Make in India 2021: Budget impact on Indian startups and the automobile sector

Extension of tax holidays, exemption of capital gains, a higher FDI limit, and fund allocation for digital payments will give startups a boost. The vehicle scrappage policy would push up demand for the auto sector.
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On February 1, Finance Minister Nirmala Sitharaman delivered the most anticipated fiscal Budget having six pillars of reform at its base — health and well-being, physical and financial capital, and infrastructure, inclusive development for an aspirational India, reinvigorating human capital, innovation and R&D, and minimum government and maximum governance.

She said this period would be the dawn of a new era and laid out some attractive plans for Indian industries including the startup ecosystem and automobiles, paving the way for an Atmanirbhar Bharat.

Budget gifts for startups

The Budget has given many relaxations to the startup ecosystem; one such major relief is the extension of tax holidays for one more year till March 31, 2022. Given that startups were hit hard by the coronavirus pandemic, this is a most welcome announcement. In addition, to accelerate startup funding, the finance minister proposed to extend the capital gains exemption by one more year.

Another big announcement is incentivizing one person companies (OPC). Till now only Indian residents could set up OPCs, but now non-resident Indians can also incorporate them The Budget proposal reduced the residency limit for Indian citizens from 182 days to 120 days to start an OPC.

The minimum capital requirement of Rs 1 lakh for setting up an OPC has also been abolished, with the provision that the company can be made private or public at any given time. The finance minister has also increased the paid-up capital for small companies from Rs 50 lakh to Rs 2.5 crore.

This will definitely boost the number of startups considering that NRIs are now allowed to set up OPCs, there is no longer a need to find a co-founder, and money can be raised easily.

The FM also proposed to revisit the definition of small companies under the Companies Act, 2013 by hiking the threshold for capitalization from Rs 50 lakh to Rs 2 crore and the turnover threshold from Rs 2 crore to Rs 20 crore. It is said to help more than 200,000 small companies and more startups would be recognized as small companies, giving them enhanced liberty from a lot of compliance requirements.

A fund allocation of Rs 1,500 crore has also been made for the digital payment industry, encouraging online payments and financial inclusion that will benefit many digital payment startups. A world-class fintech hub would start at GIFT City, Gujarat.

Last but not the least, the foreign direct investment limit for the insurance sector has been proposed to be increased to 74 percent from 49 percent, giving a broad spectrum of opportunities to insuretech startups in the coming years. All these Budget proposals would transform the Indian startup ecosystem, inviting more funding from Indian and foreign investors and helping to achieve Make in India.

How the automobile industry would benefit

The Indian auto sector had been struggling due to goods and services tax (GST) introduction, insurance regulations, new safety norms, and emission norms since the past three years, and was dealt a blow due to the impact on factory production last year by COVID-19. As a result, this Budget was crucial for this sector, and it did favour the sector, though with some exceptions.

The biggest hit of this Budget is the vehicle scrapping policy, according to which “private cars older than 20 years and declared unfit/polluting, will be scrapped and for commercial vehicles, the age is up to 15 years”. This move will benefit automakers by aiding a hike in their sales.

As stated by Federation of Automobile Dealers Associations President Vinkesh Gulati, taking 1990 as the base year, around 37 lakh commercial vehicles and 52 lakh passenger vehicles are eligible for voluntary scrapping at present. Thus, implementation of this policy would lead to a demand surge in the auto sector.

Giving preference to Make in India, the FM increased the customs duty on certain auto parts such as ignition wiring sets, safety glass, parts of signalling equipment to 15 percent from 7.5/10 percent.

While this will increase the cost for auto manufacturers that assemble vehicles as completely knocked-down units, it would also encourage domestic production of auto parts. The reduced 7.5 percent custom duties on steel products will favor the auto sector, too.

Alongside, the FM’s proposals for other sectors would also have a positive impact on the automobile industry. It includes a 100 percent tax exemption on income, dividends, and capital gains for foreign investment in the Indian infrastructure sector that will likely boost vehicle demand.

Other initiatives that will help the auto industry in the coming years are the development of more economic corridors in Kerala, Tamil Nadu, Assam, and West Bengal, for which Rs 3.3 lakh crore has been allotted, and the proposed launch of a scheme for Rs 18,000 crore to support the augmentation of public bus transport services. It will allow private companies to finance, acquire, operate, and maintain around 20,000 buses under the new public-private partnership models.

Amid this good news, the government missed touching on important pointers like reducing GST on separate electric vehicle (EV) parts such as lithium-ion batteries and new schemes for boosting demand for EVs. GST on cars is still at 28 percent, weighing on the cost factor for manufacturers and customers.

Conclusion

This time the Budget has more hits than misses and will augur well for the economic recovery in a post-COVID era. As Sitharaman said in her speech, this is a never-before-like Budget benefiting domestic industries and leveraging foreign investments. We can expect light at the end of the tunnel in this new era with Make in India.


For YourStory's multimedia coverage of Budget 2021, visit YourStory's Budget 2021 page or budget.yourstory.com.

Edited by Lena Saha

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)