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Budget Impact: Startup Ecosystem

Even though the demands of the startup ecosystem have not been met entirely... the Budget has by and large been satisfactory

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In the wake of reduced market activity due to demonetisation, further exacerbated by the delayed GST rollout, the Union Budget 2017 was irrefutably the most-anticipated budget of the decade. Apart from being the first-ever merger of the Railway Budget and the General Budget, the latest budget also had to counter the repercussions of another landmark move - demonetisation - and revive demand and stimulate consumer activity in the market. With reference to the start-up ecosystem, it should have not only ensured a smoother market, but also introduced ground-breaking reforms to boost the growth of start-ups and ensure greater investments in the sector. With all this in mind, let us now gauge the impact the budget announcements will have on the country's start-up community.

Start-ups within any industry vertical characteristically take considerable time to become profitable. The erstwhile provision offering tax exemption on any 3 out of 5 years under Section 80-IAC of the Income-tax Act, 1961, in this context, was by and large redundant. An extension of this period to a total of 7 years will now be more reasonable for start-ups. However, it should be noted that this benefit can only be availed by start-ups that have been incorporated after 1st April, 2016. Also, the annual turnover for any year should not exceed Rs. 25 crore from the date of incorporation till 31st March, 2021. A Minimum Alternate Tax (MAT) of close to 20 per cent on the booked profits will, nevertheless, be accrued by the government. The MAT credit can although be availed for up to 15 years against the erstwhile 10 years.

Another key budget takeaway for the start-up community has been in terms of carrying forward and setting off of losses. Eligible start-ups can now enjoy 100 per cent tax exemption as per Section 80-IAC on their carried forward losses up to 8 years. The original promoter's obligation to hold at least 51 per cent equity stake in the business has been discontinued by the government. The move will offer start-ups enough bandwidth to retain higher revenues against losses experienced during their initial years and will also increase investor interest in start-ups. The reduction of corporate tax for MSMEs with an annual turnover less than Rs. 50 crore has been one of the most monumental developments in this year's budget announcement. Slashing the tax rate to 25 per cent from the previous 30 per cent will, moreover, benefit an estimated 96 per cent of businesses within the country. It will also subsequently benefit start-ups that work in tandem with the MSME industry as per their business model.

Establishment of Computer Energy Response Team will help ensure a higher degree of cybersecurity within the country. It will offer greater safety and security to Indian consumers and will become a powerful deterrent to digital frauds. It will prove to be pivotal in building more trust towards the digital infrastructure and will significantly accelerate the rate of digital adoption within the country. The government's focus on multiple digital initiatives such as Mahila Shakti Kendra, BharatNet Project, and DigiGaon will further accelerate the country's digitisation and will bring digital parity between urban and rural areas. The budget also identified digital transactions as a key focus area to facilitate digital on-boarding of the uninitiated, unbanked populace.

Furthermore, the reduction in custom and excise duty for multiple components will benefit manufacturing start-ups catering to the sectors falling under the purview. It will reduce their compliance costs and boost domestic manufacturing, in addition to increasing the global competitiveness of the nation. Income Tax revision for salaried taxpayers will stimulate the consumer activity considerably over the next few years. This will not only benefit market players but will also enable the government to generate higher income through indirect taxes.

Although the demands of the start-up ecosystem - such as disinvestment, foreign listing, and research & development credit for innovation - have not been met entirely, the budget has by and large been satisfactory for the start-up community. It will make India's start-up ecosystem more lucrative for investors and drive greater growth for the industry as a whole. More essentially, the current budget will consolidate the Indian economy in the long run and pave the way for double digit GDP growth in the near future.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Sandeep Aggarwal

Sandeep Aggarwal, Founder, ShopClues & Droom

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