Finance Minister Arun Jaitley on February 1 announced that small and medium enterprises in the country with a turnover of less than Rs 50 crore will now be taxed at a flat rate of 25 percent. The move is likely to positively impact 96 percent of businesses in India. Earlier, the SMEs were being taxed with a corporate tax rate of 33 percent.
The government also announced widening of the tax-free claim window for startups to seven years from a period of five years so far. As a result, any small business registered as a ‘startup’ with department of industrial policy and promotion can now claim tax sops for any three years out of seven years, which might give marginal relief to startups.
“Most startups don’t earn profits for a long duration which is usually over seven years. So it might not give a big relief to startups. Only registered ‘startups’ incorporated post March 2016 will be eligible. However no reduction in corporate tax rate is a dampener,” says Riaz Thingna, Director, Grant Thornton Advisory Private Limited.
The move on tax holiday follows repetitive criticism of the same from the industry which claimed that start-ups usually do not make profits during such an early stage of their existence. The tax holiday will also be applicable only to companies incorporated post March 2016. “However, corporate tax relief to SMEs with turnover of less than 50 crore to 25% would possibly also lead to better compliance,” says Ranen Banerjee, leader public finance and economics at PwC.
Startup employees who earn less than Rs 5 lakh annually will also get relief. The finance minister announced a reduction in the tax rate for individuals having income in the Rs 2.5 lakh-Rs 5 lakh bracket to 5 percent from the current 10 percent. CEOs and CXOs of most Unicorn startups who earn annual compensation of more than Rs 50 lakh annually will also be impacted.
“There is some cheer for individuals as tax rates for income between 2.5 lakhs to 5 lakhs has been reduced from 10 percent to 5 percent. However, an additional 10 percent surcharge has been introduced on income between 50 lakh and 1 crore which is a dampener for high networth individuals,” says Girish Vanvari, Head of Tax, KPMG in India.
The government however failed to touch upon the much grieved issue of exits and compliance for founders who claim to be going through multiple difficulties in case they have to shut down a company. India is home to the third-largest number of technology startups after the United States and Britain, and they attract billions of dollars in funding every year, despite byzantine government regulation and red tapism that many investors often complain about.
Source: Money Control
