The markets sank days before the budget as rumours were rife of a change in the capital gains tax for the listed market, numerous blogs and articles
Entrepreneurs eagerly awaited the budget, hopeful of the myriad changes they requested coming to fruition
In Budget 2021, startups only saw two incentives – both of which were an extension of existing schemes
Budget 2021 has been the most expected of any of the previous budgets because of the context behind it – Covid-19, GDP contraction, dislocation of supply chains, a buoyant stock market and other such factors. The Honourable Finance Minister also stated that the budget will be a memorable one – “a budget like never before”. The markets sank days before the budget as rumours were rife of a change in the capital gains tax for the listed market, numerous blogs and articles imploring the Honourable Finance Minister to go big on reforms and professing wide-scale reforms were also written and the uncertainty of the country was at the same peak as what preceded the first lockdown announcement.
Entrepreneurs as well eagerly awaited the budget, hopeful of the myriad changes they requested coming to fruition. But since the 2016 budget, not much has been delivered for Indian startups in the budget and Budget 2021, unfortunately, continued this trend. The same asks of the industry for the past five years carried forward to this year, with very few items being addressed in the manner that entrepreneurs hoped.
The ESOP changes announced in Budget 2020 were only ringfenced to IMB registered startups, which only number as low as 400 in a country which boasts of over 50,000 startups. The rationalization of the IMB (Inter-Ministerial Board) framework – where a group of bureaucrats must decide if a startup is “innovative” or not, has failed the Indian startup ecosystem by adjudging less than 1% of all Indian startups as innovative, is still awaited. It must be noted that all the tax incentives for startups only apply to IMB registered startups, thus depriving 99% of the Indian startup ecosystem of these much-vaunted tax incentives and breaks.
In Budget 2021 as well, startups only saw 2 incentives – both of which were an extension of existing schemes.
The first was the extension of the Tax Holiday for startups, wherein startups registered after April 1, 2016, but up to March 31, 2021, who received IMB certification, could avail of a tax holiday of 3 out of 10 years (section 80 IAC, Income Tax Act, 1961). Instead of addressing the core issue with the IMB certification process, the Honourable Finance Minister extended the tenure for qualification to March 31, 2022.
Similarily the capital gains tax break of INR 50 lakhs for investing into IMB registered startups (section 54 GB, Income Tax Act, 1961), also stands extended by 1 year. Never mind that the startup needs to dilute 50% for INR 50 lakh, only applies to equity shares (not preference) and the startup can’t invest into computers – has all but made this section a paper tiger, this scheme stands extended by a year.
The changes to the One Person Company (OPC) structure, while great for sole proprietorships, is not meaningful for startups who want to get funded as an OPC can only have 1 shareholder. Thus the OPC cannot get external investors or even ESOPs.
The main sigh of relief across all entrepreneurs is that no new taxes were introduced (save for the agri-cess on fuel and other items). Given the fiscal constraints, this is a huge win for the ecosystem and a huge sigh of relief across the board. It must be noted that the markets had risen over 1,500 points on this news.
Overall, it must be noted that Budget 2021 is the Atmanirbhar Budget for Indian Startups – it’s lasting message is for Indian startups to become self-reliant and not rely on new government schemes or incentives to run their business. While some may dismay at this, one can take comfort in the words of the late Finance Minister Shri Arun Jaitley who said – “Entrepreneurs need freedom from the state, the sector should be less regulated. India’s IT sector grew because we had no laws restraining them.”