Union Budget 2021: What India Inc has in store for startups and MSMEs

Budget 2021 | By Dipanjali Chakraborty | Last updated on Feb 3, 2021

blog image The Union Budget 2021 was important for a lot of reasons. Against the backdrop of de-growth (first ever!), the pandemic ridden country was looking forward to its Govt. This was also the first-ever digital budget. A lot of things were announced. As usual, there were winners and loosers. Startups and MSMEs, especially digital industry were among the positive gainers.

Here, we have discussed the major giveaways that the Union Budget had for startups and MSMEs.

1. Huge impetus to the digital payments industry – Rs 1,500 crore allocation

Finance Minister Nirmala Sithraman during her Union Budget 2021-22 speech said the government has earmarked Rs 1,500 crore to provide financial incentives to incentivize digital payments.

However, how the funds will be deployed has not been mentioned. Industry veterans are hoping that funds will be used towards developing alternatives to zero merchant discount rate policy and initiatives towards bringing digital financial literacy in vernacular languages. It may also be used to reimburse losses suffered by payment service providers for processing RuPay debit cards and UPI transactions for free in 2020.

2. Rs. 15700 crore allocation for the MSME sector

The Union Budget 2021-22 has earmarked an allocation of Rs 15,700 crore for the Ministry of Micro, Small and Medium Enterprises. This is double of what was allocated in the previous Union Budget.

3. Tax Holiday extended for one year

To help India Inc’s startups in beating pandemic blues, the FM announced a tax holiday extension by one more year to Mar 2022. The existing provisions of section 80-IAC of the said Act, inter alia, provide for a deduction of an amount equal to one hundred percent. of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of ten years at the option of the assessee subject to the condition that the total turnover of its business does not exceed one hundred crore rupees for an eligible start-up incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2021.

This is likely to attract more investment outflow in startups. With proper planning, more investment inflows can also help in reducing the fiscal deficit.

However, since most startups are loss-making in their initial years, the likely impact on the majority of them cannot be vouched for.

4. Ease of Funding secured via GIFT City – IFSC Route

The Finance Minister announced that new tax incentives for units under the International Financial Services Centre (IFSC). This move is likely to facilitate the easy inflow of offshore funds into India. This will allow international funds to relocate to India and avail tax exemptions. This system allows investors to move their fund to GIFT IFSC without the transfer being subject to tax.

This will be a huge boost towards keeping the Indian startups Indian. Global micro VCs who are based out of Singapore or Mauritius will find this attractive. At the same time, since the feeder will now be in IFSC, hence, the margin management fee will also be captured in India.

5. Extension for exemption from capital gains by one more year

Along with the tax holiday extension, capital gains exemptions have also been extended for startups by another year. This is with reference to Section 54gb of the Income Tax Act. This section applies to individuals and Hindu Undivided Families (HUFs). The extension of the capital gains exemption will be available to them for investment in eligible startups by one more year. The taxpayer could make investments in respect to the transfer of residential property undertaken anytime on or before March 31, 2022. This will act as a boost for investments in startups during these difficult times and will augment their growth and expansion.

6. Digital Census 2021 – MCA 21 3.0

Finance Minister Nirmala Sitharaman said that the government will use data analytics, Artificial Intelligence, Machine Learning to launch MCA 21 3.0 which will add the facility of e-scrutiny, e-consultation, compliance management, and e-adjudication among others. With new digital windows being added, MCA 3.0 is expected to garner more interest from foreign as well as Indian tech majors.

7. Incentivising the One Person Company (OPC) set up

The OPC set up was a pet project of the Govt when it was announced. However, with the passage of time, it could not gather a lot of fizz due to certain critical restrictions. One of the major ones being the requirement of residential director/owner. Also, there were restrictions with respect to turnover and paid-up capital.

This Budget announced:

Restrictions on paid-up capital and turnover removed.
Their conversion into any type of company any time allowed.
NRIs can now form an OPC – The residency limit for Indian citizens revised to 120 days from 180 days.
Allowing NRIs to invest through this route is likely to encourage startups and small business set up without the concerns of a larger compliance framework or minimum capital commitment

8. Scope of “Small companies” extended

Changes were proposed in the definition of small companies under the Companies Act. Companies with paid-up capital up to Rs 2 crore and turnover up to Rs 20 crore will fall under small companies.

Previously, this threshold held the limit of paid-up capital to Rs 50 lakh and turnover up to Rs 2 crore.

Small companies are exempt from complying with a lot of compliances under the Companies Act. Hence, by expanding the net for small companies, this move will definitely benefit a lot more businesses.

9. Insolvency Resolution:

In order to ensure faster resolution of cases, Sitharaman said that the National Company Law Tribunal (NCLT) framework will be strengthened, the e-courts system will be implemented, and alternate methods of debt resolution and special framework for MSMEs will be introduced.

10. Customs Duty Slashed:

The government said that it is reducing Customs duty uniformly to 7.5 per cent on semis, flat, and long products of non-alloy, alloy, and stainless steels to help MSMEs and other user industries that have been severely hit by a recent jump in iron and steel prices. Sitharaman also announced exempting duty on steel scrap for a period up to 31st March, 2022 to provide relief to metal recyclers, mostly which are MSMEs. The minister also proposed an increase in duty from 10 per cent to 15 per cent on steel screws and plastic builder wares to benefit MSMEs.

11. Increase FDI limit from 49% to 74% in insurance

In 2015, the government had hiked the FDI cap in the insurance sector from 26% to 49%.To attract more overseas capital inflows, finance minister Nirmala Sitharaman on Monday increased the foreign direct investment (FDI) limit in the insurance sector from the existing 49% to 74%. The government has earlier allowed 100% foreign direct investment in insurance intermediaries. Intermediary services include insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third party administrators, surveyors and loss assessors.

This move is likely to ease access to finance and increase fund availability for insurance businesses in India. Additionally, the proposal of providing FPIs an entry into debt financing of REITs and InvITs will pave the way for newer sources of finance for real estate and infra sectors.

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