Budget Summary for Start Ups from Tax Mantra

“Thou shall prosper” – signifies Finance Minister Arun Jaitley in the Budget speech to the startups on February 29, 2016. Prime Minister Narendra Modi’s most visible campaign to boost jobs and investments has been his ‘Start-up India, Stand-Up India’ plan. The campaign is meant to encourage entrepreneurs to start new firms that are not inspired by traditional businesses, is capable of generating jobs, and build an economy driven by technology.

The entire startup community has looked as this Budget 2016 as the most interesting one, which for the first time has been prepared from the entrepreneurial upliftment vision. Here are the pointers placed.

BudgetResponses
Corporate tax rate at 25 per cent for manufacturing firms
New manufacturing firms from March 1, 2016, shall be taxed at 25 per cent (plus cess and surcharge). No further exemptions shall be available for new companies if taxed at 25 per cent. The erstwhile flat corporate tax rate was 30 per cent (plus cess and surcharge). This shall be an immense motivator to manufacturing startups from the initial years of establishment of production unit to post production phase. The investments on capital expenditure are huge, and a five per cent curtail in tax payable shall allow such funds to be routed in more capital infusion expenses.
Also, it has to be technically analysed that all other startup companies has been provided taxation relaxations under a separate rate. The entire objective to restrict the relaxation of five per cent tax rate to only manufacturing startups is on account of the comparatively lower net profits these units book. Regardless of the number of years the unit is in business, such relaxation shall continue.
Corporate tax rate at 29 per cent for companies with turnover less than Rs 5 crore
Further, companies with a turnover of less than Rs 5 crore per year shall be taxed at 29 per cent (plus cess and surcharge). All startups that had started from scrap and are now popular unicorns had been through the phase of breaking even, and for most of them, break even has been possible somewhere at a turnover of Rs 4–5 crore. A tax relief to the startups at this critical phase had been looked upon and strongly expected from the New Government, and now it is here to stay and benefit for sometime.
Startups to get 100 per cent tax exemption for three years
Startups can now enjoy 100 per cent tax exemption for the first three years (except MAT).

Here are few examples to elaborate the case.
ABC Private Limited
Turnover for first year – Rs 20,00,000
Net profit – Rs 2,23,000
Book profit – Rs 1,82,500
Tax liability as per normal provisions – NIL (since 100 per cent exemption applicable)
Tax liability as per Sec 115JB – Rs 33,762 (18.5 per cent on book profits)
MAT credit entitlement – Rs 33,762 (carried forward and allowed to be utilised where tax liability as per normal provisions exceeds tax liability under Sec 115JB)

XYZ Private Limited
Turnover for third year – Rs 50, 00,000
Net loss – Rs 70,000
Book profit – Rs 62,700
Tax liability as per normal provisions – NIL (since 100 per cent exemption applicable)
Tax liability as per Sec 115JB – Rs 11,600 (18.5 per cent on book profits)
MAT credit entitlement – Rs 11,600 (carried forward and allowed to be utilised where tax liability as per normal provisions exceeds tax liability under Sec 115JB)

Employee Provident Fund
The Government will pay EPF contribution (employer’s contribution) of 8.33 per cent for all new employees for first three years, which shall save straight 12 per cent cost for the startup companies and provide security benefits to the employees.
The erstwhile practice was that the employer shall be required to pay minimum 12 per cent of basic salaries of the employees to EPFO as employer’ contribution towards EPFO, which was in the nature of a direct component of staffing costs for the company. With this relaxation, we are expected to see startups registering their companies with EPFO on a voluntary basis in order to provide the same facilities to their employees without incurring any cost for the first three years, and moderate the challenges of efficient team making in a newly established business.
Startups often fail to hire talents due to the inherent mindset of insecurity and job consistency. With a PF registered entity, this mindset is bound to change.

Make in India – 100 per cent deductions
Make in India Policy – 100 per cent deduction of profits for startups adhering to certain conditions; MAT will apply. Manufacturing startups shall highly benefit from the Scheme, wherein there shall be no corporate taxation on the net profits. This shall ensure more employment of youth and a steady increase in the Indian Rupee value.

HRA deduction increased by Rs 36,000 per annum
The FM also provided relief to those living in rented houses by raising the HRA deduction from Rs 24,000 to Rs 60,000 under Section 88G. Since the entrepreneurs of the startup community hail from different places of the country and need to relocate to proper business locations to yield value, this shall be a huge impetus to them while planning their personal taxes.

Amendment in Companies Act, 2013 shall ensure speedy registration and boost startups
Entity registrations and underlying processes and paper work involved in the same shall be simplified so that registrations can practically happen in a breather of two to three days.

Other key pointers
Motor Vehicles Act to be amended to enable entrepreneurship in the road transport sector.
Capital gains shall not be taxed on investments in regulated fund of funds for startups.
Hub to support and escalate Scheduled Caste/Scheduled Tribe entrepreneurs.
Long-term capital gains for unlisted firms lowered from three to two years.
Rs 500 crore earmarked for SC/ST and women entrepreneurs under the Startup India scheme.
Entrepreneurship to be taught through MOOCS – Massive Open Online Course. This will open up access to educational resources across the country.
To conclude –The government has realised that the only way employment can be generated at the pace at which it is needed is by empowering entrepreneurship and easing entry barriers for youth having ideas that can build a business, nurture it well so as to add to the nation’s GDP and generating a path to the unemployed yet talented lot to work upon.

Three things that stops from making this budget a startup blockbuster budget are continued pain of startup FMV tax provision, tax treatment of ESOP gains, and continued draconian labour laws. more