How did the Union Budget impact Startups ?

The annual Union Budget has brought a cheer for startups and the small and medium enterprise sector as a whole. Here is what the Union Budget had in store for the MSME sector and startups.

Extension of tax holidays for startups

Boosting the Startup India program of the government, the Finance Minister proposed the extension of the time period during which startups can avail the three-year tax holiday. Startups can now avail of tax benefits for three years out of the first 7 years of operation, compared to the current 5 years of operation. Considering the fact that majority of Startups are not profitable in the first few years of their existence, the extension in the time period for considering tax holiday is a welcome step indeed.

The Finance Minister has also announced a removal of the embargo while carrying out losses due to any change in share holding pattern beyond 51% of promoter share. Since startups today need constant funding, there is usually a frequent change in their share holding pattern. The relaxation to carry forward losses even post change in shareholding pattern is a definite shot in the arm for the Indian startup ecosystem as a whole. With startups facing a relatively muted year 2016 owing to reduced number of investments and lower numbers of “big ticket” deals, the budget is likely to bring a sense of relief at the right time for the sector.

Budget brings big benefits for the Small and Medium Enterprises (SMEs)

The Union Budget has been quite positive for the Small and Medium Enterprises (SME) sector. While the SME sector's wishlist included multiple proposals concerning funding and tax benefits, the Finance Minister has offered enough reasons for the sector to cheer. All small and medium enterprises having a turnover of up to Rs 50 crore will get a 5 per cent tax rebate. The income tax rate of SMEs under the bracket has been reduced to 25 per cent from the current 30 per cent.

The Finance Minister Arun Jaitley, in his Budget speech, underlined the fact that this reduction in tax rate will impact almost 96% of the Indian small and medium enterprises. According to the Finance Minister, “Of the 6.94 Lakh companies in India, 6.67 Lakh companies fall in this category.”With a drop in the tax rates, it is hoped that Indian SMEs will get more competitive, helping them increase their share of production and sales globally.

Minimum Alternative Tax (MAT) to stay for now

The one big wish by many business entities was the abolishment of the Minimum Alternative Tax regime to bring parity between direct and indirect taxes. Delivering his Budget speech, the Finance Minister stressed that the government has decided not to remove Minimum Alternative Tax in 2017-18 but allowed a carry forward of MAT for a period of 15 years as against the current period of 10 years.

Easy funding availability for small entrepreneurs

To make funding easily available for smaller entrepreneurs including new businesses, the Finance Minister announced an increase in the lending target for the Pradhan Mantri Mudra Yojana (PMMY). The new lending target was fixed at Rs 2.44 lakh crore for the financial year 2017-18.

To ensure banks that have been fighting rising NPAs keep offering credit facility to smaller entrepreneurs, the Finance Minister announced funds of Rs 10000 crore for recapitalization of public sector banks. To ensure rising NPAs do not affect the new lending especially under the Mudra scheme, the Finance Minister stressed additional funds for recapitalization of public sector banks would also be provided if needed in the future.

Budget 2017 for SMEs and startups at a glance

  • Extension of 5-year time period for three-year tax-free holiday to 7-year time period
  • Removal of the embargo while carrying out losses due to any change in share holding pattern
  • 5 per cent tax rebate for SMEs enterprises having a turnover of up to Rs 50 crore
  • Carry forward of MAT from 10 years to 15 years
  • More funds allocated under Mudra Scheme

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