The Covid-19 pandemic and the sudden lockdown have had an influence on almost every industry in India and across the globe. While some segments, such as the travel and hospitality sector, have had a more in-depth and destructive impact on sectors such as the service industry, the lockdown has fundamentally changed how business is done. No doubt that last year, the many startups and the MSME sector experienced vast slower growth.
Against this background, the industry had high hopes in Budget 2021 to revive the economy and provide much relief to the suffering sectors. Though its budget could not have been a magic cure pain killer that could cure everything, it was a reformative one. Several stakeholders were well received, including the International Monetary Fund, which accepted the budget’s focus on the economy and policies that would promote a robust and supportive economic recovery.
Overall, the budget has made further progress in the Government’s digitization efforts, further facilitating the ease of doing business in India, minimizing litigation, and plugging tax law gaps. With the specific changes in Income – Tax, we may see the facility of online invoicing software for enterprises and online billing shift software features.
Let’s see what’s there in the budget for MSMEs and startups.
1. For MSMEs
The MSME industry accounts for 45 percent of manufacturing production and more than 40 percent of country exports. MSMEs were also weakened by the lockout and faced survival problems.
The Government has adopted numerous policies to provide the necessary assistance to MSME through its ‘Atmanirbhar Bharat Abhiyan’ relief package. It has announced a significant amount of INR 3 lakh crore, especially for the MSME market, and has undertaken a range of regulatory steps to pave the way for the long-term stability and growth of MSMEs.
These initiatives included, among other things, collateral-free loans, equity injection by ‘fund of funds,’ relaxed annual turnover requirements and contribution thresholds for the designation of small and medium-sized companies, etc.
The Government will devote over 15,700 crores to the MSME sector—more than double last year. The Government will launch a data mining and artificial intelligence platform to support the MSME market and enhance the National Company Law Tribunal (NCLT) framework to speed up disputes by systems such as e-courts and alternative debt resolution.
Changes are also suggested to support small and medium-sized businesses concerning customs duties on khadi, leather, gemstones, etc., to facilitate domestic processing. The Government would also raise customs duty on cotton and silk to the benefit of farmers.
The customs duty on flat, semis and long goods of stainless steel, alloy and non-alloy, for the benefit of the small and medium-sized businesses who got massively hit by the pandemic has been lowered 7.5 percent uniformly.
These initiatives would pave the way for India’s increased role, development, and employment of small and medium-sized enterprises. The budget further provides a unique debt settlement system for medium and small-sized enterprises.
2. For Start-Ups
In 2016, the Government initiated the ‘Start-up India’ initiative to promote startups in the region. Due to this initiative, India has become the 3rd largest startup ecosystem, with about 55,000 startups until August 2020. India is home to 34 unicorns with a total value of USD 115.5 billion1.
The Central Government recently authorized the ‘Start-up India Seed Fund Program’ to offer financial support to startups. This scheme provides financial support to startups for proof of concept, prototype creation, product research, business penetration, and promotion. The Government has also recently approved a fast-track merger of startups.
In a massive boost to startups, the Government has facilitated the incorporation of one-person businesses. Such businesses will be permitted to expand without any limitation on paid-up capital or turnover. They may convert to any other form of business at any time, according to the Government’s information.
To further foster the startup space and stimulate growth in this market, this incentive has been extended to startups incorporated by one year until 31 March 2022. While this is a positive change, considering the long gestation time, most startups will not be eligible to benefit from tax holiday incentives within ten years of their incorporation. Thus, the appeal for an extended duration of 15 years remains imperative for the industry.
Also, to extend the financing sources for new age-eligible companies, exemption from the Tax on capital gains resulting from the selling of defined properties has been implemented in the revenue-tax laws.
The exception shall be applicable in situations where the transferor has subscribed to the authorized company’s shares based on earnings. The exception is based on the asset’s disposal by a defined date, which is now extended by a further year to March 2022.
Now, Let’s look at the essential changes proposed in this year’s budget which could impact MSMEs and Start-Up as follows:
Proposed changes in Income-Tax Law
- TDS on goods purchase
- Extension In a time limit of Tax Holiday for Start-Ups
- Extended time for Capital gain exemption
- Increased threshold for Tax audit
- Dispute resolution committee for medium and small taxpayers
- Revamp of reassessment proceeding
Indirect Tax proposals
- Restriction of input tax credit
- Self – certification of reconciliation statement
Proposals in Company Law
- Change in definition of small companies
- Changes in One-person company
- The quicker dispute resolution system
The Union budget for 2021 concentrated primarily on recovery plans for the COVID-hit economy. The Government will devote much of the spending to develop healthcare and public facilities.
While such demands of startups, such as the creation of an Overseas Listing System, raising the number of years over which businesses can sustain losses, easing pricing conditions and further delaying the tax effect on ESOPs, etc., have not been met, the budgetary has mostly been considered to provide impetus to the industry.
Overall, the budget plans target putting the Indian economy back on a development path by providing funding to MSMEs and startups. Still, implementation will be the secret to progress.
With the specific changes for MSMEs and startups, especially regarding Tax, we can see the difference in the operation of Online billing software.
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