Budget Expectations of Startups and SMEs


The finance minister Mr. Arun Jaitley is going to present his maiden budget on 10th July 2014. There are estimated three million small startups and SMEs in the country. Yet so far, hardly any efforts have been taken to find out who these SMEs are, what challenges they face, and the infrastructure limitations they carry. The startup sector has high hopes with the Modi government and particularly with its upcoming budget.

The new government if really wants to transform lives of millions of people should look to motivate Startups and SMEs. They can be the single most way for India to claim her rightful place on the global economic platform.

The introduction of Goods and service tax, easy access to funding, the ease in getting clearances and the provision of tax incentives are the bullet issues of the startup sector who is looking forward to the budget 2014 with great expectations. In this article, we would highlight the expectations of the startup sector with the super budget of 2014.

Implementation of the Goods & Services Tax (GST):

Entrepreneurs are expecting the introduction of the Goods & Services Tax (GST) from this budget. The move from complex tax structure to a simpler GST will be a game changer especially for e-commerce and trading sector. GST is expected to unify the Indian marketplace and break tax barriers between states, bringing in a uniform tax rate across the country. This will lower the cost of goods by reducing the cascading effect of goods or services getting taxed at multiple points. However, the government may find it difficult at the moment to pass GST as it also requires support from the state governments. If not the implementation, at least clear road-map and timeline is required in this regard.

Investments in Health care and Research and Development:

From an industry standpoint, investment in the healthcare and pharmaceutical sector along with life sciences R&D outsourcing can prove to be a great success like IT was in the late 90s. India with a large population can play a significant role in Clinical trials and drug development.

Initiatives to spur investment similar to what has been created by "A Star" in Singapore would be welcome step. This can create millions of jobs. Both foreign and domestic investment needs to be harnessed. Arun Jaitley in his upcoming budget should spell something in this direction.

Enhancement of Service tax exemption limit:

Threshold for applicability of Service Tax should be enhanced from Rs 10 Lacs to 15 Lacs. There should be a threshold limit of Rs 10.00 Lacs for Service recipients also which at present is nil. The cost of compliance for this is relatively very high for all such assesses who are otherwise not subject to any other service tax / cenvat compliance obligations. Putting a threshold will facilitate taking out the small ticket service tax payers under this head.

Tax Exemption / relaxation to new businesses:

IT services giants like Infosys and Wipro benefited immensely with tax holidays on IT exports. Similar tax incentives are much needed for current IT startups as well and for startups in industries like healthcare and manufacturing.

The business startups in India can be given tax exemptions on the line of Singapore tax exemption scheme for new startup companies as per which a newly incorporated company that meets certain qualifying conditions can claim for full tax exemption on the first $100,000 of the normal chargeable income for each of its first 3 consecutive assessment years. A further 50% exemption is given on the next $200,000 of the normal chargeable income for each of the first three consecutive assessment years. This will give great boost to our startups that have to start paying taxes right from the first year onwards and on every single penny of profit it makes.

Removal of Startup tax:

Government sometime back amended the law to restrict issuance of equity shares at a premium and attached certain conditions on it. The law stated that that portion of consideration received for the issue of shares of a public unlisted company or private company that is in excess of the fair market value of those shares, will be subject to tax in the hands of the companies under the head “income from other sources”.

With the introduction of this clause the participation of private equity funds or high net worth individuals has been affected and there is a serious impact on genuine start-ups and other Small and Medium Enterprises, as they largely depend upon angel investors or private equity funds for their funding.

Startups are hoping that new finance minister should give relaxation in this aspect since this provision is creating hindrance in the developing culture of angel investors and private equity funds, funding innovative entrepreneurs, who have the desired skills but have limited resources.

Single Window clearance mechanism:

This one is so far the most awaited solution expected from the new entrepreneurs. Starting a new business currently requires an entrepreneur to go through a complex set of compliance mechanism which includes obtaining different set for clearances from the central and state government. New Government needs to plan for minimal regulation, compliance and remove paperwork hurdles for starting a business.

In terms of new businesses and startups, its time taking and complexity of the system results in a slow rise in new ventures. There are a host of state and central specifics registrations / approval required for starting a new business like trade license, environment approval, Service Tax registration, Excise, VAT and the list goes on and on. The most difficult part of this is that these registrations are obtained from different departments of the State or Central government. Instead of going through all this processes, there is a need of a single window (an online platform or offline) where one gets end to end information about the registration, compliances, taxes, etc. The platform should provide a common place to get clearances for central as well as state level formalities.

Easy access to funding:

The Indian Startups are in need of a supportive financial system which should provide the necessary risk capital to aid innovations and enterprises. The government should ensure that funding programs should focus equally on small early stage start-ups also and not only into relatively large and safer investments.

The Indian startups today are largely dependent on private investments coming from India and abroad.The main reason for this is that the Government designated fund is hard to get due to unnecessary bureaucratic bottle necks and lack of transparency.There is a need of dedicated fund, seeded by the Government, and targeted at promoting innovative initiatives. The new Government should allocate funds sufficiently for entrepreneur’s related investment schemes with the aim should be that no startup with a potentially great and innovative idea will suffer for lack of funding.

To conclude:

The New budget should simplify the tax rules; improve tax compliances and lower tax litigations. The use of technology should be efficiently and diligently put in action to facilitate a full-fledged online auto-mated system for completing all type of clearances, approvals and formalities required for starting and operating a business. With the new budget, it is imperative for Mr. Arun Jaitley to bring a sustainable model of development for the startup industry.

Startups and other businesses feel free to visit Taxmantra.com for comprehensive accounting, legal, regulatory, taxation and other compliance related assistance. Alok can be reached out at alokpatnia@taxmantra.com .