Budget 2021: One Person Companies to tax rebates, what investors have to say about the budget
The Union Budget 2021 was highly-anticipated as everyone looked towards the government for respite from the economic downturn caused by the coronavirus pandemic over the past year. Finance Minister Nirmala Sitharaman proposed a six pillar approach to help the economy.
For Indian startups and MSMEs, FM Sitharaman proposed the incorporation of One Person Companies (OPCs), with no restriction in paid-up capital and turnover, as well as an update to the definition of small companies under Companies Act, 2013.
Presenting India's first-ever paperless Budget 2021, the FM proposed revising the definition of small companies by raising the capital base to Rs 2 crore from the current limit of Rs 50 lakh.
Here is what the investors thought of this year’s budget.
Focus on growth and expansion
Ankur Bansal, Co-founder and Director, BlackSoil, says,
“The overall budget seems to be expansionary and growth-oriented. One has to look at the fine print though we can see the positive market reaction as indexes are up by around five percent. There is mixed focus around recovery and growth with a boost for the infrastructure sector, increase in healthcare budget, comfort to MSMEs, attracting FDI, setting up of fintech hubs which will promote startups, etc.”
He adds, “Plans for COVID-19 seems to be good enough for the next nine months wherein the significant population is expected to be vaccinated. Bank recap is very low at Rs 20,000 crore, though there is ongoing discussion around privatisation – which is quite big. Inflation is expected to be under control and broadly, nothing seems to be negative as no major change in tax rates or even an increase in tax rates for the wealthy. Interest rates and the bond market has not moved significantly, which shows that even though the fiscal deficit is higher, the same will not tank the economy.”
Anirudh Damani, Managing Partner, Artha Venture Fund, quips that the fastest-growing startup in the country is the tax department.
“The number of taxpayers crossed 6.40 crore in 2020, and if the government can continue to grow the base at this rate, its income from taxes alone may prompt India to reduce various taxes in future budgets. For me, the 100+ percent growth in the number of tax filers was by far the most significant moment of the Budget 2021,” says Anirudh.
One Person Company
On the FM allowing OPCs to boost startup incorporation, Ankur says,
"The biggest advantage of a One Person Company is that its identity is distinct from that of its owner. Therefore, the owner will not be sued; only the company will. Another advantage is limited liability. Since the company is distinct from that of its owner, the personal assets of the shareholders and directors remain protected in case of a default. He explained, however, that a proprietorship has unlimited liability.”
“OPC is a combined package of a sole proprietorship business and a company borrowing the best of both worlds. A proprietorship cannot raise equity funding, which is possible for an OPC. Also, an OPC will be eligible for government schemes such as those focused on MSMEs. Generally, there is lesser compliance to set up and run an OPC v/s a normal company. Also, the budget allowed NRIs to operate OPCs in India. This definitely a big positive to attract Indian talent overseas to return to India,” he adds.
Saurabh Srivastava, Co-founder, Indian Angel Network says: “Easing for One Person Companies and revising the size of small businesses will be a boost for startups. Reducing the margin capital requirement from 25 percent to 15 percent for Stand-up India scheme for STs, SCs, and women is a welcome move. The government’s One Nation-One Ration vision is an aspirational project that will benefit 86 percent of beneficiaries. Incentivising digital payments will help fintech players, and measures to facilitate contract disputes will help investors.”
Deepak Gupta, Founding Partner, WEH Ventures adds: "I think the budget has moved the ball forward for the startup ecosystem by making favourable announcements in capital gains, carry-forward losses, and OPCs. I think that's useful as NRIs will now have more leeway to incorporate in India and this should encourage some reversal of the brain drain.”
Yagnesh Sanghrajka, Founder and CFO, 100X.VC says, “A couple of changes announced today that may bring a positive change to the industry is the incorporation of One Person Companies for single founders, that will enable them to start their own company, register it, and attract investments. Some other satisfactory moves by the FM were the reduction of the non-resident days limit from 180 to 120 days, and extension of the eligibility of tax holiday and capital gains for startup investment by one more year till March 2022. The net considerations of capital gain invested in eligible startups incorporated before March 31, 2022 (now) to be eligible under 54 GB.”
Jatin Desai, Managing Partner, Inflexor Ventures on the budget says, “While the devil will be in the details and the implementation, there were few direct and indirect measures that were announced in the budget that are positive for the startup and VC ecosystem. Direct measures that will have a positive impact on the ecosystem include the extension of tax holiday and capital gains tax exemption for startups by one more year, OPC (one-person company) reforms, and setting up of a fintech hub in GIFT city. Indirect measures like a massive increase in healthcare spending, higher capex, infrastructure building, and reducing some stress in the banking and financial system will also be a net positive for startups and VC ecosystem.”
Nimesh Kampani, President, LetsVenture Plus adds, “The government has opened more channels of investments in India by providing incentives for setting up OPCs, allowing NRIs to incorporate them, and reducing the residency time to 120 days. This move will provide a wider spectrum for the startup community to work around. Tax holiday and capital gain exemption getting extended by another year will also help the startups to recover from the pandemic, though the number of startups that will benefit from this remains small due to the IMB certification requirements. The Rs 1,500 crore allocation to digital payments and extending social security benefits to gig workers were other good measures targeted towards startups.”
Ajai Chowdhary, Founder of HCL, Board Member at IAN & IC, and Member of IAN Fund says: “The budget’s focus to move India into the global supply chain is a welcome move towards Atmanirbhar India. Big boost for startups, reconfiguring of OPCs, and redefinition of small businesses will enhance ease of business under Atmanirbhar Bharat. The budget allocated for the agricultural sector will lead to infrastructural development and create opportunities for startups in the sector, leading the vision for a self-reliant India.”
Anup Jain, Managing Partner, Orios Venture Partners, says, "The big focus is on infrastructure, which is key to driving India's overall development. Also, this means reviving construction industry, which has a domino effect on employment and GDP per capita. This is an extremely positive step.”
Agriculture and rural segment
Jinesh Shah, Managing Partner, Omnivore says, “The initiatives to have a Developmental Financial Institution, the expansion of commodities under MSP, usage of agri infrastructure fund for the strengthening of APMCs, and supporting dairy, fisheries, and animal husbandry are laudable. The support for gig workers, financial inclusion, skilling, and efforts for 'minimum government, maximum governance' provides opportunities to boost India's employment rates.”
“Finally, it is commendable that the Union Budget 2021 avoids any knee-jerk reaction for fiscal deficit consolidation and instead focuses on growth, especially in rural India. The continuous support to farmers via DBT, strengthening of e-NAM, and supporting agri commodities via increased duty on import of raw materials are some of the steps in the right direction for energising the rural economy,” he adds.
Strong aid lacking
While being an overall positive budget, investors felt that some factors were amiss. Anirudh explains, “While the government continues to tom-tom about the tax holiday for the startup community, the fact remains is that this will not benefit a majority of startups. Most startups are run deficits in their initial years, and no tax benefits are useful for them.”
He further clarified that ideally, the government could have introduced tax incentives to encourage individuals and corporates to invest in startups or VC funds. The flow of private capital would increase the amount of money available for investment, and encourage corporates to invest in downstream startups that benefit their core businesses. While the move to include NRIs in the OPC scheme is noteworthy, investors say that there is a lot left to be desired in the budget.
Rajinder Balaraman, Director, Matrix Partners India, adds: “In the last year, Digital India and startups, particularly, have innovated and taken great risks to serve Indian consumers and enable small businesses. The sector has also attracted over $50 billion of FDI over the last decade to create the digital infrastructure for modern India. It is a matter of great pride for every Indian that someone living in a small town or village can purchase the same products or make financial transfers and investments in the same way as their family member in Bengaluru.”
“The time has now come for India’s startups to expand on the global stage and secure permanent global capital to do so. Today’s budget, while well received in general and by public markets, was silent on one of the startup ecosystem’s key expectations – i.e. securing access to permanent global capital via direct overseas listing (without need for a dual listing in India),” he adds.
No crypto move
On account of the recent developments, the VC community hoped for an announcement on the cryptocurrency front. However, the Finance Minister's silence on the subject during the budget is considered an indication of positivity and a step in the right direction.
Anirudh adds that there is a caveat, as the government is not expected to introduce any bills to ban cryptocurrencies in the Parliamentary Budget session's remainder. The investor funding in cryptocurrency startups is likely to grow 10x in 2022, and is bound to see a spurt of budding entrepreneurs in the segment.
Nimesh adds, “While the budget did give a push to the startup ecosystem, issues around Section 80 IAC exemptions for ESOPs and the issue around capital gains tax rate parity for sale of listed and unlisted shares needs to get addressed in the near future.”
For YourStory's multimedia coverage of Budget 2021, visit YourStory's Budget 2021 page or budget.yourstory.com
Edited by Kanishk Singh