.

Surcharge of 10% on income tax abolished only for individuals:

While, the 10% surcharge has been discontinued for most categories of taxpayers – coporates will continue to be subject to paying the 10% surcharge on their income tax bill in addition to the 3% education cess.

Simplifying indirect taxation:

The Government expressed its commitment to introduce a uniform indirect tax structure across the country from the next fiscal after consultation with states. The Good and Services Tax (GST) is expected to replace excise duty and service tax at central and VAT at state level leading to much simpler taxation norms.

Increased tax burden for MAT paying coporates:

Budget 09-10 raised the MAT rate to 15% from 10% of book profit. However, there was some relief to companies, allowing them to adjust their tax liability under MAT from 7 years to 10 years. The system of Minimum Alternate Tax had been introduced a few years back under which a company is required to pay a minimum tax of x% of the book profit in case the tax on the total income computed under the normal provisions of law works out to less than this amount. This provision was especially useful for companies having carried forward losses – as it allowed these companies to benefit from previous years accumulated losses and thereby pay a lower tax, i.e. the MAT.

Gauravjeet Singh is the Co founder of Yourstory.in and has varied experience in the investment banking industry having advised on corporate M&A and Private Equity Placements. Gauravjeet has completed his MBA from IIM Bangalore and is an alumni of St.StephensCollege, Delhi.