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Budget 2020: Startups get a tax carrot, e-commerce firms get a TDS stick
Photo Credit: VCCircle

Finance minister Nirmala Sitharaman proposed tax reliefs and a slew of feel-good initiatives for startups, including the launch of a seed fund, but imposed a new levy on online retailers.

“Startups have emerged as engines of growth for our economy,” Sitharaman said while presenting the budget for 2020-21 to parliament on Saturday.

The budget has proposed a seed fund to support ideation and development of early-stage startups, but stopped short of defining a target corpus for the fund. This is reminiscent of the Rs 10,000 startup fund-of-funds the government had announced as part of its 'Startup India, Standup India' action plan in 2016.

The Union Cabinet had later formally approved the establishment of the fund that year under Small Industries Development Bank of India (SIDBI).  Commerce minister Piyush Goyal said in the Lok Sabha in December last year that the fund-of-funds had invested Rs 2,670 crore in 279 startups.

However, the budget also had a bitter pill for the startup ecosystem, particularly for e-commerce companies. The budget proposed a new levy of 1% tax deducted at source (TDS) on all e-commerce transactions.

“The tax at 1% is required to be deducted on the gross amount of such sales or service or both,” as per the Finance Bill. This could increase burden on sellers on e-commerce platforms.

The new levy comes in the backdrop of offline retailers lobbying the government against online retailers, especially during the recent India visit of Amazon.com Inc. founder Jeff Bezos. Offline retailers say e-commerce companies such as Amazon and Flipkart offer massive discounts to consumers, though online retailers say they do nothing illegal.

The budget also proposed to ease the burden of taxation on the employees of startups by deferring the tax payment on employee stock ownership plans (ESOPs) by five years or till they leave the company or when they sell their shares, whichever is earlier.

Currently, ESOPs are taxable at the time of exercise. This leads to cash-flow problems for the employees who do not sell the shares immediately and continue to hold the same for the long-term, Sitharaman said.

“The seed fund for startups and deferring payments on ESOPs is a definite plus if implemented well,” said Anthill Ventures partner Devang Metha.

The government's proposal removes the double tax on ESOPs and solves a key issue for startups in their attempt to attract talent, Rehan Yar Khan, managing partner at Orios Venture Partners, tweeted.

Khan also lauded the government's proposals for medium, small and micro enterprises (MSMEs) to raise by five times the turnover threshold for audit from the existing Rs 1 crore to Rs 5 crore.

Additionally, the budget proposed that startups with a turnover of up to Rs 100 crore will be allowed a deduction of 100% of profits for three consecutive assessment years out of 10 years. Previously, only startups with a turnover of up to Rs 25 crore were allowed to claim this deduction of 100% of profits for three consecutive tax assessment years out of the first seven years.

The finance minister also announced other measures that have a bearing on the startup ecosystem. The budget proposed an outlay of Rs 8,000 crore over a period of five years for the National Mission on Quantum Technologies and Applications.

“Quantum technology is opening up new frontiers in computing, communications, cybersecurity with wide-spread applications. It is expected that lots of commercial applications would emerge from theoretical constructs which are developing in this area,” said Sitharaman.

The budget proposed a policy to enable the private sector to build data centre parks throughout the country. This is likely to enable private and public-sector firms to incorporate data into their business, and even in anganwadis, government schools, police stations, and panchayats, she said.

Additionally, the budget proposed a National Logistics Policy related to issues such as creating a single window e-logistics market.

While the industry largely applauded the government for its focus on startups, not all were swept off the floor.

“While details need to be studied, this budget only had a couple of announcements with respect to startups," said Ashish Sharma, CEO at venture debt firm InnoVen Capital India.

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