Union Budget 2017: Impact on Startups and MSMEs in India

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After November 2016’s surprise demonetization, businesses in India looked to the Union Budget 2017 to gauge the government’s economic outlook.

While this year’s budget retained a development-oriented focus, key tax and regulatory provisions declare the government’s intent to encourage business, create jobs, promote entrepreneurship in a digitally empowered economy, and spur GDP growth.

In this context, startups and micro, small, and medium enterprises (MSMEs) should pay attention to the following provisions and amendments stated in the latest budget.

Corporate Income Tax reduction

The budget reduced the corporate tax for micro, small, and medium enterprises (MSMEs) from the current rate of 30 percent to 25 percent beginning in the financial year (FY) 2017-2018. This tax cut will be applicable for all domestic firms (private limited companies) with a turnover or gross receipts of up to US$7.48 million (Rs 50 crore) in the FY 2015-2016.

Presumptive taxation and maintaining accounts

Small traders and businesses will benefit from a reduced minimum presumptive tax profit margin at six percent of earnings rather than the existing rate of eight percent – if they adopt digital transactions. This is an amendment to Section 44AD of the Income Tax Act, 1961 and will be applicable to those firms with a turnover under US$300,000 (Rs 2 crore).

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The threshold limit for maintaining books of accounts for individuals and professionals is now US$3741.95 (Rs 2.5 lakh), having increased from US$1796.14 (Rs. 1.2 lakh).

The limit for tax audit under Section 44AB of the Income Tax Act is increased to US$300,000 (Rs 2 crore) from the current limit of US$150,000 (Rs 1 crore) for the individual/HUFs (Hindu Undivided Families) opting for presumptive taxation under Section 44AD. 

Extension of tax benefits under Startup India initiative

Startups recognized under the government’s Startup India policy will avail extended income tax benefits. Eligible startups can now claim profit linked deduction exemption for three out of the first seven years under Section 80-IAC of the Income-tax Act; previously, it was three out of the first five years.

Shareholder restrictions removed for startups carrying forward losses

In an amendment to Section 79 of the Income Tax Act, the government will now allow companies to carry forward losses for seven years and set-off against profit in future years, even if the majority shareholder changes hands. This relaxation of shareholder restrictions is available only to recognized startups under the Startup India policy who are eligible to claim Section 80-IAC benefits.

Tax treatment of convertible shares

Startups often buy shares that can be converted from preference shares to equity shares. In a huge boost, Budget 2017 removes the provision of capital gains tax on such conversions.

Minimum Alternative Tax (MAT) credit extension

The government has extended the time limit for availing MAT credit to 15 years from the current limit of 10 years. This benefits startups claiming tax exemptions under Section 80-IAC and those companies with significant accumulated MAT credit.

Penalty for late income tax return filings

Budget 2017 introduces a penalty for late filing of tax returns – US$74.84 (Rs 5,000) for delay up to December 31 and US$149.68 (Rs 10,000) upon further delay.

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Filing Income Tax Returns in India

The penalty will be limited to US$14.97 (Rs 1,000) in cases where the taxable income is up to US$7483.91 (Rs 500,000).

Under India’s tax law, the due date for filing income tax returns is September 30 for companies and assessees covered under tax audit, for others the due date is July 31.

Changes to IDT provisions for FPIs

The budget contains several provisions encouraging funds from foreign portfolio investors (FPIs), which include the exemption from indirect transfer tax provisions for category I and II FPIs. Category I FPIs include sovereign wealth funds and central banks and category II includes mutual funds and banks. In Indian tax law, Indirect Transfer Tax (IDT) provisions cover the taxation of profit arising from the transfer of share or interest in a foreign company or foreign entity whose value is “substantially derived”, directly or indirectly, from assets located in India.

Limits to cash transactions

The budget introduced provisions to limit the amount of cash payments used for business transactions. Through an amendment to Section 40A of the Income Tax Act, the daily cash payment limit for company expenses or company acquisition of assets is fixed at US$149.68 (Rs 10,000); earlier, the limit was US$299.36 (Rs 20,000). Further, a new Section 269ST has been proposed in the budget, which will attract a 100 percent penalty on cash receipts of US$4,490.35 (Rs 300,000) or more accrued on a single day.

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