What can Startups Expect from Budget 2017?

The government of India, under the leadership of PM Narendra Modi, has started the Startup India initiative in 2016. This was to promote startups to encourage and help entrepreneurs and develop Indian economy. Ironically, startups did not do well in 2016. As per the data analytics firm Tracxn, 212 startups shut down in 2016, 50 percent higher than 2015.
Naturally the startups are hoping for tax incentives in the Budget 2017 to give them the boost they need.

Coverage under Start-up India benefits
Startup India benefits are only available to those who innovate and are approved from a specified entities. Several start-ups, do not qualify for the innovation clause.The scope of this condition must be expanded so more start-ups can be included for these benefits.

Tax holidays
Startups, under Startup India, enjoy income tax holiday for first three years. Three years is too little time as most startups do not earn profits for at least five years. In fact, they usually incur losses for the first few years. So such a 3 year tax holiday has little benefit. Commerce and Industry Minister Nirmala Sitharaman has also suggested to raise it to seven years.

No MAT for startups initially
Although startups are exempted from tax for the first 3 years, there is no mention about MAT. As per current provisions, MAT is applicable if any company has book profits. So MAT becomes applicable to startups, defeating the entire purpose of the tax holiday. The government should clarify about MAT and exempt startups from MAT at least for 5 years.

No profit-linked holiday for start-ups
ICAI recommends that profit linked holiday for start-ups will not be beneficial since most do not make profits in initial years. Instead start-ups could enjoy other benefits like longer period for carry forward of loss. Also, benefit of deduction of 30% of wages of new employees is currently enjoyed by manufacturing units only. It can be changed to include all startups as many are under service industry and lose out on this benefit.

Investing your long term capital gains in startups
If you sell your house or land and invest the proceeds in a new company where you hold >50% shares, then your long term capital gains will be exempted. The company has to buy plant and machinery within 1 year. Lock in period for shares and machinery is 5 years. This could be amended to include other long term capital assets apart from property.Also the lock-in period may be reduced from 5 to 3 years to facilitate easier exits.

Incentives for digital payments
Startups mainly depend on digital payment modes like cards, wallets, mobile banking etc. Already government has announced some benefits for small traders and businessmen with turnover up to Rs 2 crore. Their income will be assumed to be 6% of their receipts which have been collected via digital means, under the presumptive taxation scheme. It is expected that more benefits may be extended to startups for digital payments.

Easy access to funds:
In India, startup fund sources are mostly equity based. They hope for cheaper loan access with startup-friendly debts especially for working capital. Banks often refuse to grant loans to startups as they are risky. Although the government has set up a Rs. 500 crore credit guarantee mechanism, more steps have to be taken to ensure easy loans.

The government must keep its focus on encouraging entrepreneurs of today who will build businesses of tomorrow. Startups are hopeful that Budget 2017 will bring tax reliefs, ease of business and give them the boost they need.