Union Budget 2021: Key Takeaways for Indian Startups

Finance Minister Nirmala Sitharaman on Monday announced the Union Budget 2021-22. The Minister introduced the union budget stating that it rests on six pillars. They are health and well-being, physical and financial capital and infrastructure, inclusive development for aspirational India, reinvigorating human capital, innovation and R&D, and minimum government and maximum governance.

Although the budget has mixed responses, a bigger percentage of the population has applauded the focus on digitisation and infrastructure development. Mr Ketan Patel, MD, HP India Market stated that the budget confirmed the government’s focus on developing infrastructure and skills which will have short and long term benefits to Indian economy & people. “From a technology point of view, the incentives for creating digital infrastructure, education and skilling spell out the government’s intent on developing the country’s human capital. Steps like international collaboration to develop new skills will help Indian youth prepare for modern job requirements and make them global-ready,” he said.

“The announcement of the National Digital Educational Architecture (NDEAR) is a welcome step. It will help build a Digital First mindset in the entire education system in India and help students and educators adopt new ways of learning and teaching. Besides, we welcome the doubled allocation for MSME sector which will incentivise the digital transformation of our small businesses that are the backbone of our economy,” he further added.

Mr Patel's Union Budget 2021 reaction sums up how most industry leaders have felt. But the country is freshly out of a pandemic and needs funds to survive. And now, everyone has been eyeing the Finance Minister's fund allocation and incentive schemes to various sectors, especially startups. Thus, here's a list of key points for Startups from the Union Budget 2021.

1. Tax Holiday for startups

Finance Minister Nirmala Sitharaman has extended by one more year the tax holiday for startups. This has provided a much-needed post-pandemic boost to the startups, experts suggest. According to Union Budget 2021-22, startups will get capital gains exemption by one more year to 31 March 2022. Before this, Section 80-IAC of Income Tax Act provided 100% deduction of the profits by an eligible startup; for 3 consecutive years out of 10 years, incorporated before 1 April 2021.

Startups can avail this exemption provided that annual turnover does not exceed INR 25 Cr in any financial year.

2. Tax Relief on ESOPs from startups

The Union Budget has proposed a host of incentives for India’s startup ecosystem. One of them included deferring of taxes levied on employee stock ownership plans (ESOPs). At present, employees pay tax when they exercise their options. They also pay taxes when they sell their shares.

The Union Budget has now proposed deferring the tax payment on the exercise of ESOPs by five years; or until an employee leaves the company; or when he/she sells the shares, whichever is earlier. However, in some cases employees will have to pay tax twice. For example, if an employee holds the shares for a long-term expecting a buyback deal, then the quantum of shares redeemed will be taxed at 20%, in line with the Finance Act 2018 as a long-term capital gain.

3. Faceless Income Tax appellate tribunal and easy reassessment openings

The Union Budget has proposed that except in cases of serious tax evasion, i.e. of more than 10 lakhs, assessment proceedings in the rest of the cases shall be reopened only up to three years, against the earlier time limit of six years. The Union Budget 2021 has also proposed a National Faceless Income-tax Appellate Tribunal Centre. The Tribunal will work for all second-level appeal cases. Thus, all proceedings before DRC to be faceless and jurisdiction-less. This will reduce litigation and provide impetus to small and medium taxpayers to settle disputes at initial stages.

4. Time limit for assessment and re-assessment reduced

To reduce compliance burden and provide certainty to taxpayers, the time-limit for re-opening of assessment is proposed to be reduced to 3 years from the existing 6 years from the end of the relevant assessment year. Re-opening of assessment up to 10 years will be only allowed where there is evidence of undisclosed income of Rs 50 lakhs or more for a year. Further, discretion in re-opening and henceforth re-opening is removed, henceforth re-opening shall be done only in cases flagged basis data analytics, the objection of Comptroller and Auditor General, and where there is evidence for tax evasion in search and survey cases.

5. Threshold of a 'small company' changed

To reduce the burden of compliances under company law provisions, for a company to qualify as a ‘small company’, the budget increased the paid-up capital threshold from Rs 50 lakhs to Rs 2 crore and the turnover threshold from Rs 2 crore to Rs 20 crore.

6. Changes in Company Law

For benefitting startups, the government has proposed changes in companies law provisions. The first one is, an Indian citizen who stays in India for a period of 120 days (instead of 182 days) can set up one-person companies. According to the new budget, non-resident Indians can also incorporate one-person companies. Further, the FM introduced a new requirement for OPC to compulsorily convert to either a private company or public company. It has removed the compulsion of PUC exceeding Rs 50 lakh or turnover exceeding Rs 2 crore in three years preceding consecutive years.

Now, OPCs will be able to grow without the above restrictions and this move will provide flexibility to founders to convert the OPC at any time.

7. Fintech Digital Transformation

The budget proposed an allocation of Rs 1,500 Cr to boost the penetration of digital payments. It aims to boost financial inclusion. For this, the Finance Minister Nirmala Sitharaman has also proposed to set up a “world-class” fintech hub near Gujarat capital Gandhinagar at GIFT City (Gujarat International Finance Tec-City).

8. FDI Boost to Insurance Sector

The Union Budget 2021 has proposed amendments to the Insurance Act, 1938. It aims to increase permissible FDI from 49% to 74% in insurance companies. Thus, it will allow foreign ownership and control of insurance companies in the country with certain safeguards. One of the safeguards includes that the majority of directors on the boards and key management persons will have to be resident Indians. Further, 50% of the directors should be independent directors. These companies should also retain a specified percentage of profits as general income.

9. Dedicated Early Stage Startup Fund

Startup India Seed Fund Scheme shall offer Rs 20 Lakhs to startups as a grant for Proof of Concept. They can also avail another 50 lakhs through convertible debentures or debt or debt-linked instruments for commercialization. The fund will, further, provide financial assistance to startups for Proof of Concept, prototype development, product trials, market-entry, and commercialization.

Thus, to receive the fund, you will have to register yourself on Startup India platform. After that, in selected incubators, you can apply for the seed fund with relevant documents.