Well hit – but missed : How the 2017-18 budget missed firing up the start-ups sector


Aninda Pal (Partner), Rohit Chakraborty (Associate), Urmika Agarwal (Trainee Associate)

As they say – “sometimes it’s better to react with no reaction”, the 2017-18 Budget was, to an extent, a no-nonsense budget for start-ups. It presented hardly any populist schemes for start-ups to evoke passionate sentiments. The budget had no block-buster announcement to match up the scale of the Rs. 10,000 crore fund-of-funds for start-ups or the launch of the ‘Start-up India, Stand-up India’ Initiative, as announced in the last budget. However, the tone of this Budget is to set out the second generation reforms for start-ups by establishing an enabling environment where start-ups could flourish.
Most of the proposals laid out in the Budget aim at easing the operational challenges being faced by start-ups. The condition of continuous holding of 51% of voting rights for carry forward of losses in respect of start-ups has been relaxed subject to the condition that the holding of the original promoter/promoters continues. Also, the profit linked deduction available to start-ups for 3 years out of 5 years has been changed to 3 years out of 7 years, giving start-ups more time and flexibility to choose their 3year tax holiday.
Further, carry forward of MAT credit has now been permitted up to a period of 15 years instead of 10 years at present. It would have, however, been prudent to exempt start-ups from the levy of MAT or atleast rationalize the rates, which is currently at 18.5 per cent. For MSMEs with an annual turnover of up to Rs. 50 crores the income tax rate has been reduced to 25% from the current applicable rate of 30%. There is also a scheme of presumptive income tax for small and medium tax payers, whose turnover is up to Rs. 2 crores. At present, 8% of their turnover is counted towards presumptive income which has been reduced to 6% in respect of turnover which is received by non-cash means. This benefit will be applicable for transactions undertaken in the current year also. Also concessional rate of 5 per cent on interest on external borrowings have been extended till 2020.
Start-ups also stand to gain from aggressive spending outlined for rural economy, as well as from tax-cuts for middle class consumers. The allocation of Rs. 10,000 crores for the Bharat Net Project in fiscal 2018, which will deliver high speed internet connectivity to over 1.5 lakh gram panchayats is going to radically transform the e-commerce sector, as global research shows that 40% of the people who get on internet today are likely to buy something within the next two years. As many start-ups use digital means to sell their good or services, they will stand to gain by the proposals in the budget aimed at promoting the digital economy.
These budget proposals would definitely go a long way by easing up some of the challenges faced by start-ups. However, there are many other promises which were made to start-ups, which remain largely unaddressed, mostly due to executive hurdles. Promises such as the creation of the credit guarantee fund to catalyse entrepreneurship through credit to innovators and most importantly setting up the Rs. 10,000 crore “fund of funds” for start-ups managed by the SIDBI, is yet to see the light of the day.
Many experts also believe that extending the number of years for which tax exemptions/ benefits could be availed of has no meaning unless the parameters set by the Government to recognise an entity as a start-up are made uniform and set in stone. As of now, in order to be recognised as a start-up, it needs to submit along with its application, a letter of recommendation from a Government recognised incubator, or an incubator established in a post graduate college in India or from an Industry Association or a letter of funding from an incubation fund, private equity fund or an accelerator/angel network. Since, there are multiple agencies who can certify that these start-ups are eligible for tax benefits leads to confusion and delays in granting recognition. Most start-ups would still be figuring out the manner of availing these exemptions by the time the five (now seven) years could be over. Looked at it from this perspective, increasing the period for which tax exemptions/ benefits could be availed of is nothing new for start-ups to be cheerful about.
Several other proposals made by Industry associations still remain in consideration like streamlining of overseas investment operations for start-ups, setting up alternative institutional trading platforms under SEBI to enable assistance to start-ups in the listing process and in raising funds in the domestic market, fast tracking the examination and disposal of patent applications, development of mobile applications to establish single window clearance for easing compliance burden.
Viewed at from a holistic perspective, one may draw a conclusion that though the Budget offers enough tax sops for start-ups, it would do good if the executive machinery to implement these proposals is also suitably geared up in the right direction so that the promises made for creating of an autonomous business landscape for start-ups is created.

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