How Startups Reacted to the Union Budget 2016

The much awaited Union Budget 2016-17 has finally been unveiled today. In his presentation, Finance Minister Arun Jaitley announced a 100% tax deduction programme for 3 years over a period of five years for startups approved before FY2019 under the Startup India scheme.

#Budget2016: What Startups Expect of This Budget?

Moreover, to ensure that only deserving enterprises get to reap the benefits of the “Start Up Action Plan”, the government has strictly defined the term ‘Startup’ as “a company which would have equity funding of at least 20% by incubation, angel or private equity fund, an accelerator or angel network registered with SEBI endorsing the innovative nature of the business.”

Jaitley in his presentation, expatiated on a series of policy initiatives and schemes that aim at eliminating the common challenges startups come across, and ensure that MSMEs in the country get a fillip. Few of the key highlights are:

1. No tax on income from Startups. 100% deduction on profits for startups for 3 out of first 5 years; MAT to apply.

2. Shortening of the holding period of from three to two years to get benefits of long term Capital Gain regime in case of unlisted companies.

3.Registration of a company will take no longer than just a day under the Government’s 1 Day Incorporation Policy.

4.The corporate income tax rate for the next financial year of relatively small enterprises i.e companies with turnover not exceeding Rs. 5 crore (in the financial year ending March 2015) is proposed to be lowered to 29 % plus surcharge and cess. The new manufacturing companies which are incorporated on or after 1.3.2016 are proposed to be given an option to be taxed at 25% plus surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.

Here’s how the Ecosystem Reacted to the Announcements:

NASSCOM welcomed the Union Budget 2016, while terming it as a mixed bag for the sector. The budget reiterates the 7.6% GDP growth rate for the country and provides a slew of incentives for the rural, agricultural sector to enable inclusive growth. Mohan Reddy, Chairman, NASSCOM said, “Our wish list for Budget 2016 included three key priorities – policy bottlenecks including ease of business; nurturing start-ups, products and eCommerce sector; and clarifications on transfer pricing to enable inward investments in India. Budget 2016 only partially covers these priorities. Extension of Section 10AA for SEZ units till 2020 is a positive outcome though the imposition of MAT on startups will not allow the full impact of the benefits to be realized.”

Expressing his happiness on Aadhar and IndiaStack, Vijay Shekhar Sharma, Founder and CEO, Paytm maintained, “Finally, the government has provided legislative backing that will unleash the full potential of such an incredible platform. With the focus on digital payments and incentives to startups, the Finance Minister has boosted our Prime Minister’s Digital India and Startup India plans. Overall, the budget creates a strong foundation for sustainable growth in rural & urban India. Steps to further improve Ease Of Doing Business will drive entrepreneurship which is essential for job creation.”

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Putting forth his opinion on the matter, Ajay Jalan, Founder & Managing Partner, Next Orbit Ventures said, “We welcome the initiatives taken by The Finance Minister Mr. Arun Jaitley, however we were looking forward for government support in creating a positive environment pertaining to venture capital (VC) and private equity (PE) funds in India, and bringing it at par with the global standards. We were expecting regulators should help unlock domestic capital pools by encouraging institutions regulated by them to invest in VC/PE asset classes. Pensions & provident funds should have been encouraged and investment limits for banks & insurance companies in VC/PE Funds could have been increased from 10% to 25%.

Here’s what Siddhartha Roy, CEO of opines- “The Union Budget 2016 has stepped in the direction to pave the way for rural digitization with a focus on digital literacy. The aim to connect 6 crore households will provide a stronger reach and deeper penetration for digital and technology driven services in rural India thus allowing residents a plethora of services. The digital literacy scheme announced by Mr. Arun Jaitley in rural India will not only give rise to increased manpower but also boost employment generation. The budget is an indication of the government’s resolve towards the Digital India scheme.”

Similarly, Manish Dashputre , Co-Founder, Medidaili, maintained, “We welcome the 100% tax deduction for start ups for 3 years as announced by the government today. However, tax exemption alone will not help spurt the government’s ambition of boosting the start up environment in India on a large scale. Exemption from indirect taxes including MAT would have greatly reduced the compliance burden. Even though the budget has announced several favourable measures, a clear framework to translate policy actions needs to be put in place to foster the start up ecosystem.”

Talking on the same line, Sumit Chhazed, Co-Founder, CredR  stated, “The Union Budget 2016 did not have much to look out for the start-up community, as we were hopeful to see some on-ground initiatives from the government to further ease regulatory clearances policies. Prime Minister’s declaration of 100% tax deductions for new startups for first 3 years is definitely an optimistic move towards nurturing entrepreneurship and facilitating ease of doing business. Government’s effort to provide skill development and training to youth along with implementation of digital literacy will help further providing a boost to the start-up ecosystem. We are hopeful to see more immediate action from the government in fostering a conducive environment for the entrepreneur community.”

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Likewise, Pramod Saxena, Chairman and MD, Oxygen Services is of the opinion that  the general direction of the budget as it lays emphasis on development of the rural sector, digitization and reforms in banking is right.  He said, “The digital literacy mission that has been announced which will target 6 crore households with financial literacy, with this the digital connect and payments connect will play an important role. Also, statutory status to Aadhaar will play a very big role in promoting digital payments, social benefit transfers and allowing several services beyond banking & insurance to be also be brought into its fold, whether it is government subsidies or government payments it will open a way for more government payments and subsidies to flow into the financial inclusion program.”

Last but not the least, expressing his thoughts on the subject, Manish Kumar, Co-founder & CEO GREX said, “We believe the Union Budget 2016-17 is well aligned with Prime Minister’s ‘Make in India’ and ‘Startup India’ campaign. The budget focuses clearly on growth, development, job creation and creating a better environment for doing business in India. Besides a particular focus on startups by giving them exemption on their profits for the first three years is a welcome move. The relaxation in capital gain tax for investment in Funds of Funds and reducing the time frame to two years from three for availing long term capital gain tax benefit in the unlisted space will further boost the investment in startups.” Adding further, he stated, “Keeping the ‘Digital India’ momentum rolling during the budget, introduction of electronic auction platform for the private placement market in corporate bonds is a welcome move.”

The Union Budget 2016 has been well accepted by the ecosystem, overall.  However, there is a certain uneasiness that the industry has expressed on the imposition indirect taxes including MAT. Moreover, the effective implementation of the policies that have been announced by the government, is also something that needs to be waited and watched. Nevertheless, the startup community in general, looks quite happy with the government’s emphasis on narrowing down the digital gulf in the country; a move that would definitely help budding enterprises grow faster and expand their footprint across geographies.