By Tanvi Loond
Union Budget 2020 India: India watched with bated breath as Finance Minister Nirmala Sitharaman unveiled the budget for the year 2020-21 on February 1st 2020. “This is the Budget to boost the income of people of India and enhance their purchasing power”, she affirmed. After a year of economic slowdown, this budget is focused on trying to put money in the hands of people and thereby stimulating economic growth. Among the key focus areas of this budget are measures to accelerate growth of Micro, Small and Medium Enterprises (MSMEs) and to boost investment in the Indian start-up ecosystem. Here is how Budget 2020 will impact MSMEs and Start-ups.
Incentives for MSMEs
Requirement for audit
Currently, businesses having turnover of more than Rs. 1 crore are required to get their books of accounts audited by an accountant. In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, the turnover threshold for audit has been proposed to be raised from the existing Rs. 1 crore to Rs. 5 crore. The increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash.
Reduction of corporate tax rate
To boost investment, the corporate tax rate for new companies in the manufacturing sector has been reduced to 15%. For existing companies, the rate has also been brought down to 22%. This will enable companies to expand their businesses and make fresh investments in the coming future.
Removal of Dividend Distribution Tax
Currently, companies are required to pay Dividend Distribution Tax (DDT) on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess in addition to the tax payable by the company on its profits which results in increasing in tax burden for investors and especially those who are liable to pay tax less than the rate of DDT if the dividend income is included in their income. Further, non-availability of credit of DDT to most of the foreign investors in their home country results in reduction of rate of return on equity capital for them. In order to increase the attractiveness of the Indian Equity Market and to provide relief to a large class of investors, the DDT has been proposed to be removed. The dividend shall be taxed only in the hands of the recipients at their applicable rate.
Trade Receivable Discounting system
In order to enhance economic and financial sustainability of MSMEs, amendments have been proposed to the Factor Regulation Act 2011. The amendment will enable NBFCs to extend invoice financing to MSMEs through Trade Receivable Discounting systems or TReDS. The objective of TReDS, launched by the Reserve Bank of India in December 2016, is to facilitate financing of invoices / bills of MSMEs drawn on corporate and other buyers, including the Government Departments and PSUs, by way of discounting by financiers.
Working capital credit
To ensure working capital financing for small businesses, a scheme to provide subordinate debt for entrepreneurs of MSMEs is proposed to be introduced. This subordinate debt to be provided by banks would count as quasi-equity and would be fully guaranteed through the Credit Guarantee Trust for Medium and Small Entrepreneurs (CGTMSE).
Ease of doing business
An app-based invoice financing loans product will be launched. This will obviate the problem of delayed payments and consequential cash flows mismatches for the MSMEs.
Equity and technical assistance
To make mid-size companies globally competitive, selected sectors such as pharmaceuticals, auto components and others will be given handholding support – for technology upgradations, R&D, business strategy etc.
Intellectual Property Right (IPR)
A digital platform would be promoted that would facilitate seamless application and capture of IPRs. Also, in an Institute of Excellence, a Centre would be established that would work on the complexity and innovation in the field of Intellectual Property.
Government e-Marketplace (GeM)
To enable smooth procurement by MSMEs, the Government e-Marketplace (GeM) will create a Unified Procurement System for providing a single platform for procurement of goods, services and works.
E-logistics market
A National Logistics Policy will be released soon. Inter alia; it will clarify the roles of the Union Government, State Governments and key regulators. It will create a single window e-logistics market and focus on generation of employment, skills and making MSMEs competitive.
Goods and Services Tax
Several indirect tax reforms have been proposed to improve compliances such as a simplification of GST returns, automation of GST Refund, introduction of electronic invoice to facilitate compliance and return filing, Aadhaar based verification of taxpayers to weed out dummy or non-existent units, usage of deep data analytics and AI tools to crackdown GST input tax credit, refund, and other frauds. GST rate structure is also being deliberated so as to address issues like inverted duty structure.
Restraint on import of items being produced by domestic MSMEs
Labour intensive sectors in MSME are critical for employment generation. Cheap and low-quality imports are an impediment to their growth. Special attention has been taken to put measured restraint on import of those items which are being produced by our MSMEs with better quality. Keeping in view the need of this sector, customs duty is being raised on items like footwear and furniture.
Incentives for Start-ups
ESOP Taxation
In order to encourage the start-ups to employ highly talented employees at a relatively low salary by granting them Employee Stock Option Plan (ESOPs), the burden of taxation on the ESOPs has been proposed to be reduced. Currently, ESOPs are taxable as perquisites at the time of exercise which leads to cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term.
It is proposed to defer the tax payment on these ESOPs granted by start-ups to their employees by 5 years or till the employee leaves the company or when the said employee sells those shares, whichever is earliest.
Tax holiday for eligible Start-ups
Currently, an eligible Start-up having turnover up to 25 crores is allowed deduction of 100% of its the profits for three consecutive assessment years out of seven years if the total turnover does not exceed 25 crore rupees. In order to extend this benefit to larger start-ups, the turnover limit has been proposed to be increased from existing ` 25 crore to ` 100 crores. Moreover, considering the fact that in the initial years, a start-up may not have adequate profit to avail this deduction, the period of eligibility for claim of deduction has been extended from the existing 7 years to 10 years.
Technology-backed businesses
Knowledge Translation Clusters are proposed to be set up across different technology sectors including new and emerging areas. For designing, fabrication and validation of proof of concept, and further scaling up Technology Clusters, harbouring such test beds and small scale manufacturing facilities would be established.
Seed funding support
The government has proposed to provide early life funding, including a seed fund to support ideation and development of early stage Start-ups.
Quantum technology
Quantum technology is opening up new frontiers in computing, communications, cyber security with wide-spread applications. It is expected that lots of commercial applications would emerge from theoretical constructs which are developing in this area. It is proposed to provide an outlay of Rs. 8000 crore over a period 5 years for the National Mission on Quantum Technologies and Applications
Tanvi Loond is Founder and CEO, Insta C.A., an online tax and accounting service for SMEs and startups.
