TAX CONSIDERATIONS FOR STARTUPS
The taxation policies of the government for startups underwent a drastic change with the Union Budget of 2016-17. These changes, made under the ‘Start Up India’ Policy, are touted to result in a large number of concessions and exemptions. In order to boost small business and MSME sectors, Mr. Jaitley announced various schemes and policies in sync with the Startup Indian Action plan announced previously by PM Modi. Apart from giving 100 per cent tax deduction for three years and allotting Rs 500 cr fund for Women and SC/ST entrepreneurs, he also revealed some more positive strokes for these sectors.
1. Amendment in Companies Act, 2013
While presenting the Union Budget 2016-17 the government bring some modifications to Companies Act to ensure conducive environment for start ups. The government aims to ease up the process of registration, and hopes to complete the procedures within one day. The announcement follows the government initiative to encourage entrepreneurship among SC/ST people in the country
2. 100% Tax Exemption for First Three Years
It was declared in the Budget Session of the Parliament that startups will not incur any taxes on profits incurred in their first three years except MAT. MAT stands for ‘Minimum Alternate Tax’ and is calculated on ‘book profit’. “It is proposed to provide a deduction of 100% of the profits and gains derived by an eligible startup from a business involving innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property”. In order to give budding entrepreneurial ventures a much-needed boost, the government has decided to do away with taxing them for the first three years of their operation. It was declared in the Budget Session of the Parliament that startups will not incur any taxes on profits incurred in their first three years except MAT. MAT stands for ‘Minimum Alternate Tax’ and is calculated on ‘book profit’.
3. Small Bag Of Goodies For Importers
There is an attempt at simplification and rationalisation of taxes in a move that will also give some respite to importers. The government also proposes to roll out single window clearance for importers from key ports from coming financial year. Importers will not need separate clearances from various authorities such as plant quarantine.
4. Presumptive Tax Scheme For Small Businesses
This scheme covers small businesses with gross turnover up to Rs 2 crore – up from the existing ceiling of Rs 1 crore. It has also been extended to professionals with gross income up to Rs 50 lakh and can declare income at 50%. As per Section 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account. However, a person adopting the presumptive taxation scheme can declare income at a prescribed rate of 8% and, in turn, is relieved from the tedious job of maintaining books of account. However, in case income earned is at a rate higher than 8%, then the higher rate can be declared.
5. Setting up of a ‘Fund of Funds’ for Startups
In order to help startups in their initial stage by providing them with the necessary financial boost, the government has decided to set up a fund with an initial corpus of Rs. 2,500 crore and a total corpus of Rs. 10,000 crore over a four year period.
The fund will come under ‘Fund of Funds (FoF)’ which won’t invest directly in startups but will be directed through SEBI registered venture funds, as the action plan suggests.
A board of professionals from diverse areas will be set up to manage this fund. Life Insurance Corporation of India will be an investor in this fund which will support a whole range of sectors like manufacturing, agriculture, health, etc.
6. Exemptions in Capital Gains Tax
The government has also recently made provisions for an exemption of 20% capital gains tax. Capital gains tax is the tax charged on profits from sale of capital assets, such as stocks, bonds, etc. This was a long-pending demand and is deemed to prove highly lucrative for startups as before, overseas venture capital investors were forced to route their investment through Mauritius.
Before this provision, most investments in Indian startups were routed through Mauritius as capital gains tax on investment from there was waived following provisions in the Double Tax Avoidance Treaty.
7. 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.
Formally, the employer was 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.
8. 80GG Deduction Increased from Rs. 24000 to Rs 60,000 p.a
The FM also provided relief to those living in rented houses by raising the 80GG deduction from Rs 24,000 to Rs 60,000. Since entrepreneurs of the startup community hail from different places of the country and need to relocate to proper business locations to yield value, this will be a huge impetus to them while planning their personal taxes.
9. Other Tax Adjustments and Fund Allocations to Boost Startups
Some other important adjustments and allocations made in this area to boost startups are as follows:
Setting up of provisions to support entrepreneurs belonging to Scheduled Caste and Scheduled Tribes.
Allocation of Rs. 500 crore for SC/ST and women entrepreneurs under Startup India.
Lowering long-term capital gains for unlisted firms from three to two years.
Amendment in the Motor Vehicles Act to enable entrepreneurship in the road transport sector.
These policies under the “Startup-India” scheme of the government as proposed in the Union Budget 2016-2017 seem to be made with the purpose of providing impetus to all budding ventures. It is also a subsidiary of the ‘Make In India’ scheme as it aims to create more jobs within the country so that the youth doesn’t have to look to other countries for employment.
This startup tax policy and other provisions are sure to go a long way in providing new startups the boost they need.