Union Budget 2019 – A Promising Outlook for Start-Ups

Last Updated at: October 23, 2019
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Budget 2019 - A Promising Outlook for Start-Ups
Budget 2019 - A Promising Outlook for Start-Ups

The Budget 2019 unravelled several happy surprises for the booming start-up industry which had off-late been witnessing declining foreign investment and a slump in exports. The data for 2018 reported a 108% increase in the number of new start-ups registered in India, taking the total tally to about 7200, which is still far behind the ambitious target of 50,000 startups by 2024.

In the last few years, have seen the government doling out several schemes for boosting entrepreneurial ventures, from Start-Up India, Digital India and Stand Up India to a host of tax amendments, labour law simplification and corporate compliance simplification. In this post, we analyse several aspects of amendments proposed by the Budget 2019-20 that are likely to impact start-ups.

UNION BUDGET 2019 FOR STARTUPS
UNION BUDGET 2019 FOR STARTUPS IN INDIA
  1. Withdrawal of Angel Tax Scrutiny – One of the highlights of the Budget announced earlier this month was the withdrawal of angel tax scrutiny. In the last financial year, many startups complained about receiving tax payment notices from the Income Tax department. While one of the ways to regulate the angel tax could’ve been to prescribe detailed mechanisms for calculation of excess value and its taxation, the government sought to grant greater relief by providing that no investors or start-ups that have filed all requisite returns would be scrutinised.

As angel tax is levied on the excess of share valuation over face value, it affects younger companies the most, since they are in need of bootstrapping capital.

 Government data also showed that while the start-up ecosystem was gearing up, there had been a significant decline in seed-funding to early-stage companies, with the possibility of angel tax imposition being an additional discouragement to investors. This does not, however, mean that angel tax stands abolished. The provision still exists and companies with late, irregular or incomplete filings may still find themselves with a tax notice.

Register Your Startup Business Now

  1. Removal of requirements to justify valuation– In line with the government’s aim to create an ecosystem of 50,000 startups by the year 2024, the Finance Minister in her speech said “At present, startups are not required to justify fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF). I propose to extend this benefit to Category-II Alternative Investment Funds also. Therefore, the valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny.”

While the business receives investment from registered venture capital funds that provide funds to SMEs, start-ups, early-stage companies (called Category 1) was exempt, those receiving funds from private equity firms, real estate funds etc, falling under AIF Category II shall also now be exempt from scrutiny. Thus, the scope of the exemption has been expanded to meet the needs of the growing investment industry.

  1. Easing norms on carrying forward and set-off of losses incurred by startups- The Union Budget 2019 provided that startups can now carry forward their losses on satisfying any one of the two conditions: continuity of 51% shareholding or voting power or 100% of original shareholders, that is no change in ownership. This benefit of carrying forward of loss was unavailable unless the original shareholders continued.

As startups mature, change in shareholding pattern is inevitable, and therefore, an extension of the provisions of carrying forward of losses is favourable to the industry.

  1. Promoting Women Entrepreneurs – A major area of focus in this budget was on creating more opportunities for women. The Stand Up India Scheme which was launched in 2016 to boost entrepreneurship in women, has been extended till 2025. Women SHGs have been given more support, with one woman for every SGH being entitled to a loan of ₹1 lac under the MUDRA Scheme. The benefit under Women SHG Interest Subvention Scheme, granting loans with lesser rates of interest, has also been expanded to cover all districts in India.
  2. Sector-specific announcements – The budget also focused on granting tax exemptions to investors as well as customers of electric vehicles. The norms on local sourcing for Single Brand Retailing have been eased. Greater FDI limits in the insurance and aviation sectors have also been proposed.
  3. Administrative changes– The budget also announced an e-verification process for startups receiving funding from investors. On the regulatory front, no scrutiny for angel tax can be initiated by any assessing officer without the approval of supervisors, reducing cases of improper notices for this tax. A separate committee would also be created to administer the issues that startups face due to angel tax. The complicated labour law structure in India is also under review to streamline it into a consolidated bill.

While there are several additional issues such as streamlining of GST, capital gains taxation, specifics on creation of one lac digital villages etc that could’ve been highlighted by the government in the budget, the efforts to promote women entrepreneurs, greater ease of doing business through simplification of tax, labour and corporate laws, and the government initiative of providing a dedicated TV-channel for entrepreneurs’ training and development, are applause-worthy.

 

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Union Budget 2019 – A Promising Outlook for Start-Ups

2642

The Budget 2019 unravelled several happy surprises for the booming start-up industry which had off-late been witnessing declining foreign investment and a slump in exports. The data for 2018 reported a 108% increase in the number of new start-ups registered in India, taking the total tally to about 7200, which is still far behind the ambitious target of 50,000 startups by 2024.

In the last few years, have seen the government doling out several schemes for boosting entrepreneurial ventures, from Start-Up India, Digital India and Stand Up India to a host of tax amendments, labour law simplification and corporate compliance simplification. In this post, we analyse several aspects of amendments proposed by the Budget 2019-20 that are likely to impact start-ups.

UNION BUDGET 2019 FOR STARTUPS
UNION BUDGET 2019 FOR STARTUPS IN INDIA
  1. Withdrawal of Angel Tax Scrutiny – One of the highlights of the Budget announced earlier this month was the withdrawal of angel tax scrutiny. In the last financial year, many startups complained about receiving tax payment notices from the Income Tax department. While one of the ways to regulate the angel tax could’ve been to prescribe detailed mechanisms for calculation of excess value and its taxation, the government sought to grant greater relief by providing that no investors or start-ups that have filed all requisite returns would be scrutinised.

As angel tax is levied on the excess of share valuation over face value, it affects younger companies the most, since they are in need of bootstrapping capital.

 Government data also showed that while the start-up ecosystem was gearing up, there had been a significant decline in seed-funding to early-stage companies, with the possibility of angel tax imposition being an additional discouragement to investors. This does not, however, mean that angel tax stands abolished. The provision still exists and companies with late, irregular or incomplete filings may still find themselves with a tax notice.

Register Your Startup Business Now

  1. Removal of requirements to justify valuation– In line with the government’s aim to create an ecosystem of 50,000 startups by the year 2024, the Finance Minister in her speech said “At present, startups are not required to justify fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF). I propose to extend this benefit to Category-II Alternative Investment Funds also. Therefore, the valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny.”

While the business receives investment from registered venture capital funds that provide funds to SMEs, start-ups, early-stage companies (called Category 1) was exempt, those receiving funds from private equity firms, real estate funds etc, falling under AIF Category II shall also now be exempt from scrutiny. Thus, the scope of the exemption has been expanded to meet the needs of the growing investment industry.

  1. Easing norms on carrying forward and set-off of losses incurred by startups- The Union Budget 2019 provided that startups can now carry forward their losses on satisfying any one of the two conditions: continuity of 51% shareholding or voting power or 100% of original shareholders, that is no change in ownership. This benefit of carrying forward of loss was unavailable unless the original shareholders continued.

As startups mature, change in shareholding pattern is inevitable, and therefore, an extension of the provisions of carrying forward of losses is favourable to the industry.

  1. Promoting Women Entrepreneurs – A major area of focus in this budget was on creating more opportunities for women. The Stand Up India Scheme which was launched in 2016 to boost entrepreneurship in women, has been extended till 2025. Women SHGs have been given more support, with one woman for every SGH being entitled to a loan of ₹1 lac under the MUDRA Scheme. The benefit under Women SHG Interest Subvention Scheme, granting loans with lesser rates of interest, has also been expanded to cover all districts in India.
  2. Sector-specific announcements – The budget also focused on granting tax exemptions to investors as well as customers of electric vehicles. The norms on local sourcing for Single Brand Retailing have been eased. Greater FDI limits in the insurance and aviation sectors have also been proposed.
  3. Administrative changes– The budget also announced an e-verification process for startups receiving funding from investors. On the regulatory front, no scrutiny for angel tax can be initiated by any assessing officer without the approval of supervisors, reducing cases of improper notices for this tax. A separate committee would also be created to administer the issues that startups face due to angel tax. The complicated labour law structure in India is also under review to streamline it into a consolidated bill.

While there are several additional issues such as streamlining of GST, capital gains taxation, specifics on creation of one lac digital villages etc that could’ve been highlighted by the government in the budget, the efforts to promote women entrepreneurs, greater ease of doing business through simplification of tax, labour and corporate laws, and the government initiative of providing a dedicated TV-channel for entrepreneurs’ training and development, are applause-worthy.

 

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.