Budget 2017 is well balanced and had an overall systems change with how businesses transact. This was in accordance to government’s vision and policies. Budget 2017 had a lot to cheer for despite the changes in policies after demonetisation. It was ushered in with a good response from India Inc. and from the Indian startup communities.
Here are the major impacts that this budget has on startups:
1. Lowered Corporate Income Tax
The budget has included a reduction in corporate tax for MSME to 25 percent from the current rate of 30 percent for all companies. Domestic small and medium scale companies with a turnover of up to Rs. 50 crore can now claim benefits. This promotes a more structured form of business organisation.
2. Relief for businesses opting for presumptive taxation with non-cash receipts
The government has reduced the requirement under section 44AD during the demonetisation period for declaring a minimum presumptive tax profit margin to 6 percent from the existing 8 percent in cases of non-cash receipts and turnover, which is still presently applicable. Similarly, the threshold limit for maintenance of books of accounts for individuals and professionals has been increased to Rs 25 lakhs from Rs 10 lakhs whereas the limit for tax audit under section 44AB has been increased to Rs 2 crore from the current limit of Rs 1 crore for individuals or HUFs opting for presumptive taxation under section 44AD.
3. Time limit extension for using Minimum Alternate Tax (MAT) credit
Startups are exempt from income tax under Section 80-IAC but are liable to pay MAT or Minimal Alternative Tax. Currently, the government announced that it cannot abolish MAT. It will, however, extend the time period for availing MAT credit to 15 years from the current limit of 10 years. This will benefit startups claiming tax exemptions under section 80-IAC and those that have a huge MAT credit lying unused.
4. Carry forward of losses for companies
Under section 79 of the Income-tax Act, 1961, companies are allowed to carry forward of losses of a company for seven years and then set-off against profit of future years. However, there was a restriction wherein the carry forward and set-offs were not allowed in case 51 percent shareholding were not intact in the loss incurred in the year of set off. Presently, one only needs shareholding to carry forward their losses. But this is applicable for startups with the Startup India policy under Section 80-IAC.
Under the Startup India policy, startups can claim tax benefits in three out of the first seven years under Section 80-IAC of the Income-tax Act, 1961. Initially, this was three out of the first five years. Several representatives approached the government to increase the tax benefits as startups rarely earn profits in the first few years of their operations.
5. Cash receipt of Rs 3 Lakhs or more would attract 100 percent penalty
The government added a new section 269ST to stop all cash receipts of Rs.3 Lakhs or more in a single day. This would also be applicable against a single bill or occasion or event that would attract a penalty on the amount.
6. No capital gains on conversion of preference shares to equity shares
Previously when preference shares were converted to equity shares, it was considered as a transfer and had attracted capital gains tax. Now the government has exempted this conversion and acts as a big relief for startup investors that buy convertible preference shares.
7. Cash payments above Rs. 10,000 not allowed
Previously cash payment above Rs. 20,000 was not allowed as deduction from taxable income in the books of the company. Under section 40 A, this limit been reduced to Rs. 10,000 and covers capital expenditure. Any payment made in excess of Rs. 10000 for a capital expenditure will not be added to the total value of assets and hence no depreciation will be allowed for it Subsequently, this would increase capital gains on a future sale.
Budget 2017 looks promising for startups and continues with Government agenda and policies by moving towards a digital environment. Additionally, the government will add incubators in five districts which will be expanded to 25 districts by 2020.