Impact of Budget 2019 on Startups and MSMEs

 

On Friday, July 5th 2019, India’s first woman Finance Minister, Nirmala Sitharaman, presented her budget proposal in New Delhi. She broke the age-old custom of carrying briefcases and instead used a traditional bahi khata (ledger). 

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Startups and MSMEs across India had a lot of expectations from this budget. Fortunately for them, the proposal outlined many initiatives to support the growth and development of India’s startup and MSME ecosystem and to "release the entrepreneurial spirit" in the words of our Finance Minister herself.

As a startup, here is what you can expect:

  • Loan of 1 Cr. in 59 minutes: To ease credit access for MSMEs, a dedicated online portal will be introduced. This portal shall provide loans of up to 1 Cr. in 59 minutes. This will be extremely helpful for MSMEs, which have always struggled to get timely funds.

  • More Business Incubators to be set up:  The budget also proposes setting up of around 80 livelihood business incubators and 20 tech business incubators in the financial year 19-20. Sitharaman explained that this shall produce 75,000 skilled entrepreneurs in agro-rural industries.

  • Help with ‘Angel Tax’ Issue: As a way of resolving the angel tax issue, the startups shall not have to undergo scrutiny in terms of valuations of share premiums while they file the needed declarations and provide information on their returns.

  • A New TV Show on Startups: The budget proposed to launch a television programme on Doordarshan for startups, by startups. The programme will cover a myriad of startup-related subjects like challenges faced by new startups, tax planning, fund-raising etc. 

  • Increase in Credit Capacity for Public Banks: Public sector banks will be provided with additional capital, which will lead to increased lending capacity. As a result of this recapitalization, smaller enterprises will be able to borrow at cheaper rates.  

  • Modernization of Labour Laws: The labour laws will be transformed into “four labour codes” to reduce disputes. Sitharaman said, “The government is proposing to streamline multiple labour laws into a set of four labour codes. This will ensure that the process of registration and filing of returns will get standardised.” 

  • Easing of FDI rules: The government will ease FDI rules to further open up foreign investment in a number of sectors like aviation, animation, media, and single-brand retail. In fact, insurance intermediaries will likely be permitted to receive 100% FDI. 

  • New Tenancy Law: Reforms will be implemented to modernize tenancy laws and promote rental housing. House rental startups are expected to substantially benefit from this new law.

  • Encourage Woman Participation: Women SHG (Self-Help Group) Interest Subvention Programme will expand to all districts in India. Under Mudra Yojana, one woman in every SHG will get a loan of up to Rs. 1 lakh. These measures shall help augment women participation in the development of the country. 

  • EV Buyers to get Tax Exemption: As an incentive for people to buy electric vehicles (EVs), income tax worth Rs. 1.5 lakh shall be exempted on their purchase. The customs duty on import of parts of electric vehicles shall be reduced as well. The government intends to promote electric mobility through these measures. 

  • Corporate Tax Relaxation: There shall be a relaxation on corporate taxation for businesses. Earlier, the lower rate would apply only to companies with a turnover of less than Rs. 25 Cr. With the reform, this rate will include companies up to Rs. 400 Cr. turnover. 


These initiatives have received appreciation from a number of entrepreneurs across India. "It is heartening to see the key issues faced by startups in the country being addressed in the Union Budget 2019. The budget is definitely pro-entrepreneurship and provides clarity and relief in respect to the arbitrary Angel Tax that has been stalling startup growth in the country over the past few years. Start-ups no longer need to be worried about coming under the scrutiny of the Income Tax Department as long as there is full disclosure of the identity of the investor and source of income which is fair and straightforward. The exemption of capital gains from the sale of residential property for investment in start-ups until FY 21 is a welcome move.” said Meena Ganesh, the MD & CEO of Portea Medical 

While the budget proposes many measures to encourage the startup ecosystem, not everyone feels like their concerns have been addressed. There is an increase in excise duty and road and infrastructure cess, which means additional operational costs for startups like Zomato, Swiggy, Dunzo, etc. 

One of the biggest concerns is that the reform on angel tax should also apply to the investors of the startups. Yagnesh Sanghrajka, an angel investor and mentor said, “Though there have been some tax scrutiny benefits to startups, there is nothing for investors, which would have benefitted the entire startup ecosystem.”

A number of startups said that they require clarity, stating that the new policies are still ambiguous.  In spite of a few drawbacks, if implemented as planned, these reforms might really prove to be a boon for startups and MSMEs across the nation.

How do you think the budget will impact you as a startup?

 
Nayan Khemani