Union Budget Proposals Helpful for SMEs, Startups


The last decade has seen a tremendous rise in the number of startups and small-scale industries in Kerala. The startup industry in the State has been growing at a steady rate by promoting innovation and nurturing young entrepreneurs. The majority of business and industrial houses belong to this category and they are crucial for the economic progress of the State. Funds geared towards making initial growth possible for a startup, tax exemptions for firms that are in the initial stages, tax holiday for IT/ITeS startups, relaxation in corporate tax to support small-scale firms etc. were some of the items in the State’s wish list for the Union Budget. The Budget, presented by Arun Jaitley, Union Finance Minister, on February 1, fulfilled some of these wishes. Even though it failed to address all the expectations of the State, the overall consensus is that the Budget has been “fair”.

The Finance Minister, in his Budget proposals in 2015, had announced that the corporate tax rate would be gradually brought down to 25 per cent. The Minister in his current Budget speech explained that “Medium and Small Enterprises occupy bulk of economic activities and are also instrumental in providing maximum employment to people. However, since they do not get many exemptions, they end up paying more taxes as compared to large companies.” This has been a cause of major concern which has been raised by various stakeholders before the Government. Relying on statistical data of financial year 2015-16, it has been noticed that 2.85 lakh companies making profit of less than Rs. one crore pay an effective tax rate of 30.26 per cent, whereas 298 companies earning profits above Rs. 500 crore pay only an effective tax rate of 25.90 per cent. Further, the Minister himself had said that out of the 6.94 lakh companies filing returns for the Assessment Year 2015-16, 6.67 lakh companies belonged to this category of medium and small enterprises.

Budget 2017 had proposed to address various taxation issues faced by the medium and small enterprises. The Finance Minister stuck to his words as promised in the 2015 Budget and brought the corporate tax rate down to 25 per cent for all domestic companies with an annual turnover of up to Rs.50 crore. It is estimated that this will benefit 96 per cent of the companies and would make the MSME sector much more competitive and able to compare with the larger corporates. The reduction in the rates does throw a clarion call for enterprises to review their form of doing business. In Kerala, in my view, the time is ripe for transitioning from a partnership form of doing business to a corporate institution.

Tax benefits for startups were also part of the Budget proposals. The tax holiday period for startups from three consecutive years out of five years has been raised to three consecutive years out of seven years, providing a new impetus to the startup ecosystem in the State. Moreover, the present condition of continuous holding of 51 per cent of voting rights has been relaxed and altered to the condition that only the holding of the original promoter/promoters continues, which facilitates effortless fund raising. However, the benefits are available only to very few startups, since the definition of an eligible startup as per the Income Tax Act is very restrictive and the Budget has failed to relax the restrictions on the eligibility conditions for startups. According to the status report in the Startup India website, only eight startups had been approved for availing tax benefits in the year 2016 out of 111 applicants, which is indeed disheartening. In my view, the said relaxation would definitely help the emerging startup scene in Kerala.

One of the biggest bright spots in the Union Budget has been the emphasis on real estate space.  The clarity on treatment of Joint Development Agreement and the exclusion of the value of land for determining the liability to service tax would help tax payers in Kerala. Interestingly, the issue has turned to be a sore point for the industry at large. The said clarity would definitely aid the sector, which is going through a rough patch.