Budget 2019 for startups: Why Modi government should introduce a simplified compliance regime

New Delhi | Updated: July 4, 2019 3:14:57 PM

Union Budget 2019 India: The President’s address seems to suggest that the Union Budget 2019 to be presented on July 5 will contain announcements simplifying the rules for start-ups.

budget 2019 indiaBudget 2019: Many startup companies and promoters complain that compulsory audit casts a heavy burden of audit fees on them in the initial years as there is a gestation period before venture becomes profitable, says Srinivasan Anand.G

By Srinivasan Anand.G

Budget 2019 India: President of India Ram Nath Kovind in his address to both Houses of Parliament, said “Today India has joined the league of countries with most number of start-ups in the world.”. Further,“ To improve the start-up ecosystem, the Government is simplifying the rules”.

Simplified Compliance Regime for startups

The President’s address seems to suggest that the Union Budget 2019 to be presented on July 5 will contain announcements simplifying the rules for start-ups. While a startup entity can be a Registered Partnership Firm(RPF) or Limited Liability Partnership (LLP) or Private Limited Company(PLC) with turnover not exceeding INR 100 crores for recognition by DPIIT and benefits under StartUpIndia scheme,

The PLC entity form is preferred by startups as investors require “tag along rights” and “drag along rights” for easy and advantageous exit by selling their shares at advantageous price when startup succeeds and its valuation goes up. This kind of rights attached with shares can be provided only in PLC entity form.Thus,the PLC entity form makes it easier to attract outside investors and makes it easier to secure funding.

However, PLC startups have to comply with formalities of Companies Act,2013 including compliance with accounting standards and compulsory audit not to mention filing of various forms. The Central Government is empowered by section 462 of the Companies Act,2013 to grant relaxations or exemptions or modifications from various provisions of that Act. Taking a cue from the President’s address, one may hazard a guess that announcement for notifying a simpler regime for startup companies may be made in the Budget Speech and then Ministry for Corporate Affairs (which is also under the charge of the Finance Minister) will follow it up with notification of a simplified compliance regime. This will not require any amendments to the Companies Act,2013.

Many startup companies and promoters complain that compulsory audit casts a heavy burden of audit fees on them in the initial years as there is a gestation period before venture becomes profitable. They expect an exemption from compulsory audit for three years from the date of registration upto a certain turnover limit. It remains to be seen whether Govt will fulfil this expectation. They also expect that the Government makes amendment to section 44AB of the Income-Tax Act,1961 (ITA) to exempt startup companies from audit if turnover doesnt exceed a specified limit (Say Rs.10 crores) for first 3 years from date of registration.

Exempt start-up companies from MAT and rationalise section 80-IAC provisions regarding tax holiday

Section 80-IAC of the ITA provides a three year tax holiday in respect of profits and
gains of a start-up whose turnover does not exceed INR 25 crore limit. This means that recognised startups whose turnover exceeds INR 25 cr but within the INR 100cr limit cannot avail the exemption. Section 80IAC should be amended to stipulate that startups as defined by Notification issued by DPIIT shall be eligible startups eligible for tax holidays. This will ensure that DPIIT Notification revisions will not require frquent amendments in section 80IAC to sync it with startup policy in DPIIT Notifications.

Deduction may, at the option of the start-up, be claimed by it for any 3 consecutive assessment years out of 7 years beginning from the year in which the start-up is incorporated. A startup is recognised as such for Govt policies for 10 years from date of its incorporation or till it crosses the INR 100 crore turnover limit, whichever is earlier. Many startups complain they cant avail the tax holidays as ventures take at least 5 to 7 years to break-even. One hopes that the tax holiday period is rationalised to 10 years from date of incorporation. Further, the tax holiday becomes illusory for LLPs which are subjected to Alternate Minimum Tax(AMT) and for PLCs which are subjected to Minimum Alternate Tax(MAT). For such entities, it is like a holiday declared on February 31 as there is no exemption from AMT/MAT for startups eligible for tax holidays which come under the purview of MAT/AMT. To make the tax holiday a reality for startups, the provisions of Sections 115JB and Section 115JC be amended to exempt startups from MAT and AMT for 10 years from the date of incorporation.

Section 80-IAC tax holiday is available only for start-ups which are LLPs and PLCs and not to RPFs. One hopes that the tax holiday is extended to RPF startups also.

Exempting ESOPs from taxation on grant and taxing them only when employee sells shares

Employees Stock Option Plan facilitate workers’ participation in ownership management by making them shareholders in the company.They motivate employees to perform well as if they are working for their own business. Presently, ESOPs are taxed as perquisites in the hands of employees at the time of exercise of option at Fair maker value on that date less amount paid by employee. When employee sells the shares, capital gains are taxed. The taxation as perquisite at the point of exercise of option should be done away with and only capital gains on sale be taxed. This would boost startups

Conclusion

We can look forward to announcement of a simplified compliance regime for startups. Also, one expects that exemption of startup companies from MAT and rationalisation of section 80IAC tax holiday so that one startups can avail the tax holiday benefits without difficulties. Also, it is expected that an ESOP-friendly tax regime will be put in place to benefit employees of startups. Cumulatively,one expects startups will be facilitated to be the stars of our economy .

(Author is Sr.Consultant, M/s Taxmann Publications Pvt Ltd.Views are the author’s personal)

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